The straightforward answer is that many freelancers, solopreneurs and startup founders especially in those early days of their venture tend to adopt the following pricing strategy.
- I charge based upon how much I think I’m worth, which is related to how much experience I have or based upon what I think the client is willing to pay -
There are some big red flags in these approaches, so if you see something that resembles your current pricing strategy in those positions then this article is going to demystify the way in which you price, along with the underlying knowledge of why you’re worth what you ask for.
If you’re wondering why that’s important read on!
To really do the question of what to charge true justice, we have to get to the core of what you are doing. Once we know the what, we can then look at the who, the why. From that understanding we can then look at the how, putting together a formula for accurate pricing for the problem you solve for your client.
Firstly, the what
To get an understanding of what you can charge your clients you need to give some thought to what it is you actually do for them. What problem do you actually solve or situation do you significantly improve upon through the delivery of your service?
I would suggest you write this down, because if you haven’t yet created a Value Proposition this will help you distil it into its essence which will help you land more clients going forward. Besides, even if you have a VP this exercise will give you structural understanding of how to price and maybe assist in the refinement of your value proposition too.
So grab a pen and paper, writing down what it is you actually do for your clients, thinking about it in the purely deliverable sense. If you’re a web designer then you build websites for clients. If you’re a chiropractor then you realign a patient’s spine, got it? Good. Put as much detail down as you need to fully articulate what you do.
Having done that the next thing to give thought to is what benefit does your service offering actually bring the client? You see this one is a little trickier, what you believe the benefits to be are likely to be subjective. They’re subjective unless you have asked a statistically relevant number of your potential or actual clients what it is they perceive the received benefits to be. This is really, really important.
If you haven’t asked every one of your clients why they bought from you and what the main benefit of buying your service is, then you are not completely aware of the why behind the reason they buy from you. More importantly you cannot begin to measure the value of your offering to them in monetary terms.
The reason understanding this point is so vital is because the moment you realise the size of the problem you solve and the potential financial cost to your client in not addressing it then you can understand the real impact of your offered pricing.
If you realise that what you deliver enables your clients to win more sales, drive business growth, remove barriers to new markets or enables greater productivity, all with monetary values to the business in many multiples to the price you charge for your offering then you realise that there is a real financial advantage you are delivering. But if they don’t perceive it to be a big problem they are unlikely willing to pay premium pricing, regarding the offering as commodity and make decisions based on price.
If you can understand your clients business so well that you start to get a real sense of what those volumes look like when translated into $$$$ then you can quickly recognise that in the taking of your service your clients can increase profits at the discounted price of your offered service. When that happens you start to understand that what you do really drives value to your clients business and from a sales perspective you stop selling what you do and instead you actually demonstrate the value which is to be found and can see yourself as a valuable supplier.
From a mindset perspective that is huge, because it helps shift you out of a potential mindset where many feel as if they are competing asking for business into offering valued solutions that if positioned correctly actually translate to discounted increases in revenue and profits. Of course this is dependant on the type of service you offer and to whom but the principles are sound.
That said there is a snag. This is sound theory only if you can truly get to know the size and scale of problems you solve and how solving them enables your customers business.
No, not a sixties British rock band but who as in who is your client? If you’re starting out with a “me too” business then there is a lot of sense and benefit to be gained from selecting a niche market to concentrate your efforts, even if its just whilst you’re establishing your own brand or reputation.
It is a lot simpler to focus on a niche client type and understand deeply the problem you solve and how it drives value for that client than to try and present a general expression of value across a range of business types, unable to identify the specific scale and magnitude of the value impact your service offering represents for any of them.
A general expression of value, when serving a broad spectrum of client types offers no real insight to you in discerning your value to those clients because it’s harder to crystalize understanding of specific problems when everyone of your clients has unique situations, market challenges and differing buying motivations. This means you offer a much diluted proposition of value, one in which you are unable to quantify the size of the problem or value in financial terms making it harder to arrive at a solid conclusion about the suitability and strength of the price you command for the offering you have.
Make a list of all your clients and group them into types of business. Do any patterns emerge, is there a dominant business type that you currently deliver services to? Is there a client company type that you feel is easier to communicate your value to than others? It’s quite possible that if you examine your existing or previous base of clients you will gain an insight into which parts of the market might allow for better results in delivering your VP and starting new business relationships, additionally when you focus on one client niche it enables you to tighten up your value proposition so that is speaks directly to the client with points that land, either identifying pain points or illustrating improvements to the existing approach.
