If you run a business that provides a service, you’re most likely undercharging for your work.
In fact, if you ask most service providers how they price themselves, 90% of them cannot give you a good reason that’s based on anything more than a gut feeling or an intuition.
As opposed to physical products, services don’t always have a clear cost of goods sold. It’s hard to objectively measure how much money your time is worth…so you just make it up as you go along.
We’ve all been there.
You most likely chose your current prices for one of the following reasons:
1.) It “feels” good energetically: “It’s a spiritual product, so I’m charging $444” lol ok.
2.) It’s priced lower than your immediate competitors, since you believe that customers make their buying decisions primarily based on price (they don’t).
3.) It’s based on somebody else’s price ceiling for what you believe is possible in your industry: “I’ve never seen somebody charge more than $X for this product / service, so that’s the line for me, too.”
All three deeply-flawed lines of logic are one-way tickets to Brokeville that will make it nearly impossible to grow the business.
So how do you price yourself effectively?
Unpacking The Price Riddle
The #1 thing you must understand in order to effectively price yourself is that customers do not care about your offer. They care about their lives and whether or not your offer solves a problem for them.
If it solves a very painful problem, they will do mental gymnastics to buy from you. If it makes complete sense on paper but doesn’t pull them emotionally, you’ll have an uphill battle getting them to sign the dotted line — even if your prices are lower than your competitors.
Humans do not buy based on logic alone, even if they think they do. Humans make buying decisions with emotion and use logic to justify the purchase retroactively. Strong emotions can make us pull out a credit card faster than a pile of incontrovertible scientific data ever will.
- We buy because we are scared to miss out on an opportunity (FOMO).
- We buy to show belonging with a desirable group or community.
- We buy to alter the way others perceive us.
- We buy to alter the way we perceive ourselves.
At the root, our emotions drive our buying decisions in order to eliminate pain or to seek pleasure. With this understanding, you become a powerful pricing wizard.
Understanding the difference between price and value is the key. Most people never learn this distinction.
Price is what you pay for something — this includes actual money exchanged for the service and any consequences (intended or unintended) with the purchase.
Value is what you receive in exchange for the price — not just the delivery of the product itself, but the overall experience of buying and effect of the purchase on your life.
Flying Commercial vs Private
Imagine two flights from California to New York. Spirit airlines will get you there for $200. A private jet flying the same route will cost you $5,000. Which one is a better deal?
The end result is that you end up in the same location. The gigantic difference in price is not based on getting you to your final destination safely. It’s based on everything that happens between takeoff and landing.
The entire private experience saves 5-10 hours on both sides of the trip considering security, flight path and other hassles averted. It also completely eliminates the stress-induced travel hangover from dealing with the regular airport system which may slow you down the next day.
Image via PriveJets.com
The most important element of premium pricing is selecting the correct audience.
Marketing your private jet service to executives who travel often for business and make over $1MM/year in personal income makes sense. Marketing it to families traveling for a Disney vacation doesn’t. This understanding will affect where you display your marketing, the copywriting and creative you employ, as well as the price point itself.
Pretend you’re the busy executive. Why would you pay 25X for a private jet experience when the outcome is the same as a discount airline? Here are a few reasons:
- Because your can. Purchasing a premium experience that’s very limited makes people feel special and confers social status.
- If you have the means to buy a $5,000 plane ticket, it’s likely that you view your time as highly valuable. You’re paying for the luxury of being able to show up when you want and get there faster.
- You’d gladly pay the extra $4,800 not to ride with other people, crying babies or elbows jockeying for a sliver of your seat.
The high-powered executive has done the math and realizes that the price of flying commercial is actually a lot higher than $200 when you factor in the time.
For the sake of round numbers, let’s just say that $1,000,000 in annual income divided by roughly 2,000 billable hours for the year equates to about $500/hour to the executive.
The 10 hours lost on the commercial airline before during and after the flight actually costs the executive $5,000 because this is time that could be spent in productive work ($500 / hr x 10 hours saved = $5,000).
From this perspective, both flights have the same price tag. When you add to that the experience of peace that comes from removing the annoying airline experience, the private jet seems like a bargain to someone who has the means to afford it.
The “Observer Effect” In Pricing
Value is a matter of perception and it’s completely dependent on the lens of the individual. I liken this to the the observer effect in physics which states that just the act of perceiving something changes that thing.
