A famous forward to a book on pricing starts with this sentence: “Pricing isn’t sexy.”
True enough. But it matters so much!
How you price your products or services can be the difference between (cue the voice of Mrs. Tweedy from Chicken Run) minuscule profits and creating and growing the business of your dreams. Whether you’re a solopreneur, a mature startup or even an enterprise, pricing matters.
First, a quiz…
Which of these statements is a truth about pricing, and which are lies?
Which one is a truth? Do you know? Let’s see if you’re right.
“The price of something depends on the amount of work it takes to produce it.”
LIE. There is no connection between the two things. This is a mistaken notion known as the labor theory of value. It’s very possible to create something quickly and charge a lot of money for it because a customer sees that much value in it. It’s also possible to spend hours building something that a customer won’t buy because she doesn’t value it (e.g., a poorly built brand of automobile).
“Your price as a freelancer (or knowledge worker) should be established by the number of hours you work multiplied by your hourly rate.”
LIE. Your value as a freelancer should be determined by the amount of value you provide to the customer, regardless of how many hours it takes to provide that value. If you’re a copywriter and speak with a customer about generating more leads through their website, they can tell you how many leads it takes to get a customer and the “lifetime value” of each customer. If the landing pages you create bring in X leads, you can do simple math to know how valuable they are to the company, even just financially. You can then charge based on the anticipated value, not based on how many hours you spent writing the landing page copy.
“The price of anything is based on its value in the eyes of a customer.”
TRUTH. The price of something is inherently subjective because value is subjective. The value someone places in something isn’t just logical (e.g., this water will relieve my thirst), but also emotional (e.g., this water will connect me to a pristine natural environment in Maine) and even psychological (e.g., this type of water isn’t available to just everyone; it’s exclusive). That’s why Starbucks can charge more for a cup of coffee (and probably water) than other national chains.
What does this sojourn through pricing mean for your business? What are the implications? For starters:
These are not small matters. Get pricing right — or, first, understand what pricing is all about — and you can start to have value conversations with clients and customers, rather than transactional conversations.
And remember: The more value you provide (from the standpoint of your customers), the more profits drop to your bottom line.
This post originally appeared on my LinkedIn blog.