Why is it important to have confidence in your pricing?
Posted on LinkedIn recently was a question that seems to come up time and time again and further drives our question of what to charge clients. The question being, does your experience count in the justification of your pricing? Especially in situations where said service was provided by someone that spent many years gaining experience and or qualifications but resulted in said service being delivered with the appearance of great ease or in a relatively short space of time.
This brings us back to one of the pricing strategies I described at the beginning of this article. Does the amount of experience I have determine what I charge?
Perhaps, but nothing is ever black and white. Context is always relevant. We rarely deal in absolutes so this matter of experience must be considered or perhaps not, as I say context. What context means is this,
If you’re someone that needs a heart transplant or some other highly skilled procedure you will most probably want the most skilled and therefore highly experienced surgeon. It follows then that in a private healthcare market the surgeon with the best credentials is likely to be in high demand and thus command a fee commensurate with his or her experience and ability. After all you probably wouldn’t opt for the med student that offers to do the same procedure for a tenth of the price.
In that situation, price is not a driving factor; it’s how highly the patient values their own life, making their choice having understood the skill and experience of the surgeon. It is that experience when weighed against the risk / value of the two choices that determines where the patient will ultimately place their trust and their cash.
The flip side is to consider is someone like a web developer, as plentiful as they are diverse in their abilities, consider someone that has been building websites for ten years but has failed to develop and improve on their ability to create quality work. Do they have ten years experience or are they really just repeating the experience of a single year multiple times? If so they offer no advantage over a lesser experienced developer and therefore those ten years repeated counts for little especially when someone with three years has grasped what their market niche truly needs and wants, caters for those requirements and subsequently is able to charge more.
So having looked at the what, who and why lets get into the how.
So how do you decide on what to charge, well you don’t price your service based on what you think your clients will pay, or solely on how much experience you have or what you think you are worth.
The whole self-worth thing is a topic in itself, and for those clients I coach who become aware how their sense of self-worth negatively impacts their ability to attract higher paying clients I go through this process and redirect their analysis to the following approach with strong results.
You price your offering based on a deep understanding of how your offering impacts positively your client or their business and the spectrum of pricing prevalent in the market place for what you offer. Knowing the client and the market will help you find a price point and give you the confidence to defend it if clients push back. It means that you can rest your pricing strategy on something more tangible and unrestrictive than what you think your clients will pay by finding out what your clients believe about your offering and how it solves a problem.
To achieve a depth of understanding you’re going to have to do some work. You’re going to have to speak to your clients, and prospective clients and ask them that same question as described before.
If that sounds daunting then consider reducing the complexity of the challenge of that understanding, by identifying an Ideal Client type, a business or individual that has the strongest need for your offering. This you express not as the function of what you do as per the first exercise but as an expression of the benefit you bring to the client. The clearer you are on your clients problem and how it affects their business the better you understand just how valuable your solution is to them, meaning that you can express this value clearly and powerfully in your sales engagement.
Sometimes all is needed to help in those sales situations is your expression of value presented clearly to reset the client’s perception of the importance of what you do or the cost of not taking action quickly.
Furthermore, ensure that your chosen IC is actually accessible, that you can engage with them without considerable difficulty to deliver your value proposition. This is made easier if you have a niched IC because your market will respond to a single marketing message, will be easier to identify and depending on your engagement strategy make it easier for you to be found through the way you promote your offering.
Also, make sure that you choose a client type that can afford the prices you choose to command. Invariably they both require similar if not equal effort to attract, so why choose a client that will see your value, have a genuine need you can fulfil, be easy to engage with but when it comes to it hasn’t got the means to pay what you’re worth?
I’ve had many conversations that start with me asking why charge what they charge, and nearly always met with the level of experience response or what the clients will pay response. If you accept that there is always variation in a range of service offerings (reflected as low to high price) then it’s fair to conclude that there must be a corresponding variation in clients willing to pay differing amounts. Once you see that then you must ask yourself which clients would you rather deliver services to, those that want the service at the lowest price or those that see the value you demonstrate and who are prepared to pay for it?