My irregular advice column returns with this question:
Anonymous asks:
“I’ve realized I need to charge more if I’m actually going to make a living at this. Is this a valid reason to raise prices in the eyes of a customer? Should a service provider only raise prices when they’re fully booked, or are there other valid reasons to raise prices? If so, what are they?”
This is a great question. It’s sometimes hard for me to just go out, guns blazing, and just discuss pricing. Everyone has concerns that are a little different. So I’ll take this opportunity to tackle Anon’s question, and if you immediately think “Well, what about my situation?” then you can write to me and ask. Pricing is one of those things that concerns every micro-business owner out there, so I don’t mind fielding questions about it, because me taking questions like this ultimately helps everyone in the community. Remember what your teachers said, “If you have a question, ten other people have the same question, and are afraid to ask. So speak up.”
But back to this question.
I’m pretty sure this question came up because of the Overhead Exercise that I included in the first of the Shouldn’t I Know This Calls. (which you can still get for free for a few more weeks. After that, they disappear.) The Overhead Exercise walks you through, not just your currently overheads, but also the things that you should aim to have your overhead include someday, like professional development and planning for retirement. I know. Quite the concept, right?
The result of this exercise is that it brings home, in real numbers, how much further your business will need to expand in order to provide the lifestyle you need it to. And once you know this, then you can begin figuring out how to solve this issue. Changing your pricing is only one way to do this, but it is usually the most obvious one. And since most people are undervaluing themselves, I think it’s a fairly good place to start.
Let’s look at this aspect of raising your prices, though, because it’s very interesting:
“Is “I’ve realized I need to charge more if I’m actually going to make a living from this” a valid reason to raise prices in the eyes of a customer?”
Notice that Anon has framed the question in terms of how to justify the price rise in the eyes of the clients. This is a very common way of thinking, but that doesn’t make it right.
It’s wrong because most prices do not require justification. We don’t ask the mechanic to justify the price of their oil change. We’re just happy it’s getting done. (If anything, we’ll just grumble about the taxes that makes it 25% more than what we were quoted.) We don’t ask the hairdresser why it costs $60 for her to cut hair when we can go down to Smart Style and get it done for $15. If I didn’t believe my $60 haircut was objectively better than my $15 haircut, I would already be at Smart Style.
Is a BMW worth $60,000? Well, the marketing would have you believe that the quality of engineering and design does make it worth the money. But that’s not a justification. They’re not saying, “We have to charge you this much. German engineers are expensive!” However, people who love BMWs will tell you that they are indeed worth the money and people who don’t love BMWs will tell you that they aren’t. And, except for their marketing, BMW stays out of it and DOES NOT JUSTIFY THEIR PRICES.
Nevertheless, you can’t just spring a price change on your clients. Or can you?
Needing to bring your prices in line with your cost of living is important, but no, it’s not a compelling reason to your clients. It doesn’t matter to them if your business model is viable, and it shouldn’t.
What matters to a client is that they get more value from your service than they pay you. For instance, I get Erin Kurup to do my e-book editing. I have been a writer for over a decade now. I could put together a pretty well put-together e-book all by myself. But man oh man, is it worth the money to have Erin go through and not only make sure that my work is readable, but that it’s the best organized, most polished, and coherent it can be. Whatever I pay her, I know in my heart of hearts that she’s worth way more than she’s charging. Not just because she saves me all this work (although that would be enough,) but because she makes a tangible difference in the outcome of the quality of the book.
Likewise, your job is to make sure that clients experience the same feeling; the feeling that they are getting more than they are paying. There are a lot of ways to go about this, but I don’t want to limit your imagination by guiding it along a too-narrow channel, so I won’t suggest any. But don’t forget that your job here is two-fold: making the clients feel that way, AND demonstrating to potential clients that THEY will feel that way, too.
