[Thomas the Rhymer]

Lately I've been interested in figuring out how to set a price for my services. Most of the advice on the internet is pretty lame and average - and since I don't want average results, I thought I'd ask the forum members for what they think. I will also share what I've found

Pricing method doesn't seem to have been discussed much in the forum; either that, I just missed it in google search because of the enormous noise of the keyword 'price' - I get a lot of irrelevant results. If anyone knows of a thread/post on pricing method buried somewhere deep in the archives, please dig it up!

From what I've found on the forum, the only poster you had anything useful to say on price was Beyond Borders:

thread-9290-...#pid138168

thread-47266...pid1135976

I agree with these posts but BB doesn't discuss 'how' to price. What a business/freelance newbie needs is a step-by-step how-to or some useful rules of thumb.

I have found two possible models of pricing that are out-of-the-mainstream and seem to be legitimate -

Firstly, this Tropical MBA podcasts mentions pricing specifically with regards to manufactured goods:
http://www.tropicalmba.com/builtajob/

They basically state that as a rule the price you sell a product should be 4 times the cost of the product (i.e. the cost of the product should be 25% of the final prince). This is a lot more than most recommend but they give good reasons. The main reason is that 'profit' is never, ever what you expect it to be and building in a healthy margin gives you that buffer against unexpected problems.

I guess a similar attitude to service products would be to work out your cost of living per hour, and then quadruple that to make your hourly service rate?

The second method is based on this ebook, and it is focused specifically on service products:
https://www.freshbooks.com/assets/other/...arrier.pdf

In the book, the authors advocate throwing out the 'bill-by-the-hour' model out of the window. Instead, they advocate getting a number from the potential client about how much extra revenue they expect to generate from using your services. You then offer them a solution to generate that extra revenue and you charge 10 - 20% of what that expected revenue might be. In other words, they are not hiring you, they are making a revenue generating investment; and you are not selling hours, you are selling a specific end point. If it takes you 60 minutes or 60 days, it doesn't matter, you are selling a solution, not your hours. The idea is that as you become better at your service and it becomes easier to do your job, you basically keep your billing high even though your hours shrink.

What the book also advocates is to create a menu pricing system, whereby instead of offering one price for one solution, you instead provide 3 or so solutions and then offer different prices for each one. That way you can still offer your services to clients looking for value-for-money and you also have the right to limit your service offering so that you can focus on getting clients who are willing to engage with you more fully.

In any case, the book also encourages to not engage with cheapskates and bargain hunters. These are losers who will only drag you down, and see you as a cost and not as an investment.

In summary:
- Try to aim for 75% margin or better
- Avoid 'per-hour' billing, rather bill as a percentage of expected increased revenue
- Provide a menu of price options
- Avoid cheapskates and bargain-hunters who try to push your price down, they will drag your business into a black hole

If anyone on the forum has their own insights into pricing methods, please share it in this thread.

[H1N1]

The main difference between price setting with goods and price setting with services is that with goods, people generally expect to see cost of goods come down over time, whereas with services, people expect to see your prices go up as the value of your offering increases. For goods, I would say 4x is a healthy minimum for any new product. It's not just that manufacturing can have hidden costs, it's that you generally have to earn back some development costs, and before you start selling the product it is hard to be sure what kind of volume you might do. So if you make something for £100, and sell it for £400, that's great, but out of that £400 comes your overhead, any additional costs for delays, costs of sale, sourcing replacement parts for bits that have been discontinued, as well as the actual staff costs that went into developing the product itself, which might be hundreds of thousands of pounds.

[262]

In before someone says the red pill price method is high because IDGAF.

But one serious tip would be to offer three tiers of price and service, if possible.

The point of the low and high tiers is mostly to make the medium seem more reasonable than if it were offered on its own.

It can also help you address different market segments.

Just don't make it too complicated, though. Too many choices make customers less likely to buy.

[Ski pro]

Very interested in this this thread as I have exactly this dilemma for something I am starting next year when I go independent.

