Tuesday, February 24, 2009

Pay Peanuts; Get Monkeys

My dad grew up in Zimbabwe, and has a great saying: "if you pay peanuts, then you can expect monkeys." Now, don't get me wrong - I love monkeys, and they are incredibly intelligent animals. That said, the saying nicely illustrates the challenge with pricing your service - price too low, and your customers perceive that you are not very good at what you do.

Products are usually a little bit easier: when you're selling a product like a banana, you know that you are going to eat it, and when you eat it, you'll have food in your belly. It's pretty simple, and most bananas are pretty much the same in terms of taste and quality. This means that pricing a banana can be based on simple economic factors like supply and demand.

Services, on the other hand, are much more complicated. Often the customer doesn't know what you are going to get, and it's hard to know whether you're buying "the best" or "the worst" because there are few benchmarks available. That's why pricing is so critical. You don't want to price yourself out of the market, but at the same time, if you price yourself too low, you automatically create an assumption in your customers' mind that you are not as good as higher-priced professionals.

Think back to the concept of supply and demand: the higher the demand, the lower the supply and the higher the price. Thus, someone with higher fees is perceived to be in high demand and, thus, the human brain deducts, must be really good.

I'm not saying that service professionals should over-charge their clients, but it is really important to remember how critical pricing is when positioning yourself.

Let me know if you have any experiences with this, either as a consumer or in business.


mgoodman said...

I've been dealing with pricing as an important element of the marketing mix for years -- for my own business and for clients. I'm totally convinced that the way you price your products/services speaks as loudly about your value as any marketing communication. Pricing is an obvious expression of your positioning.

I have seen clients cut their price in order to get a contract (or customer), only to regret afterward that they aren't making enough/any money on that client. Then they reduce the quality of their offering in order to restore some margin, then lose the business because the quality is unacceptably low.

If you price to value delivered, you'll always come out OK. When you tinker with price thinking it will help you land the job, even though it's too low, you shoot yourself in the foot ... sometimes twice. (First you lose money, then you lose the client.)

In the process of all this, I've actually come up with a neat tool for estimating price elasticity. Most clients who use the tool are surprised at how much room they have to raise prices without jeopardizing the bottom line.

Virginia Ginsburg said...

Thanks so much for your comment - I couldn't agree with you more. In fact, there have been a few times when I have unwisely lowered my rate for a client only to regret it later. I would love to hear more about your tool for price elasticity.