Posted on 07/10/2013
by admin | Comments Off on Pricing: How Do You Value Your Time?
By Katie McCaskey (Google+)
Pricing your goods and services is vital to running a successful small business — and too many people do pricing with disastrous results.
The good news is that pricing can be changed. Changing your prices can be one of the single best decisions you make as a small business owner. Prices must accurately reflect your costs and accommodate your customer, but those are not the only two factors that matter.
Let’s look at why many of us get pricing wrong.
First, many of us are taught a “cost-plus” assumption to price. We add up all of our costs (time, material, overhead, etc.) and divide it by widgets. If you make fewer widgets your cost for each one goes up. Similarly, if you can scale using the same resources your costs for each widget go down. Slap on your profit margin, and away we go as long as the customer agrees to pay it, right?
Not so fast.
There are a few problems here. First, are we talking about creating hard goods? Or are we talking about using your intellectual capacity requiring, among other things, your talents, training, and experience? Secondly, of these goods and services what (if any) are viewed as commodities and what (if any) are seen as specialized knowledge only you possess?
Let me illustrate with an example from my own small business. My husband and I own and operate a specialty grocery/cafe. We sell a small assortment of artisan, handcrafted cheeses. The reason we have a small assortment is because, to do it right, artisan cheese must be hand-sold, each piece to each customer. Although our customers appreciate good cheese, the two of us only have so much time to dedicate to that particular category and, admittedly, we possess a limited amount of cheese knowledge.
Compare that with Meg Hall, our local cheesemonger. Meg doesn’t make any of the cheeses she sells herself but she’s so close to the process it is virtually impossible to replicate. She has deep knowledge about everything from individual farm pasture to process. She’s studied cheese for over 20 years. She’s visited farms in person to understand the historical and culinary traditions. She even witnesses and notes new cheese styles as they emerge in our country.
In short, Meg’s a cheese expert with an even finer understanding of American-made cheeses in particular.
So, how do our prices compare? Well, you’d be right to assume our specialty grocery sells cheese at a higher price point than the supermarket or big box store. That’s because we have a smaller selection and offer less common items. It’s also because the cheese we carry isn’t viewed as a commodity you can get on every corner.
Meg, however, sets and earns an even greater premium price for all of her goods and services. She can command these fees for a variety of reasons, including her knowledge, personal attention, and, yes, cheese problem-solving skills.
I know what you’re thinking: “Cheese problems”?
Herein is Meg’s secret and exactly what you should consider when evaluating your own pricing structure.
“Problems” in this context are first-world concerns but nonetheless cause customers grief. All problems are business opportunities. Some “cheese problem” examples I’ve observed working with Meg include: “What type of cheese is best for this entree/meal/dietary need/occasion?” “What wines pair best with this cheese and why?” “How do I cut/serve/store this cheese versus another?” Again, Meg’s depth of knowledge makes her advice and services more valuable to the customer.
The second big pricing mistake is discounting to “compete” with what you consider your “competition” — when instead you should be focusing on building a small business that belongs in its own category.
Meg is what the authors of the new book, The Rise of the Naked Economy: How to Benefit From the Changing Workplace, call “super specialists.” Super specialists are the people whose knowledge is so specialized that, literally, only a small handful of others have similar qualifications.
FreshBooks, the cloud accounting software, recently released a free e-book on the topic of pricing, called Breaking the Time Barrier, which emphasizes attaching price to value. Most people wrongly attach price to either time (hours) or, as mentioned earlier, a “cost-plus” analysis.
Here are two contributing factors you should evaluate when it comes to pricing your goods and services, regardless of industry:
- What do I offer that no one else — or virtually no one else — can provide? This can be literal or it can be in interpretation, delivery, or practice. If you are in, or can position yourself as being in, a category of “one to none,” your pricing and perceived value can skyrocket. (See also: the wages of any major Hollywood star compared to average Screen Actor Guild wages).
- What impact do my goods and/or services provide to my customer/clients? What does it allow them to accomplish?
Pricing is connected to time, but it needs to also be connected to the value — emotional, physical, financial, or other metric — your goods and services provide to the customer. Don’t fall for the trap of under-pricing. Don’t fall into the discount price trap to “compete.” Value your time and expertise, and build a category for yourself where true peers and competitors are few and far between.
- Source: Free Digital Photos “Money in Hand”