Pricing: You're Probably Doing It Wrong
Do you run a service business? Your obsession with time may be messing with your pricing and seriously limiting how much you make, argues a new ebook from FreshBooks. Whether you’re a dog walker or a designer, your approach to pricing is probably pretty similar, at least if you’re relatively new to the game. Most likely you take a look at your costs, figure out what you need to cover them and then add a bit on top for what seems like a reasonable profit and present the final product of these calculations to prospective clients as a daily or hourly rate.
It’s a tried and true method, but it’s probably costing you a bucketload of money and creating schedule feast or famine -- periods where you stress through the lean times and run like a lunatic in the busy ones -- according to a new ebook titled Breaking the Time Barrier from online accounting company FreshBooks.
The book, which is a quick read, follows the trials and tribulations of a fictional website designer named Steve who’s struggling to make a healthy living as a freelancer. He enlists the help of a more experienced and successful designer named Karen, who acts as a sort of pricing Yoda, guiding Steve to discover his potential as a high earner and acting as an oracle to dispense FreshBooks' wisdom. What’s her central insight?
Quit all that obsessing about time and focus on value instead. Your clients, Karen insists, don’t really care how long it take you to do something; they care about the value it creates for them. Focusing on clock watching isn’t just limiting your income, it’s also downright selfish.
"I look at pricing from [my clients’] point of view,” she tells young padawan Steve in the book. "They don’t hire me to design a website for the sake of designing a website. They hire me to design a website that’s going to help them grow their business. I find when I look at it like that--from their perspective--it’s clear I’m not selling time. Instead, I’m selling a solution that is going to make an impact for my client and achieve some business objective."
By having an in-depth conversation with prospects about what they’re trying to achieve and really listening to their goals, you can set value-based prices that are higher for you and also deliver more for the client, ideally, offering clients a menu of options to help them reach their objectives.
Getting hard numbers for your clients’ goals is best, Karen tells Steve. If you can get a prospect to tell you they’re looking to gain an additional $100,000 in revenue based on your work, you’re more likely to get them to agree to pay you $20,000 for it. If you thought about the project in terms of hours, perhaps you’d charge a tenth of that, she warns.
Increase your income by a factor of ten is, of course, awesome for you, but its not bad for the client either -- they may be paying more but they’re much more likely to get greater value for their dollars. "Selling hours actually creates a conflict of interest," according to Karen. "It puts you and the client on opposite sides of the table. If you’re selling hours, it’s in your best interest to take longer, to bill more hours. But your client is interested in getting solutions that work as promptly as possible," she argues. "Clients don’t care about our costs. They care about the value we create for them, so that’s what we should be asking them to pay for."
Of course, this approach doesn’t work for everyone, pricing guru Karen concedes. “When I started out I charged an hourly rate and I think hourly rates make sense for someone just starting out, someone with little experience and limited skill,” FreshBooks has her tell Steve. "But over time... you begin to outgrow the cost-plus pricing model of charging by the hour. So if you stay with that pricing model, you’ll find it very limiting," she adds.
But that’s not the only potential stumbling block to value-based pricing. How do you handle clients that push back against the idea of paying for value? What do you do if your skills aren’t broad enough to meet the client’s fundamental objectives? How can you change your image from a gun for hire to a collaborative partner in solving a client’s problems? And how do you price small jobs and routine maintenance?