Do you know how to price your new service? It's one of the hardest things for a novice to learn. Should you give something away to get started rather than risk not having enough customers?
It's a little easier with a physical good, because there are usually competing products for sale online or in a store that businesspeople can use for comparison.
But what about intangible services, such as advice? Among the most frustrated entrepreneurs are those who sell for less than they think they should get.
Classic economics teaches that the proper price is the one that results in supply-demand equilibrium. The trouble is that the supply of many services is far too plentiful - especially when people will do stuff they like for nothing. That's why artists starve.
When I've started ventures with business partners, we've invariably had trouble setting the price of our services. I clearly remember one case in which a bank accepted our initial offer right away - a sure sign that our fee was too low. After a lot of experience, I've learned that setting the right price seems to involve a combination of behavioural changes and applying some practical business sense to avoid making mistakes. My partner and I later sold the same service to bank number two for 10 times the original price we charged bank number one.
Here are a few useful rules.
1) You should only offer your services for free or at a discount for one reason: You know you will get paid more later.
My partners and I have often discounted our services at the start, but only for a limited time. We also clearly tell customers they are getting a break, and that they'll have to pay more if they ask us to do another job.
This solves the get-in-the-door problem, and the behavioural issue of "anchoring" a price - when customers use a sticker price as a starting point to wheedle for discounts. The client knows how you feel, and that you are prepared to earn respect for your service that will allow you to charge more later.
2) Always ask for more than you did the last time. But be prepared to justify the new price and for the client to give you the big "no."
I have a videographer friend who was undercharging while he built his portfolio. When it came time to negotiate a contract with a new client, I encouraged him to ask for 25% more than he wanted - to leave room for negotiation down. Fair enough. But in a meeting, the client jumped to accept the inflated price, and I had to tell my friend that he got screwed - he could have charged more.
The next time there was a discussion about price, I told my friend to ask the client a simple, open-ended question: "Do you think you are paying me fairly?" I've asked that a bunch of times, and I almost always get the response I want. Clients usually pay more than you expect because they assume you have some idea of the answer. My friend ended up getting double what he would have sold his service for.
3) The law of large numbers means that for all the "no's" for your service, there will be a "yes." Keep pitching.
Great salespeople don't really hear the word "no." They hear "not now," "not yet" or "try a different approach." There are firm noes ("can't do that") and annoying, passive-aggressive let-me-think-about-its. But there are a lot of yeses if you keep asking.
4) Don't ask a small business what its budget is when you are pricing a service, but always ask a big business.
Small firms don't have budgets. They're usually trying to get stuff done as cheaply as possible. Asking "What's your budget?" can show that you're not in touch with how people run small businesses. On the other hand, big businesses almost always have a budget. There's almost no point in even pitching until you know roughly how much it is.
5) Ask for a reference.
The psychological nub of any successful business is called "the herding effect" by my behavioural economist partners, Nina Mazar and Dan Ariely. Nothing works better for attracting new clients than a testimonial from a previous one. Always get a written reference in case a client changes his or her mind later. Use validation as a key to pursuing larger and better clients.
6) If you can measure your value, then you are golden.
My partner and I run a business in which we get paid a portion of whatever value that we realize for a client. That means we measure everything we do. If we don't find much value, we get paid a bit, but if we help the client save or make a big whack of dough, we get paid a lot. Even if someone pays you to walk their dog, reminding them of how much of their valuable time you are saving reinforces your worth.
Whatever the terms, aligning what you do for a client with your own incentives makes for a great business relationship.
Doug Steiner has a real job in the financial services business in Toronto.
Special to The Globe and Mail
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