How do you decide what to charge for your products or services?
I ask this question because one of the biggest and most costly mistakes small business owners make, is that they set their prices or fees based on what they need to sell them for. Here’s an example of what I mean.
People buy for their reasons, not ours
I had a chat last year with the owner of a coffee shop, who was worried about how few customers she had. She explained that her prices were between 10% and 30% higher than other, equally good coffee shops in her area and as a result, the place was almost always quiet. I asked why she charged so much more, when there was no clear reason as she was stocking the same quality of products as her competitors. She said that she HAD to charge more than her competitors, because her rent was far higher than theirs.
I noticed last week that the coffee shop had closed. As she discovered, local coffee drinkers didn’t care that she negotiated a crappy rent agreement with her landlord. They just saw that she charged more money for the same coffee, so they went elsewhere.
The role of value
In almost every industry, there are businesses who serve the bottom end of the market and others that serve the top end. In each case, their customers are buying based on value.
- Those who value a super-low price will make their decision based on the cheapest deal they can find.
- Those who value outstanding products and services, will make their decision based on quality and excellence.
What doesn’t work, is when a provider sets their prices or fees based on their need – rather than the value they offer. Your prospective clients don’t care that you need to earn X every month. They care that the value they receive from you, is greater than the price.
The importance of adding value
Smart business owners have figured out that if they pump enough value into their products or services, they can have an extremely profitable business. They have also discovered that it’s a lot more professionally rewarding, to work with clients and serve customers who value quality. I believe that in an age, were customers can find the cheapest provider on Google, in minutes, it has never been more important to focus on value.
Photo: Taro
January 28, 2013 at 12:56
First time I’ve heard this put in quite those terms, but far from a new idea.
OTOH: it sure does underscore something I’ve told clients for as long as I can remember: there are basically two models for pricing: “cost plus” (I need x% more than the item I’m selling cost me) or “market value” (I’ll figure out the highest price I can get and still sell my stuff, based on what the market will bear).
Your coffee shop lady seems to have picked the worst of both worlds. She ignored the market value, and twisted cost plus into shapes it isn’t supposed to make.
Nice lesson … hopefully for her as well as the rest of us …
January 28, 2013 at 13:09
Thank for sharing the feedback, Jeff. Much appreciated.
January 28, 2013 at 14:34
I accept your term, as if we have targeted traffic then we can make money with no problem I prefer.
January 28, 2013 at 16:15
Hey Jim,
I’m curious what your announcement is.
Any clues???
January 28, 2013 at 17:29
All will become clear Wednesday, Andre
January 28, 2013 at 17:13
Hi Jim,
Very interesting… pricing according to what we need? I am guilty of that for sure. How do you assess value? Especially when it is a service?
Thanks
Geoff
January 28, 2013 at 17:29
Hi, Geoff. In my experience, as someone who has sold marketing services since 1995, the best way to assess value is to listen to your marketplace.
Consider how they respond, when you quote your fee. If they see the value, they will happily pay it. If they see too little value, you will ‘think’ they are just being fee-sensitive, but they are simply not seeing the value.
It’s a HUGE topic, too big to cover via blog comments.
These may help:
How to attract the best clients and the highest fees – Part 1.
How to attract the best clients and the highest fees – Part 2.
How to attract the best clients and the highest fees – Part 3.
Thanks for the comment.
January 29, 2013 at 07:38
it really a great and interesting article i really like article so much thanks for sharing such a nice article.
January 29, 2013 at 07:41
You’re welcome.
January 29, 2013 at 07:58
This article is on the money Jim. I shared it with my networking group this morning and I think you’re gonna see some new readers.
Thanks
January 29, 2013 at 08:23
Great post Jim – I remember back in the early days of my business when I ran a short intro workshop for a very low cost – just to get people through the door and because it was my first one. I heard that a few people didn’t sign up because it was “too cheap”!
I know that the people who get the most from what I do don’t buy on price.
January 29, 2013 at 08:33
Good point, Clare. You’re right – Offering freebies attracts ‘freebie hunters’ rather than clients. Yes, you may get he occasional fee paying client that way, but you will also attract all the local free loaders. Thanks for the feedback.
January 29, 2013 at 14:37
I see people applying the old adage, “You get what you pay for”, to products and in some cases identical products but the higher priced ones sell more than the cheaper ones. Pricing too low can make your products seem cheap but pricing too high can backfire and not generate any sales.
January 29, 2013 at 16:05
Excellent article, Jim. On the other side of the pricing coin is the small business entrepreneur who undervalues and under prices their product/services and struggles as a result.
January 29, 2013 at 22:31
Hi Jackie. You’re right, lots of people new to business seriously under-charge for their services.
It’s hard to claim you are a professional, when working behind bargain basement fees.
Thanks for the feedback and welcome to the blog.
January 30, 2013 at 15:43
Very interesting you’ve tossed a right question will definitely think bout it.
February 5, 2013 at 12:42
Another one out of the top drawer Jim. You offer value and they will come.
February 5, 2013 at 14:03
Thanks, Neil.
March 24, 2013 at 12:13
Pricing is a very sensitive issue, in needs you to be creative enough to always come out with the best pricing. Since I have been in business I have met different customers who don’t argue with a price and those who keep complaining about prices. In business you must always in a good mood and not get angry when a customer complain. Be cool and explain your product/service to the customer and make them special, do your homework, there must be something your low pricing competitors are not doing right, which you can use it into your business benefit. We sometimes forget when we are dealing with customers face to face. First appearance say a lot about you. Which maybe difficult if you are selling online, because you don’t have to speak with that in person. Keep in mind that one customer is worth a million. Its easy to get a customer through a word of mouth recommendation, I have seen that in my business. Anyway I’m not against your advice Mr Jim. In business we experience different things all the time, we need to be creative enough to face business daily challenges. Thank you for sharing informative tips with us.
May 20, 2013 at 13:30
Great post Jim, I think that too many people price their products and services based on their own needs and not that of their client’s needs. Thanks for the different perspective.