I'm working on the basis that the thing we don't want to sell is the 1hr lesson so there should be a sliding scale that encourages clients to book more time so it appears a better deal. I want clients to book 3 hour sessions so it makes sense not to even offer a 1 hour option, just 2 or 3 hours and make that 3 hour option more attractive.

In terms of my costs, I'm already up the hill, I've already driven there and I already have my pass so I make more profit per hour in a longer session.

[Truth Tiger]

I've offered products at fairly low prices ($25-$100) which are commodities (similar or same available in other places), at medium to higher levels ($300-$700) which are more unique, and fairly high levels ($1000-$3000) which are totally unique / bespoke / designed for the customer. I also offer services generally in the hundred+ range per 30 min session. I did some research to note pricing of similar vendors in the marketplace. I made the first stage products a little more than the rest and indicated how it was better, then second and third stage sold the hell out of the benefits of working with me vs. anyone else. No one offers the particular service I do so that makes the consulting prices much easier to hold to.

My take on pricing is that if you can't quickly 1) establish uniqueness and 2) indicate high value people aren't going to pay a premium price. If you provide one or the other, you can easily charge a reasonable price that will be paid. I think it's very important to indicate WHY someone needs to buy your product or service vs. someone else. The unique selling proposition (USP) or unique value proposition (UVP) however marketing folks say it. Then demonstrating value through your media / outreach / online contributions / reviews / authored article, books, blog. Sending people to your site, youtube channel, or blog is huge for establishing value.

If you're looking for clients, offering free some freebie is one approach, but you can get tire kickers and time wasters. If you say 'I've trained with an Olympic skier' or have some way to clearly distinguish yourself, then go for premium. Higher pricing creates an expectation of higher quality and exclusivity. You're better off charging too much than too little, but make sure you're backing it up with the value they expect.

I think offering 3 tiers for services or 3 levels of product helps capture a wider net and it's worked for me. 3 is not too many, nor too few. You give them a chance to ask you explain why each one makes sense given where they are. You can also customize for them which a good number of people like and want - so you could say '3 basic levels and also custom packages' or '2 basic levels and also custom packages.' Not too few options, nor too many. Those who want to control things will want the custom, those who want to have their hand held and are cheap will get the cheaper option, those who want their hand held and are value-driven will go for the higher package.

There are a good number of people who are naturally skeptical of a new business / service. Highlighting referrals from past customers is really important in gaining their trust. Some people will just want to try it out, see how you are as a service or product provider need to feel comfortable and only with a small investment and some time will they gain that comfort. I've had a LOT of repeat business from people who I thought were cheap but really just wanted to make sure I would deliver on my product / service promises. Building TRUST is key in being able to charge high prices. If you can credential yourself via Youtube videos, a blog, some marketing / media resource you'll also have the 'internet fame' working for you - if they see your face online, hear your voice, you become a mini-celebrity to them. You don't have to milk this (best you just be casual) but know they are feeling "wow, this is the guy I was listening to / watching online!"

The Law of Diffusion of Innovation is worth considering, Simon Sinek's TED talk 'How Great Leaders Inspire Action' talks about this (his book is Start With WHy but I haven't read it, have focused on maximizing gains from the TED talk).

In short: Make your value clear, separate yourself from any potential competitors by highlighting your experience / referrals / review, offer 2 or 3 pricing options, give option for custom setup/package, charge more than some cookie cutter / high-volume outfit. People want a personalized touch. Would not suggest offering discounts, those people will end up being a pain in the ass (BTDT) and takes money out of your pocket. Be willing to increase prices every year - including on products. If you are providing value there's every reason your prices need to GO UP, not down or stay static.

[RatInTheWoods]

Research what similar products/services to yours go for to get a range.

Divide the hours of work/effort and work out a cost that pays you a wage/profit you are happy with. It doesn't matter what you sell stuff for, if you are making $1 an hour its bad.

Set a point and try tweaking it based on the response you have - too busy then its too low, not enough sales it could be too higher a price.

[Thomas the Rhymer]

(01-16-2017 06:42 PM)RatInTheWoods Wrote:  

Set a point and try tweaking it based on the response you have - too busy then its too low, not enough sales it could be too higher a price.

