You’re familiar with the three P’s of marketing: Product, Price, and Positioning.* Of the three P’s, pricing is the most often overlooked. Charge what you are worth for a happier, more profitable future.
Generally, business owners pay the most attention to the product (or service). After all, that’s what your customers are buying.
Positioning gets secondary consideration. Positioning is a combination of branding factors, including the visual design of your logo, website, and marketing materials; the demographic segments you market to; the businesses you are affiliated with; the quality of your customer service; and the physical location of your business. Many local small business owners lump all the Positioning considerations together under a general heading of “marketing” and try to avoid it as much as possible.
This leaves poor, sad, lonely Pricing to get treated as an afterthought. Some common ideas are, “we’ll charge our cost of materials plus 20%” or “we’ll charge 20% less than our competitors.” But this is not a strategy, it is a shortcut. Following this path is like gambling: it might sustain your business, or it might drive you into bankruptcy, depending on a roll of the dice.
What then should you charge?
Let’s start with the cost of living. The cost of living includes:
- Rent or mortgage payment
- Health care
- Your phone bill
- Your internet bill
- Your electricity bill, garbage bill, and water bill
- Occasional clothing purchases
- Automobile maintenance
- Auto insurance
- Occasional home maintenance or appliance replacements
- Rental insurance / homeowner’s insurance / life insurance
- Your retirement savings
- Your children’s education fund savings
- Child care, if you have young children
- Servicing your student loan debt or other outstanding debt
- Dining out once or twice a month
- Going on vacation once a year
- Buying your relatives presents for major holidays
- Income tax (state + Federal), Social Security & Medicare
This doesn’t even get into a rainy day fund, or the cost of caring for an extra family member or elder parent. This is just the basic cost of living.
So if you were someone else’s employee, you’d be getting paid enough if you could cover all those expenses.
But you’re not an employee. You’re a business owner. So in addition to those basic living expenses, you also have to pay for:
- business legal filings
- business income tax and/or excise tax
- payroll taxes
- business insurance
- capital equipment
- interest on capital loans
- bookkeeping costs
- the cost of your office lease
- the cost of your office data connectivity and utilities
- the cost of the raw materials and other supplies your business consumes, converts, or re-sells
- ongoing professional education, licensing or certifications
- memberships in professional organizations like the Chamber of Commerce
- and your employees’ wages (which hopefully cover their cost of living if you want to enjoy high productivity and low turnover rates).
Next, you have to figure that your business will probably have to spend some 20% of its total revenue on some form of sales, marketing, and/or customer support; because whether you hire a salesperson on commission, or pay for a bunch of advertising, either way you gotta pay.
Got all those costs covered? Now, on top of all that, you’re in business to make a profit. Don’t just break even: make money! This is truly the American dream. So after your salary, your employees’ salaries, the cost of your sales or marketing, and all your other various expenses: on top of all that, you need to make an extra… what, ten percent? Twenty percent? Fifty percent?
At this point, it becomes clear that competing on price takes a toll directly out of your profit margin. Compete too aggressively, and you won’t even be able to pay your actual business expenses. This is why so many businesses fail in the first three years after they start up: they aren’t charging their customers enough to pay for their actual expenses.
Pay your bills, and also make a profit. Can you do that on minimum wage? No. You can’t even do that on $10.10 an hour. You are a professional, and you’ve got to charge professional rates.
What’s a professional rate? Well, what does your auto mechanic charge? What does your plumber charge? What does an electrician charge? What does an HVAC technician charge? We’re talking $85 an hour PLUS EXPENSES for the auto mechanic, up to well over $400 an hour for the plumber.
Why should you charge less than an auto mechanic? Why should you charge less than an electrician? Like them, you have a specialized skill. You provide a valuable service. You have unique knowledge and experience. Make the most of it, and charge what you’re worth.
Your customers don’t know what you are worth
The most common idea about pricing is, “We’ll charge what our customers want to pay.” But how do you know what your customers want to pay? If you ask them, they’ll probably tell you they want your product or service for free: they’d rather not pay anything at all.
Giving your product away for free might earn you customer loyalty for a brief time, but you can only give away so many free samples before you close your doors and go to work for someone else who knows how to price their services appropriately. Think you can start out by giving your services away for free, then raise your rates when you’ve established a reputation? I can tell you from personal experience, you will have to find a new customer base when you raise your rates, because all the people who were only with you for the low price will go somewhere else. They are not loyal to your brand.
To build a sustainable business model, you need to establish a relationship with your customers that goes beyond “low price.” You need to provide value, and your customers need to recognize the value that you provide.
The Salem Chamber of Commerce doesn’t know what you are worth
I’m a member of the Salem Area Chamber of Commerce. It provides interesting opportunities to meet and talk to other business people in the local area. It also provides an interesting perspective on how people value other people, and the services they perform.
The Salem Chamber states that it wants to promote local businesses, but it has chosen some strange ways to pursue this objective.**
One of the Salem Chamber’s big pushes in the past year has been the rollout of the “Member Marketplace.” This feature is now integrated into the local Chamber’s website, and the Chamber sends out frequent e-mails to all its members encouraging us to sign up for it, and to list our products and services for sale in the Marketplace.
But the whole point of the “Member Marketplace” is to encourage business owners to charge less for their services. There’s actually a visual feedback mechanism based on how deeply you are willing to discount your offer.
Here’s an example based on some completely imaginary numbers. Say you’re willing to list your product or service on the Member Marketplace with a juicy 10% discount. For every ten dollars you would normally charge, you’re only charging nine. That’s a substantial cut to your regular price, right? Not according to Member Marketplace. They rate your “Offer Strength” as “Weak.” In fact their rating of “Weak” applies all the way up through a 19% discount.
