Chapter 13

Pricing Services

In-a-Rush Tip

You can skip this chapter if you sell products, not services.

Also, you can skip chapters 13 through 16 if you need to set prices immediately. These chapters give you additional ideas to test down the road, to continue improving the profitability of your pricing.

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Imagine No Chapter 13!

I wanted to skip Chapter 13, but my book editors overruled me. Why skip it? To help sensitize you to the power of numbers. You see that power when:

• High-rise buildings in the United States skip a 13th floor and go right from 12 to 14, because otherwise they would have to discount the rentals they get on that floor.
• People in Japan avoid elective surgery on the 4th of any month (“shi” is the number 4 and also means death in Japanese).
• More people buy products with a “7” in the price.
• Many more people will buy a product at $99.99 than at $100.

I recommend you reread Chapter 10 and start profiting from a smarter use of numbers in your pricing strategy.

The Complications of Setting Prices for Services

Many problems complicate the problem of selling services. A few of them are:

• Pricing by the hour versus the job
• Finding out what your competitors charge
• Comparing your services to a competitors—when what you’re offering depends somewhat (or a lot!) on the person providing the service

Additional problems arise when the service business is a sole proprietorship (as are most):

• Pricing when you’re desperate for work (or at least when you have more available time than work)
• Pricing when your variable costs are almost zero

The Myth of Pricing Based on “What You Want to Earn”

Almost all articles on pricing services at some point will tell you to price based on what you want to earn. For example, say you want to earn $60,000 a year before taxes, and you’re willing to work 40 hours a week, 30 of which you think will be productive (earning) time. You factor in two weeks of sick days and three weeks of vacation. That means you’ll need to charge $42.55 per hour.

Sounds very scientific, doesn’t it? But here’s the problem: Why would I want to earn $60,000? If the choice is mine, why wouldn’t I want $80,000? $100,000? Heck, if I’m honest, I want to earn $10,000,000 each year. Wouldn’t you?

When you’re pricing services, the question is not what you want to earn—but what the market will pay.

And here the pricing gets even more complicated.

• It’s much easier to say what a pair of shoes is worth than what a good time is worth.
• Buyers have an idea what a meal is worth because they’ve purchased the ingredients. They’ve also eaten in restaurants.
• Buyers have no idea what your specific consulting services are worth.
• If a picture is worth a thousand words, what’s a photographer worth in cold, hard cash?

Pricing by the Hour versus the Job

This problem comes from two opposing desires:

• Service providers want to charge by the hour because:
  • It’s easier to calculate.
  • They don’t have to worry about extra demands from a client abusing their time.
• Clients want to pay by the job because:
  • It’s easier to budget for.
  • They don’t have to worry about service providers running up hours to squeeze more money out of them.

What’s to be done?

The simple answer is to do what your competitors do, if they are uniform.

• If all writers price by the hour (or the word), then you can, too (and may have to in order to sell your services).
• If all accountants in your area price by the hour, you can, too (and may have to in order to compete).

If your competitors differ—or if you want to see if pricing differently can be a competitive benefit—then I recommend you test what is most profitable for you in terms of both landing customers and profitability on those customers.

Offer the next several potential customers the option. Give them a price per hour and a fixed price for the job. See what they take. My suspicion is a large percentage will take the fixed job.

If customers prefer it and your competitors don’t offer it, this could be an advantage for you.

How to Protect Yourself from Client Add-Ons to a Fixed Price Job

If you create job proposals, there’s a clear way to protect yourself. Write your proposal for each project in great detail, showing exactly what you will do and what you need from the client. I typically do a two- or three-page proposal for potential consulting jobs (single-spaced with lots of detail).

In addition to preventing no-cost add-ons that aren’t in the proposal, this tactic has many other advantages:

• In spelling out the job in detail, you better understand yourself exactly what is entailed and how many hours roughly it will take. That makes your price better in tune with the work it will require.
• The detail impresses the potential client in several ways:
  • It shows them you are organized and thorough.
  • It shows them the huge amount of work required—in case they were considering just piling it onto an employee.
  • It shows them where what you’re doing requires skills none of their employees have.
  • If possible, it also shows skills required that few if any of your competitors have.
• It gives them a feeling of partnership in the project, because at the end you give a price based on the above detail and ask for anything they would want to add to the project or could subtract from it. If so, that will often lead to a revised price.
• Psychologically, it makes your price seem lower or more reasonable when it is listed after all the work you’ll be doing to earn it.

