Pricing is a balancing act we have to deal with as business owners. We can’t be too low or we won’t grow. We also don’t want to be so high that we give our clients sticker shock. In truth, the latter is the better way to go because it implies value. But what if you’re just starting out how do you price your service and product so you can grow?
The Truth Behind the Lowest Price
Walmart brands itself as constantly rolling their prices back. They want to be the lowest price around. Why? Because of the age-old truth, the longer people stay in a location the more they buy. You come for a low priced TV and stay to pick up groceries, toiletries, household items and more. What was supposed to be a 30-minute trip turned into an hour and a half with a price tag to match. Walmart is the lowest priced because they can afford to be making up for it in volume. Whenever they put a product on their shelves, it’s not just one store it’s thousands. Buying in bulk like that will make a manufacturer drop their price to lower than wholesale values. Walmart is a multi-billion dollar company and can afford to offer rock bottom prices. As small business owners we can’t afford to be the lowest price.
One thing you have to realize is that your clients WILL NEVER lower their expectations of you no matter what price they pay.
The Carrot of Future Work or Exposure
This is one danger you can’t fall into at any cost. Someone says they will do business with you at a price they quote you based on more work to come. If you know the price is too low or it will cause you to lose money then under no circumstance do you take the job. In fact, you should never take a job where someone promises more work if you drop down to a lowball price. If you do an amazing job, which you know you will, then more work will come either from the client or those who see it. That’s why you have to have the four steps to increasing your price in place because if you deliver the same result every single time then people will come back no matter what price you charge because you can be trusted. Trust provides peace of mind and that has a price tag that is always worth paying.
To avoid this danger you have to deal with price up front. Most people deal with price last, because it’s uncomfortable. You know what’s unbearable? Doing a job at a loss and the person who said they were going to bring more work never does. Why? They’re a bargain basement shopper always looking for the lowest price. Once they get what they want you don’t get what you want. You both have to win and in order to do that you have to discuss price upfront because that’s what professionals do. This is how you can do it.
We’re going to use a lawn care business as the example throughout this post. You get a call and the potential client asks you, “How much is it to take care of my lawn twice a month?”
“Without any details on the size of your lawn and what else it might need it will be between $400–$200 a month. For that rate it comes with x, y and z. Is that what you budgeted?”
“Wow, that’s high. You know, I have several in my subdivision I can refer you to. Can you do better than that?”
“I appreciate that very much. I would love to work with you and make your lawn the talk of the subdivision. In fact, we do such a great job for our clients the neighbors see it we’re referred freely. Feel free to call them or look at our reviews to see for yourself. However, in order to do so the same amazing job on your lawn the range I quoted you is our usual charge. I’m sure we can come to a fair agreement. Why don’t we set a date for me to come out to see your place and see what we can do?”
“Ok, why don’t you come by Saturday morning?”
“Excellent, I’ll see you then.”
What you’ve done is discussed price upfront and held to it. You embraced their objections and pivoted it to a body of work that demonstrates both the value you provide and that you don’t need their business (even if you really do). You also demonstrated that you have a system in place that delivers the same results for a number of clients and they will get the same, if, they pay the price you quoted them.
The Problem with Being the Lowest Price
If you start low you then have to stay low because you set a price range in your client’s mind that they won’t move past. When you charge more on the next job for the same service they won’t accept it and think you’re price gouging them.
This is why it’s so dangerous to lower your price to win the business. We become desperate and lower our price and subsequently our value just to get a check. One thing you have to realize is that your clients WILL NEVER lower their expectations of you no matter what price they pay. They expect the best simply because they’re a paying client. For the most part they’re right. You promised to deliver and if you have a brand you most certainly made a promise. If you chose to lower your price to deliver that promise to a point you’re not comfortable with it then that’s your fault.
Case in point, we had work done on our house by someone who was a professional in what he did. I’m keeping it vague out of professional courtesy (more on that in another post). We negotiated a fair price and it was fair, after all, I’m a small business too and know what it’s like to be haggled. He started in one area of the house to see how that would go. It went great and asked him to do another area. After surveying it he quoted a very good price. However, when he got deep into it he realized he under-quoted us and tried to get more. He complained over and over again about the price and how we’re robbing him. He saw another area that needed to be fixed and started doing it without running it by us first. Then he tried to price gouge us on that work he started, which was really him trying to compensate for underbidding us in the first place. He never came back and we never referred him although he did an amazing job. Why? Because we didn’t like the experience of doing business with him and didn’t want anyone else going through the same experience. What was his problem?
He did what so many of us do on our own. Underbid a project just to get the work and then deliver inferior work rather than preserve our reputation and take the loss. I don’t advocate taking a loss for business. However, preserving my reputation is more important because it’s our reputation that brings in more business.
Tell me if you heard this one before. You need some work done on your house and you’re asking your friends whom you can call. A friend says, “I used so-and-so for it. I gotta tell you he’s expensive, but so worth it.” You look around at what the work he did in your friends place and call him up. Of the three who quoted you for the job he was the most expensive. You hire him anyway. Why? We want to do business with someone we know, like and trust. We know he came from a trusted source, our friend. We liked the work he did on their house and trusted that if he did such a good job for them he will for us because that’s his profession. We validated the high price emotionally with the aforementioned.
