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Only Value Is What You Can Charge For

By September 11, 2018June 19th, 2020Business

Most days, I go for a walk along Wollongong’s Blue Mile around lunchtime. As well as taking time out of the office to reset (which we might talk about in a future article), it also gives me pause to reflect on how fortunate we are to have this asset on our doorstep. The walk itself is completely free of course, but for me its value is immense. Of greater interest in the context of the pricing discussion is how much would I be prepared to pay? Given the alternatives available (there are plenty of free ones – we live in a beautiful part of the world) probably not much.

In earlier articles, we have talked about pricing, and in this last article in the series, it is time to reflect on what it is that your customers are actually paying for. The principles are the same whether you are selling professional services or televisions – in the absence of value, or at least the perception of value, you have nothing to sell, at any price. Once we recognise that value is the only thing we are selling, then the pricing issue becomes even more complicated.

We discussed how the notion that we charge for time is a fallacy (see here). We use this model because it provides us with a convenient way to justify what we charge. In fact, in most cases, we are only justifying our pricing to ourselves. When our customers have no idea how long a service takes to perform, and no conception of the cost structures of our business (which we may or may not have used to calculate our hourly rate), then they can certainly not be measuring the appropriateness of our pricing on a time x rate basis.

This is also true in terms of products. The customer rarely, if ever, considers the underlying cost of the components of that 75inch 4k Ultra HD television. All they are interested in is how good the footy is going to look on it.

Value-Based pricing is a difficult thing, after all, how can we assess the value that we bring to our clients and customers in the absence of any objective measure. In one of my earlier articles I referred to “the man with the hammer” analogy If you need to look it up you can go here). If he had been asked in advance how much he would charge for one blow with his hammer, he might have considered that not only was he bringing all of his knowledge and experience gained over years to bear, he was also filling a need for his customer, either desperate or not. The amount that the customer would be prepared to pay is therefore dependent on his needs, not the needs of the hammer wielder. If the solution provided with the hammer is judged to be sufficiently valuable, the client will pay a lot, if it is not, he won’t.

Professional services firms are often reluctant to provide estimates in advance of what their customer is going to have to pay. This makes it really difficult for the customer to assess the value to them of the potential service, and therefore makes it less likely that they will buy. Does this come from a fear on the part of the service provider that they will not be able to deliver the service efficiently, and that if they can’t the customer will need to pay for it? What if we can deliver the service really efficiently, should the customer pay less?

We therefore have a job to do with our prospective customers. We need to convince them in advance of the value that we will bring to them. We can do this by providing examples of solutions we have provided in the past, or by demonstrating the utility of our product and the benefit the customer will receive by purchasing it, but in the end, unless the customer believes that they will receive adequate value for the price charged, they won’t buy, regardless of whether we believe we add value or not.

Key to being able to achieve this is our perception of our own value. We need to believe ourselves that what we are doing for the customer has value, otherwise there is no way we will be able to sell it. This leads us back to the pricing discussion in the first of these articles. Not having sufficient confidence in our own value, or the value to the customer of what we about to sell them leads us to undercharging, and the mistaken belief that they will not be prepared to pay.

With this in mind, it is easy to come to the conclusion that the rate (how much) and the time taken (efficiently or otherwise) are irrelevant when it comes to pricing. In the end, you should charge whatever value the customer is prepared to pay for, not a penny more, and not a penny less.

In September we will be running a workshop “Setting Prices For A Service Based Business”. You can register your interest by emailing, or by calling 0242580099

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