Finding What Service Competitors Charge

This is not a problem for service businesses where prices are posted. Unfortunately, much service pricing is not posted.

Knowing what your competitors charge is critical for successful pricing, so you may have to get creative. Here are some possibilities when prices are not posted:

Picking Your Price Positioning

Once you know what some of your competitors charge, you can better assess the proper price positioning strategy to take. If competitors better than you charge X, you’re going to need to charge X minus something, unless you can improve what you offer. If your competitors have lower attributes (credentials, features, glamour, etc.), then you’ll want to price higher.

An interesting research study was done to answer the question of how much more (or less) expensive than competitors a service should be. Arnold, Hoffman, and McCormick (1989) looked at four differentiators of the service, including:

• Availability (How available are other options?)
• Testability (Can your results be proven? Can they be partially tried?)
• Commitment (What’s required of the buyer in dollars or in time?)
• Price sensitivity (How price sensitive are potential buyers as a group?)

The authors concluded that services can command more premium prices the more the services are unavailable to the consumer and the more they can be tested.

They further conclude that price sensitivity is a guiding factor for the amount of customization versus standardization you offer for the service.

What Your Price Says about Your Firm

Part of the impact of a price position in a competitive environment is in its effect on buyer perceptions of quality.

A correlation between higher fees and perceived higher quality was found (Anonymous, 2003) for accounting services, which are high in credence attributes (those attributes difficult to evaluate even after the service has been performed).

The author concluded that in high-risk scenarios, people prefer those professionals who charge higher fees.

Ask yourself if you were on trial for your life, which of the following attorneys you’d want to hire—based solely on their prices:

• $390/hour
• $350/hour
• $325/hour
• $250/hour

I submit that given any way you could afford it (and even if you couldn’t!) you would not want to hire the $250/hour attorney.

Suppose you have decided to have a face lift. You’ve checked out local doctors and found four who do the procedure and who have no complaints against them. Their prices are:

• $15,000
• $14,000
• $13,000
• $9,000

Be honest. You wouldn’t want to hire the $9,000 doctor, would you?

This rejection of a lowest-priced alternative happens when the risks of bad performance are very high.

Let’s instead consider an amusement park. If we have two choices that sound about the same and one is substantially lower, many of us (probably most) would take the cheaper alternative. There’s no risk to a bad choice. If we don’t like it, we can go to the other one another day.

However, consider the same scenario if you’re a young man picking the amusement park to which to take a date who is important to you. In that case, the higher-priced option would provide some psychological protection against the risk of a bad experience that might influence the date.

Of course, the risk of a bad criminal attorney, a bad tax advisor, or a bad plastic surgeon is exponentially greater.

Rejection of the lowest price alternative also happens where we don’t have enough other ways of ascertaining quality than the price.

How to Charge Higher Prices to Those Willing to Pay More

Many, many services can be more profitable by charging higher prices to those willing to pay extra and lower prices to those who are the most price sensitive.

How can you discover who among your customers doesn’t really care if your price is higher? You don’t have to figure this out. You can structure your pricing so your customers divide themselves into groups based on their price sensitivity.

These technique works well for movie theaters, sports parks, amusement parks, and many other services.

Look at your business and find the most popular:

• Time of day for purchasing
• Days of the week
• Turnaround time
• Anything else where customers prefer something specific

Then, price your services higher for those most desired scenarios, and offer lower prices for the least desired. Examples include:

• Bargain matinee rates for theaters and films
• Bargain weekday morning prices for amusement parks
• Bargain services with a three-day turnaround

Just remember: You’re not charging extra for peak times. Instead, you’re offering bargain rates for un-peak times. Psychologically it’s a huge difference. Nobody wants to pay an “add-on” fee. But people love having ways to get a discount.

Note

In several industries, people are used to paying an add-on for a “rush” job. That doesn’t mean they like it. Ask yourself how many people are paying for your rush work. If not many, consider making your rush price your “regular” price and your rush delivery timeframe also “regular,” then offering x percent discount if customers are willing to take slower (two-day? three-day?) delivery. You could get a lot more people paying higher prices. (Just make sure you could handle them with your quicker service!)

This way, those who really don’t care about your prices can come/buy when they want. Those who are price sensitive can feel good about changing their behavior in order to get a deal.

It’s a win/win situation for all concerned—including your profits!

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