Today, we’re going to talk about pricing. If you’re a longtime reader of my blog, you know that I don’t write fluff pieces. This is an in-depth look at pricing so, buckle up.
Most people that I coach and most businesses that I consult have a very narrow understanding of pricing. They often seem trapped by an idea of what they should charge based on competition and fear.
We’re going to cover pricing strategies, how to set your price, how to value your time, and several other related topics. This post is specifically relevant for service businesses though I may use some products as examples to illustrate a point.
To set the table for this post, I will be defending the idea that price is mostly an imaginary construct that is almost entirely a contextual function of storytelling. To simplify that mouthful: price is a component of Brand.
Let’s start with how pricing typically plays out in practice…
The Most Common Pricing Strategy
The most common strategy for choosing your price is looking at your competitor and pricing around the same. Maybe a little lower if you want to undercut them. Maybe a little higher if you want to position yourself as the more premium option. Maybe you would price exactly the same to remove price as the competing feature and shift the focus to some other factor.
And right there, we have our first stories.
Price lower and you’re telling the story about value. By pricing higher, you’re telling the story of quality or possibly status. By pricing the same, you’re telling the story about features and benefits.
Pricing, is a story. But, what’s in that story? What’s in that price?
One common way for us to answer these questions is to introduce the element of time.
What is your hourly rate?
About 10 years ago, a senior attorney walked into a junior attorney’s office. He explains that he’s been looking for a PDF document online, and after 3 days he’s been unable to find it. He continues “you’re young and tech-savvy, help me find it.”
The young attorney, eager to prove her value begins searching online. In just two short hours, she locates it.
Later that day, I arrive at the office. The young attorney excitedly recounted the story of her sweet victory in tracking down the file. I casually asked what they’d been looking for. She told me the title of the report and the format. I turned to the open browser window on her laptop and entered a single search query into Google using advanced operators. The document they’d been looking for was the top result — About 302 results (0.36 seconds).
Now, imagine a job where three people are all assigned the same task. One person requires 3 days, the next 2 hours, and the last 30 seconds or less.
Who among them should have the highest hourly rate?
If you were to take the amount of time it took each of us to solve it and calculate an hourly rate from it based on a $100 payout, it would look like this:
- Senior Attorney: $4.16/hour
- Junior Attorney: $50/hour
- Me: $12,000/hour
This is calculating hourly rate based on true value—distinct from perceived value. It looks ridiculous, doesn’t it? But tell me this, if all three of us told you nothing more than our hourly rates—based on this method of calculation—who would you think was the more senior person?
Setting your hourly rate by the value you produce in that time, doesn’t really tell the full story, does it?
How to actually determine your hourly rate
If you were to calculate your hourly rate by the value of your work, like in the example above, you may find yourself at one extreme or the other. Instead, if you calculate your hourly rate based on your needs, you will get a truer measure of what your time is worth. Here’s how…
Add up all of your expenses for the year. This includes all of your living expenses and your business expenses. Let’s say it costs you. $100,000 per year to meet all of those needs.
Assuming you work 50 weeks in the year, and work 30 hours per week, you would get 1500 hours per year of work that you need to bill for. This would give you a rate of $66 per hour at full billable capacity.
Therefore, to break even, you would need to charge $66 per hour and work 30 billable hours for 50 weeks.
Imagine if in the example above that the senior attorney needed to bill $132 per hour and I needed to bill at $66 per hour to meet our financial obligations and breakeven. Should they bill at double my rate because of their needs?
Setting your hourly rate by your needs doesn’t tell the full story either, does it?
NOTE: I have a resource for doing this calculation in my Playbook: How to Start a Business in One Week. You can find it on Day 2.
So, should you price based on time or value?
The answer is neither and both. You need to understand what your needs are and your pricing must exceed those needs in order for you to do more than break even or worse, go into debt. Likewise, if you only price by your needs, you may miss capturing the value of your time, labor, and expertise.
The answer is to understand how the story of your price is crafted, and then set the perfect price.
The story of the perfect price
You need to understand this fundamental truth about pricing.
Price is just the first part of an agreement.
It’s a statement of the conditions you agree to, for selling your time, talents, products, resources, etc. You can literally make it up. It does not have to be based on anything tangible. It generally does not need to follow any rules. There is only one thing that is important: someone must be willing to pay it.
That is your only limiting factor because a price is fair the minute that someone else agrees to it and pays it.
