On Pricing

July 29, 2007 on 11:39 am | In Uncategorized |

Pricing is arguably the trickiest part of kicking things off. I’ve agonized about it, both because I take too personally the negative reactions inevitable, well, pretty much from someone or another if it’s anything short of free, and because it obviously has to be sufficient to generate adequate revenue. At least, I think so, as presumably does anyone who has ever managed to stay in business an extended duration.

At one extreme you have low pricing that should result in massive numbers of customers, but may leave you broke, unhappy, disinterested, and with fewer customers than you might have expected due to the stigma of poor quality widely and not incorrectly associated with lower price realms.

At the other extreme you have high pricing that will drive most prospective customers away, possibly to the point of unprofitability, and had better be justified on the quality, value perception, and satisfaction side.

In between is a sweet spot, which will differ between type of business and even individual business.

In another incarnation. since 1996, the rate for most services at the business of which I was part was $80 an hour, unless discounted for volume, and for some services it was $100 an hour. In general, we were at the low end for the target audience, yet more often than not people were shocked by $80. Years ago I computed that the rate “needed” to be $95 for the revenue to be adequate, based on it being primarily one person, able to do a certain number of billable hours, needing to support overhead and keep current on technology. That would explain the tendency of the rate to settle in close to $100 at so many places, why ones that had been as low as $80 increased to as high as $120 and beyond, and why ones that offer piece rates can work out to be so high priced.

If you’re paying someone to work for you, you’re likely averaging $30 an hour plus benefits and such, so call it $40 an hour to employ someone. There are potential customers out there who would be loathe to pay $40 an hour and let you barely cover an employee. There are a lot of them. And what are you doing with the rest of that $99 for the hour, you mean old computer services firm?

Well, how about covering the pay during the time that’s not billable? How about covering training and hiring? How about overhead; the office, phone, management and administration, computers and software and gadgets for the business and for learning, the internet, the web site, sales and marketing so people hear of you and know they have the option of hiring you for way too much? How about enough profit to remain in business and capable of adequately servicing customers? Is it really worth getting an oversized bargain if the people giving them gradually go out of business, aren’t serious, or aren’t so good? If it’s a one-person shop with limited expenses, what, it should be so discounted that the one person can get by but never grow to more, perhaps can’t even keep up with changes in technology? Thanks, but not so much.

So, where are we? Too high and nobody buys. Too low and you’re not around long for anyone to buy, even if they take you seriously enough to buy. High enough and you can stay in business but might not make optimal money. Low enough and you can get greater volume than the competition.

All of which varies regionally, demographically, and by what exists for competition.

All of which varies based on the exact nature and quality of what you offer, what you can control for costs, and what you might emphasize besides price.

Getting in a car and going to a home or business, even close by, is worth more than staying at your desk and helping remotely, be it taking remote control of the computer, answering questions by e-mail or chat, or working with someone on the phone. Dropping everything and responding in an emergency is worth more than scheduling a task at a planned time or date. Plain, understandable English is worth more than heavily accented geek speak, at least to some. Responding outside of traditional working hours is worth more.

Prepayment is worth discounting. Predictability or contractual certainty is worth discounting. Proximity is worth discounting, versus charging more or precluding traveling greater distance. Limited self-help assistance is worth discounting.

All of this goes into my thinking about pricing and offerings.

As does the danger of expectations. That’s the danger of using low pricing as a hook and planning to raise them later. If you start out charging $50, you will offend way too many of your customers when you increase to the $90 you really wanted to charge in the first place. Does it do any good to establish a customer base, then turn around and lose or alienate it? Were those people who jumped at the low rate really the customers you wanted, if they have such a low opinion of you or the type of thing you offer? Better to start a little high, gain customers who appreciate you at that price, then realize the ideal price is a bit less and make them even happier by lowering it.

None of which takes into account varied pricing to get that last bit of marginal revenue or soak up spare capacity you’d not otherwise use, marketing with one-time specials, and that sort of thing. That’s distinct from a decision about what will be the day to day pricing.

Which leaves me? Still thinking about it, but generally decided on a base hourly rate that will apply to “other.” That is, where some other, lower price doesn’t already apply. That is, a price from which discounting or computation of flat rate offers can be computed. Thus it matters, even if it’s not what any customer ever pays. Beyond that, I have some idea about what will be discounted and packaged how, and that may be subject to experimentation, with a care toward the expectations problem, but without being ruled by it.