One of the most common questions I get from live audiences and via email is about how to price services. I hear questions like “Should we start with a high price and offer a discount?” “Should we work on an hourly or project basis?” “Should we be the low-bidder and then use change orders to recapture margin?”
Price anchoring starts with a high price, and then offers the purchaser a discount. This creates the illusion of value (“I bought this $350 item for only $179”). While this approach can be very effective in the business to consumer (B2C) environment, when selling services, the buyer might think “What’s wrong with their service if they are discounting it?”
If you win on value, a competitor with a lower price might not be enough to pull the client away from you.
Hourly or Project Pricing
When selling business or professional services, you have a choice of selling your services on an hourly basis or for a fixed fee for the project. When I speak with CEOs and executives, they often fear fixed-fee pricing. They tell me they fear that the project might require more effort than they envisioned. Those surprises could turn a profitable project into one that loses money for you.
Recognize that when you charge by the hour, you are selling effort not results. Realize that when you charge by the hour, the client pays more when you are less efficient. The faster you deliver what they need, the less they pay. That’s backward. Nobody ever sat at their desk hoping for 12 hours of your time. Clients want results. If your business allows you to focus on results with your client, then manage your interactions to focus on results instead of resources.
If you are selling baby-sitting services, then charging for effort might make sense. If you are a litigator, the other party can easily change your level of effort. If someone just wants your brain in the room, hourly billing might make sense. But, don’t just stay with hourly billing because it’s what you’ve always done. Figure out a way to link your fees to expected results, and you’ll be better off in the long run.
Low Bidder and Change Orders
If you know the client is considering alternatives, you might be tempted to propose a low, fixed cost. You’ll win as the low bidder. Then, once they need changes, you can charge a premium for the additional work. The problem with this approach is that you are consciously engaged in a bait-and-switch business model. It’s tough to build long-term customer loyalty when your client feels they always have to guard their wallet. The way to get out of this trap is to discuss (early – before the procurement comes out) the notion that their results matter. Not every client will appreciate your approach. But, the ones who do will want to figure out how to work with you.
The Right Way to Price Your Services on Value
Your customer might want to pay by the hour. But, in most cases, this is in neither party’s best interest. They might want you to be the low-bidder. So how do you shift the conversation? Focus first on the challenges they face and work together to quantify the impact of not solving those issues. Then, be sure to ask them how you can work together to define success. How will they measure this initiative to know if it is successful six months or eighteen months from now? Having that discussion will put both of you on the same side of the table to overcome their issue and achieve results.
Your client might have come to you asking for resources – They might not know any better. But, by helping them to define the outcome that defines success, you both can appreciate your value. If you can’t deliver the results they need, then politely opt out of the opportunity.