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Perfecting Your Pricing Strategies

You're no blue-light special. Throw in the extras, play to the customer's needs, and get the price you deserve.

Again and again, I've seen incompetent people earn more than competent people. One reason: They know how to charge. Charge $500 when the customer would have paid $1,000, and you've just tossed $500 down the toilet. Charge $1,000 when the customer's puking point is $500, and you've tossed a customer down the toilet.

Sometimes, it's not how much you charge--it's how you ask. Should you charge by the hour or a flat fee? Go for the big sale or start 'em out with a small one? When's the right time to spring the price on them? What if a customer tries to bargain with you? Should you offer a sliding scale and risk being taken advantage of by fat cats who plead poverty?

The questions all boil down to this: How can you charge above-average fees while leaving customers knowing they've gotten a good deal? The following strategies have worked for my clients and for me. The 10 minutes it takes you to read through these strategies may yield you more money than any 10 minutes you'll ever spend.

Make Clients Comfortable

Many customers will pay extra to reduce their risk, so consider these options:

  • Offering an all-inclusive price rather than an hourly rate. Many people will pay extra for the peace of mind of knowing, upfront, how much a project will cost. A side benefit of a flat fee: You needn't make explicit your hourly rate, a number that often raises eyebrows.

Of course, when determining a flat fee, build in 25 percent to 50 percent more for the extra time you'll inevitably need. There's only one way a task can take no longer than it's supposed to-if everything goes right. Obviously, there's an infinite number of ways that the task can take extra time.

  • Selling a low-priced service or product first. Many customers are understandably reluctant to spend big in their first encounter with a business. So, especially if you're sensing reluctance, offer a low-cost initial purchase. For example, if you build Web sites, instead of expecting the customer to hire you off-the-bat to develop their site, say, "Let's take it a step at a time so you can feel comfortable with my work. For now, why don't you just hire me to develop a blueprint for your site? If you're satisfied with that, we can go further. Make sense?"

Don't offer to do initial work for free by, say, offering a complimentary hour of consultation. Too many customers will take the freebie and walk. Besides, offering to work for free can make you look desperate.

  • Offering a guarantee. A money-back guarantee provides peace of mind for the customer yet is unlikely to cost you anything. If your product or service is any good at all, very few, if any, customers will ask for their money back.
  • Accepting non-cash payment. A cash-poor customer may be willing to offer you a great deal if you're willing to accept non-cash payment. For example, an accountant did a small project for a playground equipment manufacturer. He got paid with a swing set, sliding pond, and play structure, delivered and set up in his back yard. Leading Silicon Valley law firms such as Wilson, Soncini sometimes do legal work for cash-poor start-up companies in exchange for equity in the company. Wilson ends up making more money than if it had charged its regular hourly rate. This tool can be just as effective for home based entrepreneurs.

Why You Can't Compete on Price

Many entrepreneurs, especially newbies, compete on price. Bad idea. Here's why:

  • Few small businesses, even low-overhead ones, can hope to earn a middle-class living unless their bids are based on an hourly rate of at least $75 an hour. Your fee must figure in the following costs: taxes (usually 50 to 60 percent if you count federal, state, FICA, disability, etc.), liability insurance, cost of setting up and maintaining your office, travel time to clients' locations, equipment, materials, books, accounting fees, marketing costs, business license fees, training costs, vacations, sick leave, health insurance, retirement.

And don't forget that you probably can't bill 40 hours a week. Most small-business owners must spend considerable time on nonbillable activities: marketing, doing administrative work, acquiring new skills, etc. The average one-person business bills only for 10 to 15 days a month. You only want customers that allow you to earn at least a middle-class income.

  • You'll attract difficult customers. Customers who insist you work for sub-middle-class income are likely to be difficult to deal with in all matters. Even if you've given them a rock-bottom price, they're more likely than others to nitpick your project so they can get a price concession or more work out of you for free.
  • If you develop a reputation as a low-cost provider, your perceived value will be low. People believe you get what you pay for. Sometimes, the easiest way to appear more competent is to raise your prices. Crazy, but true.
  • It's rarely necessary to be the low-price leader. Simply market well-then once customers call, all you have to do is listen to their needs, professionally propose a service or product, and offer a price that's within reason. Often enough, they'll say yes.
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