The problem with this attitude is that it ignores the existence of Veblen goods/services - things for which demand increases in proportion to price.

So the problem is, sometimes what you are offering is actually a Veblen product, and the demand is low because your price is low.

There was a Tropical MBA podcast I listened to recently where the entrepreneur was saying demand was best at $500, and was actually less if the price was lower.

I also remember, I think it was from the book Super Freakonomics, a story about a prostitute who tried to raise prices in order to have fewer customers, but ended up having more people trying to book her as her prices went up.

As a person entering the business arena, there doesn't seem to be a clear cut way of establishing whether your product will follow 'normal' supply-demand curves or will follow a Veblen curve.

I guess that ideally, we all want to be in the Veblen space, where we can charge high prices off the bat and have the high demand with it straight off.

Textbooks say that Veblen goods are only for super luxury items but I am not convinced of that argument. I think people use price as a surrogate marker for value, because I've noticed Veblen trends in products that are not strictly super-luxury products. There has to be a way to harness that energy to turn any product/service into a Veblen good.

I think this is where the confusion regarding Giffen goods comes in - Giffen goods might just be temporary Veblen goods operating outside of the traditional markets where Veblen goods are found. I'm not an economist thought, so I can't say for sure.

[456]

When quoting a price or rate for custom services, where you have a monopoly on being You, the solutioneer (in whatever capacity), a quick tip to make sure you're pricing in your inner-Veblen:

If you don't feel a little nervousness or butterflies that your price is too high, your price is too low.

This has always served me well and allowed me to progress to higher-end clients and larger-budget projects.

Always consider what they'll make off of what they'll pay you. If the ratio is out of whack, either you're priced too low or something else is off (non-starter, disaster, deadbeat, or maybe they like to speculate).

---

Thoughts on billing in situations when you're "forced" to bill hourly/daily/etc. -- and it's many times possible to do so WITHOUT succumbing to "selling your time instead of your value".

I've had clients say "we're fine with paying you $XXXXX/mo, but Corporate needs to see an hourly rate < $XXX, so do what you gotta do." In this situation, the ratio of [what they are making off of the work / what they are paying me for the work] was a great deal for both sides. Their acknowledgement of the billing disparity is rare though.

Generally, think about how time works in these examples:
a) Client Communication -- checking email 5x/day -- each time checking may involve asking your workers, looking up data, interrupting flow on more profitable activity, or actually coming up with a new idea or solution (cue lawyer example of "an hour where I figured out the winning argument -vs- an hour where I filed paperwork"). That's worth at least an hour or two of actual bandwidth and business value.

b) Project Management -- internal team communication, necessary for the project, how many hours per week are spent on that?

c) Special Knowledge Bonus -- if task X would typically take a competing firm 4 hours, but you created your own internal process and can pump it out in 15 minutes, due to your ingenuity and years of experience, do you charge .25 hours? Or do you charge 2 or 3? Still a good deal for you and the client, and it reflects your amortized value.

d) Time-blocks -- if a whole day is being blocked out, that's 8 hours. Easier to do when it comes to hiring a contractor per day on the project as it abstracts away that contractor's own internal methods. Keep billing units round to de-emphasize nickel-and-diming.

e) Invoice Categorization -- categorize hours as broadly as needed while still being descriptive and informative. Not every individual task needs a line-item -- think about the broader Business Goals the tasks serve as the ultimate line-items. That also de-emphasizes nickel-and-diming.

Be ethical, keep the value ratio in line, and label things appropriately, and you can basically get your Value-Based Price even if you don't have a retainer or large per-project fee. Some customers are fine with X/mo but need to feel like it's "fewer hours" or "lower rate", so raise your rates and adjust your billing practices accordingly.

[Thomas the Rhymer]

The Double Your Freelancing podcast, Episode 3, is a discussion on pricing.