If you are successful in doing this, raising your prices won’t be a problem because people will still know that they are getting more than they are paying. However, this principle works on a sliding scale of how badly they need what you’re selling and the effect that paying you would have on their cash flow. For instance, art that I love is worth a lot in intangible value. But it’s very unlikely I will ever pay five figures for a piece, no matter how much I love it. On the other hand, if you run launches, and you demonstrate to me through your marketing and testimonials that if I pay you $10,000, I will make an extra $25,000 on my launch, I will probably hire you if there is any way at all that I can scrape together $10,000. The more tangible your value, the more leeway you have. So try to be tangible if you can.
Now, sometimes you have a relationship with your buyers where you share a lot, and so they might feel a little shut out if you changed your prices without a word. In this case, you would explain briefly, but be extremely careful not to justify. My favorite tactic is to offer an “introductory price” for a new service or product, to see how it does or how I like doing it, and then at a later date, announce that the introductory period will be ending soon, and the new price will be $X. I don’t say something like “Well, actually, coaching takes a lot of time in terms of prep work, so I need to charge $X so that my effective hourly rate is more reasonable.” NO. Clients do not care what you have to do to get the economics to work for you. They just want to make sure the economics work for THEM.
Should a service provider only raise prices when they’re fully booked, or are there other valid reasons to raise prices? If so, what are they?
Any reason is a good reason.
If you need to or want to raise your prices, you don’t need any justification whatsoever. You might need to look at the decision within the context of your business and the impacts it may have to your brand perception or your clients’ buying behaviours. But if you’re selling something at a price point that makes it “not worth it,” whatever that means to you, then ultimately the business will fail because you won’t want to succeed under these circumstances. I talk about this a little bit in the Defining Your Resentment Rate post, but the psychology of that decision applies to all sorts of business decisions. Most people are not willing to make certain tradeoffs simply to ensure the business’s survival, especially when those tradeoffs are unsustainable and make them hate their lives.
But I think what you’re really asking here is what reasons will sound okay to your clients. The answer is: none of them.
If you’re selling something at a price point that makes it “not worth it,” whatever that means to you, then ultimately the business will fail because you won’t want to succeed under these circumstances.
Ask yourself, when was the last time you were happy to see prices go up? NEVER. However, people will be okay with prices going up as long as the rise will still fit in their budget and they still feel like they’re getting a good deal. So you need to bring your thinking around from “What do I need to get here?” or “How much can I get you to pay me?” to “What can I do to demonstrate what great value this is, even at the new, higher, price point?”
Some people would caution you to go slowly here and ease into the higher prices. Other people would tell you to take the attrition rate and rip off the bandaid as quickly as possible. I say: You do you. If you feel more comfortable with incremental changes, provided that you’re not slowly dying inside in the meantime, and have considered whether you’re raising prices slowly enough or reasonably enough that customers aren’t going to think “Every time I turn around, she’s raising the prices,” then you’re fine.
But if you’re thinking, “I’m not drawing another fucking logo for $300!” and you’re ready to fire every client you’ve ever had, then raise your rates substantially, immediately, and let the chips fall where they may. (In this case I might say something like, “I haven’t raised my prices since 2007, and they’re not commensurate with my experience and abilities. Having created over 700 logos, designs and other creations, effective immediately, my rate will now be $X.” With any luck, people will think “Wow, I had no idea this guy was so experienced! I’m sure lucky to have him!”)
Two questions to keep in mind
I know you probably expected advice on pricing psychology. Pricing psychology is important. But there are lots of articles on pricing psychology, and not very many on pricing psychology from the perspective of the micro-business owner. People always talk about “charging what you’re worth” or “what the market will bear.” But at least in the beginning, I prefer to frame it as:
- What do I need to charge to make this a viable business model for me?
- How do I need to frame my offer in order to make clients feel like they are getting more than they are paying?
I think this framework serves both customer and business owners in a mutually advantageous way. I find that other frameworks tend to be more adversarial and competitive. What do you think?
[ssbp]