The Problem With Being the Highest Price
There is no problem with being the highest price. You should be the highest price. However, if you’re going to be the most expensive option you better make sure that they people you’re targeting can afford to pay it. Jonathan Stark of the Podcast, “Ditching Hourly” says value based pricing goes both ways. You want to price your worth, but the people you’re submitting your bid to better see the value in it because if they don’t then get your resume ready. I say that from experience. One of my biggest mistakes was pricing high to targets that didn’t see the value in what I was providing. The ones that did wrote checks like it was nothing. Find more people like them.
How to Raise Your Prices—Step 1: Have A System of Delivery
People want to do business with you to satisfy an emotional need. You need to make sure that you can deliver on that emotional need every single time. Think about the end result and glowing comments from the client. How can you get that same result every single time? Documenting and repeating that process becomes your system of delivery.
Step 2: Price With Margins
You can’t price a job based on what others charge or underbid your competitors in order to win the project. The easiest way to price a job is to price it as if you were paying someone else to do it. Let’s go back to our lawn care business. How would you price that out? Your competitor, Mr. Lawn, charges $145 a month to do it, can you do better? First of all it doesn’t matter what your competitors charge. What matters is your cost to deliver amazing value. So let’s break it down pricing this as if you would pay someone do it while you go out and get more jobs like this one.
$40 (Average time of 2 hours @ $20/hr.)
$20 (Driving Fuel Cost)
$60 (Total cost per month)
Now you have to price for unknowns, insurance, equipment, and other things. That number can vary but usually you charge 3–5 times more than your core cost which brings you to $180–$300 a month, more than Mr. Lawn. Many people price match or underbid without taking in the previous factors to their detriment. What we need to keep in mind is: 1. Mr. Lawn is bigger than us and like Walmart, can afford to offer a lower price and make up in volume. 2. Since we’re smaller than Mr. Lawn we can over deliver and offer a greater value though we’re a higher price. 3. Since we now know our core costs we can lower our price and still be profitable.
Step 3: Gradually Raise Your Price
Now you can’t start at a high price unless your target is an affluent buyer. They expect high prices since it equates value to them. Most of us aren’t targeting people with deep pockets so we can’t give our clients sticker shock starting out. We have to price based on where our brand is at. Price low and build a volume of work. With each new job you do gradually raise your price to the value you know its worth. I did it the opposite when I started Cherished Keepsakes.
It wasn’t even Cherished Keepsakes at the time and I was offering my products at a high price. The target didn’t see value at that price but another they quoted me. In order for me to meet that price and still be profitable I had to go back to Step 1 and adjust my systems to be able to deliver at that price. To eventually raise the price I packaged it in the brand, Cherished Keepsakes, and then raised the price over time. Although I was selling my products at a low cost at first, it was still profitable from day one and profit margins increased with time.
One thing you must consider is that you’re not raising your prices just for the sake of it. You’re gradually raising it as brand recognition and value increases. As you do that then you’re ready for Step 4.
Step 4: Target the People Who Can Pay Your Price
This is probably the most important step. It’s one that requires you to be honest with yourself. Will the people you want to do business with actually pay what you’re asking? In conversation everyone will be nice and say yes. It’s an entirely different story when someone has to part with money. On an episode of Seinfeld he opens talking about the difference at a restaurant when you’re being served to when the bill comes. The bill is reality, where the rubber meets the road. You’re an entirely different person then and so is your target if they’re the wrong one. Now the question is, how can I tell if they are the right targets?
Offer your product or service for a really low price to start and see if they buy. To do this properly though, it has to be done this way.
Tell at least a dozen people you’re starting a new lawn care service and want to see how many people are interested in it. You normally charge $200 a month for it but will offer it for $60 to start. You’ll offer it to them at $60 a month, but ask that they provide an online review and refer you to two people they know could benefit from it.
If they buy then you’re off to a good start. The next step is to over deliver so that they’re raving about you. When new people contact you for your service you provide the reviews of their trusted friends and visual samples of your work. Then you tell them to do the same work it will be $200 a month. Now, there might be some negotiating down, which is fine after all, you’re still new in the game. However, you already priced it with margins high enough that you can lower your price and still be profitable. This allows you to continually deliver high value without regretting the end price. The referred client is happy they got a great price; they buy your service and refer others.
Congratulations, you got a business worth starting. Your business is solidified if you’re able to convert your initial clients to your new rate and they continue to pay. What you did is a term called preselling. You had something you weren’t sure would stick and tested the market to see how many people would invest in your idea. The ones that bought and reviewed showed it was worth it, but the rubber met the road when you were able to charge your profitable rate and people purchased at that price.
Pricing will be a balancing act if you leave it to last and don’t factor in your operating costs to run your business. However if you follow the four steps you be well on your way to increasing your price and building your brand. Much success to you!