My Suggested Pricing Strategy
I recently read a book with a diagram that showed 12 different pricing strategies. For what it’s worth, I only use one pricing strategy with two conditions. I think the rest of the strategies are mostly a waste of time. I only use one pricing strategy with an upper and lower limit:
- Charge the highest rate someone will pay me—and then deliver that amount of value or more.
- Charge the least amount I can afford to.
Use the upper limit as your default to increase the amount of freedom and flexibility in your schedule. You can work half as many hours when you charge $200 per hour as when you charge $100 per hour.
Use the lower limit to work on things you really care about and where purpose outweighs profit. This is also why you charge the maximum amount you can for the other work. So that you can have the maximum amount of time to work on things that matter to you.
Follow this path and the market will start to let you know what you can charge.
Recognize The Imperfect Conditions
We’ve covered that neither time nor true value tell a full story. This is why neither is the best way to set your price. Both are imperfect and subject to other factors.
Story is the variable that lets you raise your price. Let me give you an example…
An NFT (Non-Fungible Token) just sold for $69 million.
This price has absolutely nothing to do with true value based on labor time, quality, or need.
Is it a fair price? Yes. Because someone bought it.
This price was based entirely on status and scarcity.
The Five Contexts of the Price Story
Price is so much more than a number. Price without the context of value, is meaningless.
If I tell you a car is $75,000 and ask you if it’s a good deal, you have no way of knowing.
- Is it a Kia or a Ferrari?
- Is it brand new or beat up and in need of repair?
- Do you even need a car?
For price to have meaning for people, it must have context.
The Context of Need
On a normal day, how much would you be willing to pay for a bottle of water?
How much would you be willing to pay if you just crossed miles of desert with the hot sun beating down on your scorched and weary body?
Did the cost to bottle the water change?
The Context of Status
How much should a handbag cost?
What if it’s a Birkin Bag, or it’s covered in Louis Vuitton logos?
Should those be more expensive than the Coach bag you found at TJ Maxx?
Do any of these bags carry belongings more effectively?
Is there a tangible value that comes from carrying a designer bag?
The Context of Labor Time
How much should a website cost?
What if I told you it took 100 hours to build?
Should that be more expensive than one that takes 15 hours to build?
What if the end result is the exact same website?
Should the 15 hour site cost more, less, or the same?
Remember the PDF example from above.
The Context of Quality
“Somewhere in the world is…The world’s worst doctor and he could be yours.” -Steve Martin
How much should accounting cost?
What if the accountant makes a lot of mistakes?
What if you could switch to an accountant that finds tax strategies that save you thousands.
I think we can all agree that one is worth paying more than the other.
The Context of Scarcity
How much would you pay for a baseball card?
What if it was a 1989 Topps Bobby Bonilla All Star Card?
What if it was a T206 Honus Wagner?
The first one you can find all over eBay for under $4. The second one has only 57 cards in existence and sells at auctions for more than $1,000,000.
How to set a fair price
Throughout this post, it could sound like I’m encouraging price gouging. Allow me to be very clear that I am not. If you are overcharging based on need like Pharmaceutical companies raising the price of insulin then you are objectively a piece of shit.
No, this is not about overcharging people, it’s about finding the optimal sales agreement, and doing so when we’re not talking about life or death. The point I am illustrating, is that price is almost completely reliant upon the story you tell about it.
- It’s loosely tied to labor, but it doesn’t have to be.
- It’s loosely tied to time, but it doesn’t have to be.
- It’s loosely tied to quality, but it doesn’t have to be.
An hour is not a universal unit of measurement when it comes to business. The rate you charge for you time is a function of perceived value.
How to set your price
I’ve shared with you my pricing strategy but at the end of the day, it’s up to you how you set your prices. I just want you to understand how it works.
If you want to increase your price.
- Find things that people need because you can sell it for more.
- Find things that dramatically improve people’s sense of identity. This is done through perception and status. If you can help people achieve self-actualization, you can charge more for that.
- Understand the value of time. Sometimes working faster is worth more, sometimes working longer is worth more. Know the context you are in.
- You do not need to compete on price with people who are not at your level. If you offer something of greater quality, you should charge more for that.
Do not set your prices simply by looking at what everyone else charges. The truth is, they might not be telling a very good story, and by copying them, you are leaving money on the table.
Also published on Medium.