They briefly discuss cost plus pricing, market based pricing, and value based pricing. I think it's very much worth a listen:

https://doubleyourfreelancing.com/unders...g-pricing/

[456]

^^

Haven't listened to the podcast yet, but the "notes" show they know what's up -- "market-based" is a great term for when it's hard to get between time-based and value-based -- "what would another, more established firm, charge for similar work?".

Also, their section at the bottom is VERY NICE for "extracting" good data from prospects which can help in pricing:

Quote:

Ask your next potential client questions that get at the business value of the project:

- Why are you looking for this project?

- What kind of financial outcomes are hoping a successful completion of this project will bring you?

- What would you consider a failed project?

- Try to get to the root of why the client is coming to you and see what you can do so you can deliver a substantial amount of business value to them.

If they are a ~1mil/year revenue ecommerce operation with shitty technology that's leaving sales on the table, and wasting employee time (i.e. admin, fulfillment), and you realize that the Project they are discussing with you could double their sales and cut employee time wasted in half, you know that anything less than $100k is a GREAT DEAL for them.

Of course this is easier to do when you have a clear-cut prospect like this who is already making money -- it's a little harder when it's a client with nothing, looking for a greenfield project... you have to use some more analysis.

[Jack_Smith]

...
Any meaningful advice on Pricing Strategy requires a deep understanding of your customer, your differentiation, and the marketplace. Without that context, we are engaging in mental masturbation.


What service are you selling?

Who is your ideal target customer?

What problem do you solve for them?

How are they currently solving that problem (incumbent solution)?

How do you differentiate your solution from the incumbent solution?

[monster]

There's a really good Dan Kennedy book on this called "No B.S. Price Strategy"

[Ski pro]

(04-27-2017 02:14 PM)Jack_Smith Wrote:  

...
Any meaningful advice on Pricing Strategy requires a deep understanding of your customer, your differentiation, and the marketplace. Without that context, we are engaging in mental masturbation.


What service are you selling?

Who is your ideal target customer?

What problem do you solve for them?

How are they currently solving that problem (incumbent solution)?

How do you differentiate your solution from the incumbent solution?

And then how do you go about adjusting or setting pricing based on this? I would be interested to know more.

[Thomas the Rhymer]

A useful insight from the business lounge thread :

qwertyuio Wrote:

How do you guys create a new offering then determine pricing? I've been thinking about it lately and it seems more like an art than science.

H1N1 Wrote:

There's a bunch of ways of informing your decision.

Are there other products out there that are similar, what do they cost, what's your edge on them (ie are you able to produce cheaper and undercut, or are you offering a premium product that serves a need others don't)?

If it's a really innovative product, and there's nothing much like it out there, then what is the cost to the customer of not having it? If the cost is high, then you can pretty much pick a number. I had a good run with a product line like that once, and I was making about 10x cost, and cutting my customer's costs by 70% or so.

What does it cost you to acquire a customer, and what is that customer's lifetime value to your business if you are able to charge X?

Past that though, it's really about trying to get a range between the minimum you need to charge to make a profit, and the maximum you can charge before it becomes cheaper to use another product/combination of products rather than use yours. Then you just stick your finger in the air, see what way the wind is blowing, and take it to market. It's much easier to lower your prices than it is to put them up though.

[456]

^-- that H1N1 quote above is a great way to phrase it as well.

So our conception of our own Veblen could almost be one's own Pascal's Wager -- if the cost of the customer NOT having my service is sufficiently high, then what I'm pricing in "powered by Veblen" is just as easily my own fair margin well within customer's own value prop, which could be far better than I imagine (that's why you look for clues as H1N1 said, triangulating questions).

Any dollar I leave on the table whether from real or imagined "Veblen", from fear/greed, or from natural deserved margin, is fungible and ultimately in our minds (and rightly mine to try and claim). As well, the customer's to refuse to pay. Making my own market.

And so we negotiate and seek a proper price, never fearing lack of cooperation once it's clear WE CAN SOLVE THIS for you.

And if forced to give up some dollars, pair that with a reduction in scope/service that SOUNDS like it's worth less (but that you know secretly runs you more). etc. Win win. (i.e. customer thinks you gave a big concession, but maybe you scalped off the worst wart of the project).