During the networking hour at my last entrepreneurial networking event, I had the pleasure of meeting two fellow young starters who are starting their own identity consultancy (I’d love to link, but there’s no site yet). We had a great talk about the challenges of properly pricing your goods and services. They were nervous about over-pricing their services, driving off customers. At the same time, they didn’t want to leave significant money on the table.
Their mindset reminded me of my experience when I started freelancing computer support back when I was a teenager, and made me appreciate the experience that I’m carrying with me to Fwd:Vault. Here’s what I suggested to my fellow bootstrappers…
Compare rates of similar vendors
First you need a baseline. Gleaning pricing info varies from extremely easy to incredibly difficult depending on the market. For example, I can find hosting prices very quickly, but getting numbers from a web designer takes more effort. However there are basic tactics that apply across the board.
Since you’re starting your own business, it’s assumed that you’re walking in the door with a fair amount of experience, which should include knowledge of other players. Starting with previous employers, find out what others in your field charge for services similar to your new business. Most businesses make their pricing info public, so start with their website. Google searches can often turn up prices if the vendor is “hiding” their pricing (this is almost as bad as hiding phone numbers, never do it).
If that doesn’t work, try calling their office and asking for pricing from the receptionist. Most will give you some clue as to pricing, but some will immediately route you to a sales rep, account manager, etc. The key is to avoid as many phone handoffs as possible. These people won’t give you anything without extracting as much information about your project as possible — which doesn’t exist because you’re just looking for pricing, duh.
If they insist on routing to a sales rep, and the company is a direct competitor, hang up, because the jig is up. If however you’re talking with a similar company in a different market, tell them who are (make it clear that you’re not a competitor) and what you’re doing. Most people are happy will help out a colleague.
You’re worth more than you think
Once you have a picture of the overall price landscape, you have to determine where you fall in it. However a lot of freelancers and entrepreneurs make the mistake of undervaluing their own ability or product quality, myself included. I charged about $35/hr for one of my very first jobs, and standard fare was well above twice that for similar work. I was afraid that my age and limited experience would work against me, so I deeply undercut the competition.
It’s perfectly natural to cower a bit when putting yourself up for comparison against large standing players. But you (should) get into business for yourself for at least two reasons: (a) you’re good at it, and (b) you’ll make better money than working for someone else. Don’t sell yourself short on either one.
Never compete for the bargain basement
Even if a consumer is new to your market, most people have a decent nose for a good deal. A “deal” is not just about price, but what you get for that price. A higher quality product can fetch a higher price, and some people will take the better product because it’s better, in spite of the price increase.
We make this analysis ourselves all the time, but the natural feel to it goes out the window when you’re pricing your own product. Combine that with the poor self-valuation I described earlier, and you end up with pricing way under the mark.
I bring this up because there’s a real danger here. Businesses that deep-discount goods or services tend to attract a certain kind of customer: the kind only interested in saving a buck. These customers will never ever appreciate the quality of your product, or they’ll ignore it while attempting to squeeze you for a better deal. You’ll end up spending most of your time price haggling or figuring out ways to cut costs to improve your margins. Over time, the cost-cutting invariably eats away at quality, which is death knell of a small business.
It’s okay to undercut the competition, but don’t go so far that customers are focused solely on price.
Price is perception
Sometimes we pick the more expensive of equivalent products precisely because its more expensive. Why in the world would anyone buy a pair of Diesel brand jeans? They get worn like any other pair of jeans, and hold up as well. They even look the same, barring subtle stylistic differences. But they cost twice as much as a pair of Levi’s or Wranglers you pick up in a department store. You can make the same argument with sunglasses (Oakley), electronics (Sony), even food (Ben and Jerry’s), and there are hundreds of other examples.
Price helps determine customer perception to some degree in every industry, and you shouldn’t ignore its power. I worked for a non-profit for a number of years, and at one point we were discussing a price increase. In a hotly contested debate, one board member suggested that a price increase would be the equivalent of pricing a Pinto (i.e. our product) as a Cadillac. A board member compared our flagship program to one of the worst cars in history! How good of a program does that sound to you? Would you spend money on it? I retorted, saying that our program was in fact the equivalent of a Cadillac, but was priced it as if it was a Pinto. How enticing does the program sound now? Assume I wasn’t lying (I wasn’t; the program was bang-up awesome).
Fake it until it’s real
I’ve given you every reason to price your product “aggressively” — don’t shoot through the stratosphere, but don’t below sea level either. But none of this means a damn thing if you don’t have confidence in your ability to deliver at that price point. To that I say, “Suck it up!” Entrepreneurship and freelancing are not easy, especially at the beginning. But if you want to make a real honest go of it, you have to approach every new client, contract, and sale as if you were a 20-year vet. The only way to fetch professional prices is to do professional work, and the only way to do professional work is to just get started.
To establish the kind of street cred you’ll need, sometimes it really means you simply have to feign confidence. When I was just starting out, I came across some very aberrant behavior while fixing a person’s computer. I had zero clue as to what the problem was or how to fix it, but I knew that I could figure it out with enough time. When the person asked me what I thought, I waved the issue off as no big deal, that I see this kind of thing all the time. A few days of work and a lot of research later, the problem was fixed, and I had another skill in my belt.
This is a fine line; you want to look like you know what you’re doing, but don’t want to overstretch yourself. If it’s way over your head or way outside your area of expertise, come right out and say so. You look good by knowing your limits too.
Add 10%
So now you’ve got price guidelines and fake confidence, more than enough to come up with a good starting figure. Unfortunately, if history is any indicator, you’ll most likely end up underpricing yourself anyway.
So, once you’ve determined your final number, add 10% to it. If you don’t cringe uncontrollably, you’re set. If you do cringe, recalculate at 9%. Repeat the whole process until cringing ceases. If you reach your original number, add 5% and walk away, you’re thinking too much.
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