Price as Positioning 3.February.2007
Knowing what to charge is one of the greatest challenges of any business. If you charge too much you’re just not going to make sales, and if you charge too little you aren’t going to make any money. (Pending some fantastic business model). Conventional wisdom says charge just enough so you don’t loose any business and you can still make ends meet if you stay busy. I would like to challenge that conventional wisdom. If what you’re selling is good enough to be on the top half of the market, you can use price to position yourself above the competition.
First, let’s look at the opposite side of the coin, people charging too little. When they just starting out people and businesses are desperate for work and it shows. Their price starts low and is easily plied lower. They end up getting the job and barely covering expenses on it. There are all sorts of very good reasons for doing this that people like to use. “I just need the work” and “I just wanted to get my foot in the door” are my favorite tag team. Here’s the problem with that. At that price you’re working long hard hours and barely making enough to get by. Take a price cut to get your foot in the door, only shoots yourself in the foot. As Nick Griffin says in an article for the May 2006 issue of Creative Cow magazine “most discounts are permanent”. He goes on to say that “after you’ve been pigeon-holed as a certain level of supplier, it’s nearly impossible to ever talk them into a substantial increase in fees.”
But instead, what happens if you charge what you’re worth and stick to that price. There will definitely be customers who say “ahh, that’s a bit too much for us.” And if you’re really lucky, they’ll talk about how you doubled what they were expecting, but that they’ll “keep you mind for future projects, should the need arise.” Perfect! While most you won’t ever hear from again, you positioned yourself as being able to deliver a higher quality product than your competition. Maybe they’ll be unhappy with their low cost provider and next year, realize they need to hire the big guns.
I just congratulated you about scaring a client away. Now you’re probably thinking, about closing this window and moving on to more intelligent authors, but hear me out. The fact that you scared away some work, means you’re not going to be as busy, but because you are charging a pretty penny for the work you do get, you don’t have to work yourself ragged. And with any luck, your business will increase as you gain the reputaution of being the best in town. And because you’re the best in town, your words take on a whole new meaning in meetings. They actually listen to your ideas, feedback and expertise. If you don’t believe me, look at the consulting industry: when you pay someone $12,000 for two days, you better believe you’ll hang on every word they say.
This is fine in theory, but does it actually work. A friend of mine, who started a company within the last year, has two clients whom he gave substancal discounts to. These are his company’s least favorite clients. (The company and owner’s names have been withheld to keep any clients from being insulted.) The clients second guess everything his company does, the projects have bad scope creep and the timelines continue to get abused. Haven’t heard from the client in weeks, but now they say they need it tomorrow kind of stuff. On the other hand, in one particular occassion his company provided a bid that blew that potential client out of the water. Now that potential client is the owner’s favorite client. “I learned that establishing your price from the beginning and holding firm is the best and quickest way to say ‘I’m reputable, I do great work, and I expected to be respected.'”
This type of positioning really works if in fact you can deliver products that are worth what you’re asking people to pay.