pricing for services
Pricing for Services
Vocabulary
| lack | namely | disadvantage |
| gain | break in | newcomer |
| render | undercut | according to |
| profit | strategy | freelance |
| bill (2) | in essence | underprice |
| billable | charge (2) | competition |
| fee | measly | feeding frenzy |
| frenzy | bargain | extreme |
| piranha | premium | reputation |
| reliable | deliver | attribute |
| inferior | prospect | turn off (2) |
| desire | attract | don’t mind |
| ironic | to please | demanding |
| stuck | relative | rule of thumb |
| aim | category | trade (3) |
| budget | stretch | squeeze |
| decent | average | perception |
| rank | flexible | take advatage of |
The Underpricing Strategy
New, service-providing businesses are often at a disadvantage. Namely they lack experience and a customer base.
To break into the market, many try to undercut the competition by significantly lowering their rates (or “low-balling”).
If, for example, most graphic designers charge $100 an hour, newcomers believe they can gain a market share by offering $50 an hour.
Only When Selling a Product
Drastically underpricing the competition is a great strategy . . . but only if you’re selling a product.
On the other hand, when you’re selling a service, charging a really low rate isn’t a good idea.
There are several reasons for this, according to freelance copywriter Bob Bly.
Low Earnings
1. First and foremost, if you are rendering a service, you are in essence selling your time — of which there is a limited quantify.
The less you charge, the less profitable your business becomes . . . and the less money you earn.
Let’s say you can work only 25 billable hours a week. If you charge $100 an hour, you earn $130,000 a year. But if you charge $25 an hour, you earn a measly $32,500 — working just as hard and just as long.
Bargain Hunters
2. Second, the notion that lower fees attracts more clients is not necessarily true.
Yes, some customers actually are bargain hunters; and low rates draw them in like piranhas in a feeding frenzy.
However for many others, price is not a deciding factor.
Instead, these clients place a premium on quality: reliability, speed, expertise, track record, and reputation.
And for that, they are willing to pay TOP dollars.
Low Fees
A low fee signals to these buyers that the vendor does NOT deliver those attributes.
The message is that the provider and his or her service are inferior.
And so low prices actually turn many prospects off!
Difficult and Demanding
3. Low fees attracts a less-desirable clientele for your services; a premium rate attracts clients who value good work and don’t mind paying for it.
Price buyers, are not only the least profitable clients to deal with, but ironically, they are often the most demanding and difficult to please.
Selecting a Price
So, if low-balling is a bad pricing strategy for a service business, where should your pricing fall relative to your competition?
Years ago, GD, a pricing expert, gave the following rule of thumb for setting service fees: Your price should fall in the middle of the top third.
In other words, if the lower third of service firms in your trade charge $50 to $100 an hour … the middle third charges $100 to $150 … and the highest-paid charges $150 to $200 … GD thinks you should aim for $175 an hour.
Why?
Well, those in the lowest third are in the low-ballers category. You certainly don’t want to be stuck there.
The middle range isn’t quite as bad. It can make you a decent living — and win some good clients. But if a low price creates a perception of low quality, a middle price can create a perception of being average.
Your goal is to be ranked in the expert, professional group.
Middle of the Top Third
In the above example (for services that range between $50 and $200 per hour) GD says to charge $175. Bly recommends flexibility, charging between $150 and $175 per hour.
Why not go all the way and charge the highest price — $200 an hour?
Because that would be going to the opposite extreme.
At that point, the fee becomes a huge concern to clients. It stretches their budgets to the limit. They begin to feel like they’re being squeezed and taken advantage of.
Not the Highest Price
By backing off the top of the price range, you can still command a premium fee, but remove price as the foremost issue in the client’s mind.
Okay. So your price should be somewhere around the middle of the top third in your market.
But how do you justify that price . . . especially when competitors may be more skilled, experienced and (perish the thought) perhaps charging even less than you?
Questions
1. New service providers usually succeed instantly. What do you think?
2. What strategy do many new entrepreneurs use? Why do they do this?
3. According to Bob Bly is this a good or bad strategy?
4. Reason number one is the most obvious, straightforward reason. Do you agree?
5. Do low fees attract all kinds of clients–or only a certain type of client? What kind of clients do low fees attract?
6. What do low fees indicate to prospects?
7. Who are more difficult and demanding, bargain hunters or premium clients?
8. What price range does Bob Bly suggest?
9. Pricing alone guarentees success. Is this correct or wrong?
A. Do you agree with Bob’s pricing strategy? What do you think of prices as a customer? How much does pricing affect your purchasing decisions?
B. What is the pricing strategy of your business?
C. What is the price range for services in your market? What is the average price?
D. Has your enterprise conducted experiments and varied its prices?
