How much should you charge?


This week the blog takes a slightly new direction. For the first time there’s a subject which I think is so detailed – and so important – that I’m splitting it over two weeks, hopefully with a good dose of your feedback in between weeks one and two. The subject of what will effectively be a 1,200 word ‘special report’ as opposed to a blog post is simple – pricing.

If you’re running a business – especially a service – ‘how much should I charge’ is a perennial question. Too low and you miss out on profits; too high and you miss out on sales.

But how do you settle on what to charge? And with more and more products and services being sold online, does modern research on pricing shed any new light on the subject?

This week I’m going to have a look at some long accepted wisdom – and some of the new research that’s been done on pricing. Next week I’ll bring it closer to home – just what should you charge for your product or service? And how do you make sure that you’re correctly positioned in the marketplace?

Probably the one thing that everyone knows about pricing is the “power of 9.” Why do we constantly see goods marked at £1.99, subscriptions at $19 a month and even houses for sale at £199,950? We all know that there’s virtually no difference between those prices and £2, $20 or £200,000.

So why, when I was selling wine for Diageo, did I have such a battle – so often – with Threshers off-licence chain? Every time there was a budget we’d have an argument about the extra 4p duty that had been imposed on a bottle of wine. Was I going to take the hit or were they? Because one way or another that bottle of wine was going to stay on sale at £4.99. Sell it at £5.03? You must be mad. Sales would have plummeted.

Here’s an interesting study that was done in the USA. An identical product was put into three separate catalogues and sent to three demographically-identical audiences. In one catalogue it was priced at $34. In another it was priced at $39 and then $44 in the last one. More sales were made at $39 than either of the other two prices.

Remember too that price isn’t just about the product. After all, a bottle of San Miguel is a bottle of San Miguel. It doesn’t matter whether you buy it from your local corner shop or from a trendy café bar in the centre of Leeds – it’s still San Miguel.

Now obviously, I know that the café bar in central Leeds has far higher overheads than the corner shop, so I should expect to pay more for my beer. But why is it that people will still pay more for a beer from an upmarket hotel, even when the beer is going to be drunk on a Spanish beach, and even when there’s a cheaper alternative thanks to the kiosk across the road?

Price isn’t just about product: price is about perception as well.

After all, how did Starbucks build a business selling coffee for $3 when everyone else had been selling it for $1? Because you weren’t buying a coffee any more – you were buying a Caramel Macchiato with a double shot.

Nothing is cheap or expensive by itself: everything is relative – to the competition, to the benefit your customer will get from it and (as Starbucks showed) to the perception of the product.

I’d welcome your views on all aspects of pricing, but let me leave you with one question: can your product or service be too cheap? After all, as Sybil Fawlty constantly reminds us, “Why is it cheap? Because it’s no good.”

If you’re selling an hour’s consultancy for $49 can it possibly be any good? Some people on the internet are charging – and getting – $1,000 an hour. Maybe the guy at $450 looks like good value in comparison. But $49? Does he know anything at all?

With that, I’ll look forward to your views and be back with part II next week.

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11 comments

  1. Rory Ryan · April 27, 2012

    I have sent out fee quotes of €2300, €4450 etc. Should I switch to €2299 & €4449?

    • edreidyork · April 27, 2012

      Hi Rory – I personally don’t think it makes a big difference in B2B professional services, or when it comes to amounts like this for the service you’re providing. Interested in others views…

  2. ksrobbins · April 27, 2012

    Ed what peramiters in your opinion should be assed when setting a price for work or product?

    • edreidyork · April 27, 2012

      Morning Kenton – without wanting to hedge my answer too much, this is exactly what we’re looking to cover next week. The short answer I think is that the parameters vary depending on all sorts of stuff such as industry, sector, product/service etc. There are however some golden rules which apply universally, such as price to make a profit in the long term

  3. Dick Jennings · April 27, 2012

    Ed, I agree with you that “the power of nine” doesn’t have much effect in B2B professional services. But kidology by the seller, and wilful self-delusion by the buyer, are present just the same. How many professional advisers quote a high hourly charge rate (to establish themselves as top drawer) but then discount that rate heavily more or less on request? It’s just like a Middle East bazaar, (or an English car dealership). The high rate carries kudos, the discounted rate leaves the buyer feeling they’re a good negotiator. Everyone satisfied.
    Come to think of it, why on earth don’t I play that game?

  4. edreidyork · April 27, 2012

    Hi Dick – thanks for your typically astute observations. I love the comparison between Middle East bazaars and professional services firms (particularly funny given we both run one!) Perhaps you’re right; should we be “playing that game”? Food for thought as ever.

  5. watershedconsulting · April 28, 2012

    You should never be afraid to bill a client your going rate. Marketing consultancies/comms companies like my own often run scared of sticking to their principles and fail to recognise their own value. Professional services cost just like a lawyer or an accountant. Banks don’t hesitate to whack you with tasty arrangement fees while we agonise over what we should charge.

    Good advice and great ideas can transform businesses – Compare the Market was just another online insurance company until someone came up with the Meercat – what was that idea worth? I once wrote a strap line for a FT100 global client as part of an exhibition stand I was organising in Europe.Afterwards they adopted my line for all their advertising, transport, literature, annual report and it appeared on over 300 factory gate signs across the world. I used to joke with the marketing director that they had paid peanuts for my idea and I should charge them £25k for the use of same. Of course I never dared. Who was the fool?

    • edreidyork · April 28, 2012

      Hi Dougie – your point about the value that good advice and/or great ideas can have is spot on. Is it too late to cut your £25k invoice?!

  6. Dick Jennings · April 28, 2012

    @ Dougie: I struggle with this one too. Sometimes you can create huge value for a client in a moment. Other times you are slogging through a time-consuming morass for the client with little to show for it – yet your opportunity cost, in terms of what you could have charged another client for the same hours of working time, is probably identical. Do you price by opportunity cost – i.e. charge a rate per hour – or do you attempt to price by value?

    I price by rate per hour. For one thing it’s better value for the client: the long unrewarding slogs are usually an unavoidable part of the process and I’m hardly going to do them for free, so if I charge heavily for the sudden brainwave total cost for the client will be higher. For another thing hourly rate is measurable, therefore accountable. That also makes it comparable – a client can measure my cost against my competitors. And finally hourly rate is practical, whereas how on earth am I ever going to measure – really measure, no empty gimmicks – value? The most value I’m likely to contribute in hours of slogging over a 150 page business sale agreement is the clause that will save my client in court in three years time. But whether he ends up in the position of testing my clause out at all, of needing the safety net I’ve carefully constructed for him, is completely uncertain and unpredictable. And even if the value can in some sense be measured, as with the idea of the meerkat advertising campaign, it’s value depends also on painstaking and expensive realisation by the client so how much of the credit should the advisor really take? Getting results is 1% inspiration and 99% perspiration, as someone once said. You can’t claim 100% credit just for the idea.

    Difficult!

  7. edreidyork · April 28, 2012

    Dick – not for the first time, you’ve nailed a couple of key issues. I agree that charging by potential value created in professional services is nigh on impossible. I suppose the very best clients sometimes recognise (and perhaps reward) this after the initial work, which then means you might just go that extra mile the next time to ensure maximum value is delivered again.

    Thanks as ever for your contributions!

  8. Fresh from Kitchen · April 30, 2012

    great topic! would love to hear more views with regards to pricing and overcoming pricing objections would be great.

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