When starting up, and especially if you are providing services it’s quite hard to price the things you are selling. In most of the cases, prices are lower than they should be from a number of reasons:
- bad evaluation of the efforts involved to provide the service
- wrong assumptions regarding costs, taxes
- the wish to take the projects no matter what
I actually wrote in an older article Pricing strategies for small business about having a low price strategy:
“Going cheaper is not really a wining situation on the long term. For at least one of the reasons:
- going cheap will cut down your margin. You only have a limited amount of time to put to work in the evenings, no way you could recover on volume.
- as a result of the above, your partners (if you have) and ultimately you won’t be very happy at the end of the year. That’s especially bad, as it will cut down your desire to do the extra work required by the business.
- you’re sending the wrong message to the market. Cheap means low quality.
- cheap cuts the wings of long term development. You will invest less. Use your old printer more. Use your old laptop more. You’re not going to have the best tools for the job.
- your employees (sales guys especially) will think cheap. If you set your prices low, they won’t go higher. They will be lazy and sell cheap, because it’s easier.”
Now, of course sometimes it happens that the prices go the other way around: too high. There are some reasons behind this as well.
- the entrepreneur wrongly assumes that his service is so unique that people will pay a lot of money for it
- the entrepreneur comes from a big, established company that affords to sell on premium prices based on brand, history or anything else.
- lack of proper market research
Ok. So what’s to be done? I could go the regular path and say you should do market research, watch the competition, calculate the amount of money that you need at the end of the month. But I’m sure that if you’ve got to read my (relatively small) blog, you already had the chance to read many others talking about the above.
The thing is that sometimes you have to build your pricing strategies based on the customer profile. It might sound unfair that you can name a price for the same service differently based on the customer. I mean if the service is the same, why should one pay more (or less) than the other?
Well, it depends. I found myself many times deciding to change the price based on the customer. Usually this process gets the prices down but that’s not necessarily the only way. Let me explain. Let’s say that creating a small site costs around $3,000. I don’t think this price tag is going to be a problem even for a small company, but if you are to make it for let’s see, a relatively unknown poem writer, maybe you should think that the revenues the poem writter has or will get through the new site won’t be enough to cover the site price. Of course, that shouldn’t be your problem really, but sometimes you don’t feel like loosing a customer.
Then what can you do? As soon as you get the feeling your price should be adjusted on the customer type, you will see there are ways to do that. Let’s say your sales feeling say that for this customer, and acceptable price would be $2,000. However, your costs don’t allow you to make this kind of prices. There are ways to deal with it.
- Maybe you could cut a little bit on the features, in a way that the result is not too different.
- Maybe you could discuss a longer delivery term, which means you could work on it between bits and pieces from other projects
- Maybe you could outsource parts of the project to a more cost efficient provider
I don’t know. Have you ever made the prices depending on the customer? (I know you did, but I’m talking at a strategic level)
Bye!
Well made points in the blog. I have a basic philosophy for an entrepreneur — any company really — that if your success is based on pricing, you will ultimately lose. Using a comodity approach — even for a service business — leads to failure, because there is always someone crazy enough to offer a lower price.
After over 25 years of experience I have learned it is much better to offer your service or product based on value not price.
My experience is that people will almost always buy value over price. If they don’t, then they will not be customers you want.
There’s two ways I normally decide. I create a list first, then ask the list what they want and how much they’d page – almost ALWAYS higher than I think to offer.
The second way is to start with a low price and incrementally increase the price periodically until sales start to slow.
Your post brought up great points – I also try and remember that pricing that is too low often brings me the wrong type of client – a price shopper rather than someone happy with true quality.