The act of you observing the price of a product changes your perception of the product itself — for better or worse.
Discount shoe retailer Payless proved this recently with a fascinating social experiment where they created a fake luxury shoe store called “Palessi,” filled it with avant garde sculptures, mood lighting and a sales staff dressed in all black.
They then proceeded to mark up prices by over 1,800% — turning $35 ugly duckling shoes into $645 swans with a snap of the fingers. And the “sophisticated” buyers ate it up!
Check out this video:
Kids at my school used to get teased mercilessly for wearing Payless because it meant you were too poor to afford brand names.
The value of an expensive shoe has nothing to do with the quality of the materials or performance in athletics. It has everything to do with how people perceive you and how you perceive yourself when you’re wearing them.
How To Price Your Products & Services For Profit
You’re not doing anybody a favor by underpricing yourself: not your customers, your team or yourself.
You cannot overdeliver if you underprice.
Remember, pricing really comes down to your positioning within a specific market and the perception of value you are creating.
The difference between charging $1,000 and $10,000 for the same service isn’t a 9x skill or quality gap. It’s a 2x or 3x gap at best. The rest of the price difference is created via perceived value and positioning.
Not understanding this simple concept around pricing will keep you broke and mad at people who aren’t any better than you — but are charging the rates you deserve!
Your job as a business owner is to make a profit.
Don’t neglect the needs of your business trying to “over serve” your customers and give them a good deal, only to end up bankrupt. After all, you can’t support your customers if you go out of business.
- You want to price yourself in a way that accounts for everything you need to deliver the service as described.
- You want to price yourself in a way that allows you to overdeliver to your customers and go out of your way to “wow” them whenever possible.
- You want to price in a way that allows you to bring additional support systems and team members in to get the job done right.
- You want to price in a way that allows you to effectively market and deal with the rising cost of advertisement across all mediums.
- You want to price in a way that accounts for taxes.
- You want to price in a way that takes your financial goals into account and actually affords you the lifestyle you want to live.
In line with these ideas, here are two concepts that will allow you to position yourself effectively and increase the perception of value, which will allow you to raise your prices accordingly:
Concept #1: Sell money at a discount
Show how the product or service you are providing is actually an investment that makes (or saves) the customer money, not simply a purchase which drains their bank account.
One of my students has a company that places expertly-trained sales assistants inside of online businesses. These assistants are trained to prospect and nurture leads in your social media and email inboxes, which saves you time and makes you money by setting up sales calls.
The investment up front is $12,000 — but if you have a product that’s $15,000 and they create 2 appointments which result in sales, you’ve effectively purchased $30,000 for $12,000. That’s an easy sell.
Concept #2: Prevent direct comparison by bundling vs a la carte selling
If price or a few features are the only differentiating factor between you and your competitors, you’ll lose to lower prices and attract uninspired buyers.
Whenever possible, never allow your customers to make direct “apples to apples” comparisons of your product with another on the market. You want to force them to make “apples to oranges” comparisons.
If you’re a chiropractor, don’t just sell the adjustment for $100 a pop (no pun intended). This sets you up for direct price comparison.
Instead, create an experience that sells the care package including a certain number of adjustments and bundle it with proprietary online resources, a copy of your book, physical merchandise, discounts to other healthy lifestyle businesses in your area, a ticket to an upcoming live event and more. Your cost to create this bundle is a few hundred dollars — but you could easily charge upwards of $2,000.
The adjustment itself is a discrete deliverable. But the other elements of the bundle are hard to put a price on at first glance.
What’s the objective value of coming home from your appointment with everything in a beautifully branded glossy gift box full of goodies? It’s all in the eye of the beholder.
Without the direct comparison to make, customers will have to rely on how the experience makes them feel. This is where price elasticity begins to take effect.
Instead of having a $100 “whenever my back hurts” client that comes in 6x/year and spends $600 total – you now have a dedicated community member that’s drinking your Koolaid, wearing your t-shirt, and happily paying you $2,400.
It’s Time To Rethink Your Pricing Strategy
Based on everything that you’ve read — are you going to make any changes to your pricing strategy? Maybe you don’t even have a pricing strategy right now…
If so, what changes are you going to make?
Leave a comment below and let the community help your business become more profitable!
PS — on Thursday, we’ll be doing a deep dive into price strategy and psychology on The New Wave Podcast.
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