Your offer is only rated “Good” if you are willing to discount your prices by 20% or more.
And if you really want to get the system’s approval, you have to discount your price by 40% or more. Offer to give away your $100 product or service for just $1, and the system does not say, “Are you crazy? You can’t do that! You’ll go out of business!” Nope, the system says that your offer’s strength is “Great.”
Think you can simply list your offer for its regular price? The problem is, you don’t get to write your own ad copy; and all the options have the savings appended as a percentage. Who is going to click on an offer that says, “Save 0%”?
The message that the Salem Chamber is promoting here, is that whatever you’re charging, it’s too much. The Chamber is trying to say, if you want to make any sales, you have to give deep discounts. The Salem Chamber is telling its own members and local business owners, “You’re not worth it.”
What kind of message is that? Is this how they promote local businesses, by beating us up over the price? I think the Salem Chamber is deeply misguided on this point. The Chamber should be helping its members provide better value to their customers: value that will support existing pricing structures, or even allow local business owners to raise their prices. After all, aren’t we in business so we can make more money?
You won’t make more money by charging less. It’s simple math.
The logo redesign fiasco
This point was driven home for me recently when I received an RFP from the Salem Young Professionals, a division of the Salem Area Chamber of Commerce. This five-page document went into great detail about what would be expected from the designer who won the contract: including icon design; typography; multiple versions with the abbreviation and the full written name; multiple versions with various color schemes and also greyscale; multiple versions to be displayed vertically and horizontally; multiple versions in both standard display format and “reversed out” for use on backgrounds of different colors; multiple versions with just the logo/just the words; all of the above to be delivered in multiple file formats; final files to be accompanied by a 2-page branding document specifying the components of the logo and “guidelines on proper logo usage.” Oh, and they want the final files delivered within one month.
So that’s a lot of work on a tight schedule, and the RFP clearly states that only designers with well-documented professional portfolios will be considered. Given the extensive nature of these requirements, combined with the stature which their organization enjoys in the local community, this project is probably worth about $3,000; but for the privilege of having an important, well-known local organization’s logo in my portfolio, I’d have been willing to take it on for a deep discount; say maybe about two grand.
But their RFP also clearly states that their maximum budget for this project is a measly $500. They’re kinda hoping to award the project to someone who bids even lower than that.
The people who sent out this RFP clearly know that they’re asking a lot, and they clearly know that they’re asking someone to give them a deep discount off the regular price, in exchange for the privilege of working for a well-known organization. I’m sure that in the end somebody will submit a proposal to do this project for five hundred bucks or less. The Salem Chamber wins at some local designer’s expense.
Low bids hurt local business
The designer who takes on this project will put in three to six hours to write and submit their proposal along with the required biographical statement and work samples; anywhere from twenty to fifty hours of actual design time including customer support issues, design changes, and final file prep; and another two to four hours to write the final “branding document.” All told, the designer will work anywhere from 25 to 60 hours on this project, and will probably lose sleep in order to meet the one-month deadline. All this, for an hourly rate that might go as low as $8.33 an hour.
Professionals do not charge $8.33 an hour. The suggestion is offensive. It’s a shame that the Salem Chamber of Commerce would stoop to debasing local professionals in this manner. An organization supposedly devoted to promoting and sustaining local businesses, should be prepared to pay people what they’re worth.
[Update: since I originally posted this article, I have seen the logo design that resulted from the above RFP. And I have to say, it’s obvious the designer who won the bid did not put in 60 hours as I speculated. Based on the final product, I’m thinking they barely put in 10 hours. It’s obvious that the designer was able to rein in their client, to eliminate revisions from the design process entirely. It’s also obvious that the so-called “icon” which they submitted, and which was accepted by the client, is nothing more than a stock image from a stock photo website. I think I have a copy of the same image that I downloaded in 2008. I wouldn’t personally describe it as an “icon” as specified by the RFP, but what can you expect for a lousy five hundred bucks? I guess the lesson here is, if you’re going to lowball the bid for design work, you should be prepared to accept design work that is not original, and which barely meets your stated criteria.]
Human resources professionals don’t know what you’re worth
My last example concerns a casual conversation I recently had with a human resources professional. In a social setting, I was telling her about some of the work I do, building MySQL databases. She listened to me for a while, and then told me that she thought I should list my services on a website called “Fiverr.” I couldn’t remember where I had heard the name before, so she reminded me that it’s a website where you can offer to perform any service for a $5 flat fee.
Five bucks. A human resources specialist thinks that a business owner with a graduate degree and more than ten years’ experience should work for hours upon hours, performing advanced, mission-critical, technology infrastructure support services, for a flat rate of five bucks. And be grateful for the opportunity.
It boggles the mind.
Only you know what you’re worth
You have to decide what you’re worth, and then you have to stand up and fight for it. There will always be naysayers trying to drag you down, customers trying to get you to cut your rates and give them a deal. Possibly some of your close competitors will offer discounted prices, putting pressure on you to follow suit.
You don’t have to do it. Charge what you’re worth.
Instead of giving a discount, give value. Support higher prices by providing a better service. You don’t have to charge less than your competitors if you have resources that aren’t available to them. And never forget that your knowledge and experience are a resource: a valuable resource that other people don’t have and can’t match, whether they are your competitors or your customers.
Leverage your resources to support higher prices. Don’t discount yourself out of a job.
*(Some people add “placement” as a fourth marketing P, but I would argue that “placement” is an aspect of “positioning.”)
**(One of those involves getting involved in politics, which I personally believe is a serious error: the Chamber should stick to business and leave the politics to the politicians.)