Name Your Price

The Intangibles

If you're selling breath mints, there are a lot of fixed costs that go into creating your product and distributing it, and of course, the store selling your product deserves a cut, too. Even your customers understand that you incur those costs and that you deserve a profit.

It's a little different selling yourself, as 35-year-old Joshua Estrin discovered after forming Concepts in Success, a business development firm in Fort Lauderdale, Florida, in 2001. After years in the nonprofit sector, Estrin formed a company that helps businesses and nonprofits with everything from business planning to event planning. His business's goal is, in a few words, to help companies grow.

It's a lofty but nebulous goal, and when Estrin tried to determine the price for his services, he came up with a yearly salary and tried to work out a formula in which every project would pay him as much as if he were working for the company full time. "That was a lesson learned," says Estrin. "I spent a whole heck of a lot of energy documenting every last breath, phone call and hangnail to my clients."

Later, Estrin switched to an hourly rate-which exceeded $100 an hour-and found he could live with that. Eventually, he decided to switch to price points-set fees he could charge for the various services he offers companies. It's a strategy that still seems to be working four years later. Concepts in Success, which has only one full-time employee besides Estrin and about 15 to 20 contract workers, should bring in approximately $1 million in sales by the end of the year, and its clients have included American Airlines, American Express, Hertz and Pepsi.

"In the beginning, I struggled, but I made the decision to stay true to my gut," says Estrin of coming up with those initial fees, which were often in the thousands of dollars. "In those first few test runs, I'd go out and network, have people ask what my rate was, watch them usually catch their breath and fall out of their chairs, and practice not apologizing for it."

And if you have a strong background in the area you're consulting in, you shouldn't apologize. Remember that when someone pays you for an hour of consulting work, the fee covers more than just your time; it includes the experience through which you built your expertise. It's similar to paying for a surgical procedure-the cost includes not only the time the surgeon spends operating, but also the body of knowledge underlying his or her ability.

It's also a smart idea to try and turn an intangible into something you can touch. "In my business, financial consulting, we'll bring out mock financial plans and show them to clients or prospects so they can see exactly what they're going to get," says Los Angeles business advisor Robert Pagliarini. "Suddenly, you've turned a service into a product. We can show them sample reports, charts and graphs-all these products that really represent the service we provide."

A shrewd strategy, because adding value to your price is what really wins over consumers. "Pricing is not about cost, it's about value," says Docters. "Because the fact is, it doesn't cost Chevrolet twice as much to manufacture their cars. They can charge as much as they do because it's about value instead of cost."

"Pricing is an art, but it's not only about pricing, it's about differentiating yourself and deciding what your niche [is], and what the value of your niche [is]," says Doellgast. "If you only build your [business] around your low price, somebody else is going to come along next week and undercut you. And then how have you established your market? You really haven't."

Golden Rules of Pricing

Setting a price is dizzying to think about, isn't it? If you're truly overwhelmed and don't have the time to take a pricing class from Dilip Soman, marketing professor at the University of Toronto, check out these five basic rules he gave us, distilled from one of his lectures:

1. Never set your price lower than what it costs to stay in business. Sounds obvious, but you'd better remember it.

2. Bigger objects are always more valued than smaller objects. That's probably why, says Soman, software manufacturers package small disks in large boxes.

3. It's always easier to substantially increase your prices when you have fewer competitors (think airline seats) than if you have a lot of competitors (think gasoline stations).

4. If you own a service business and you want to charge high prices, don't be afraid to start on the low end of the scale and raise your prices later. It's easier if you develop a reputation for good service first.

5. If you have to increase your prices shortly after starting up your business, consider offering something that will make the product or service more valuable-like changing the packaging of your product or adding more support to your service.

Geoff Williams admits that when it comes to paying for anything, his favorite price is cheap.

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Geoff Williams has written for numerous publications, including Entrepreneur, Consumer Reports, LIFE and Entertainment Weekly. He also is the author of Living Well with Bad Credit.

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This article was originally published in the September 2005 print edition of Entrepreneur with the headline: Name Your Price.

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