Premium Pricing Gives You Much More Freedom

A lot of consultants, designers and other service providers ask me about pricing. They usually start by saying that larger competitors are charging $X, say $200/hr, so they feel they should be cheaper, say $125/hr. “Is this right?”, they ask. First, there’s really no such thing as “right”. Pricing is not about perfection, it’s about doing better (or worse).

I’ve written about how to price and position your services. See these posts for some background:

This post is about helping people understand the impact of different pricing decisions. My goal is to convince you that’s it’s so valuable to put some effort into pricing that you’re willing to devote some time to do it better.

To help, I’ve put together a little Google Spreadsheet that you can play with and even download as an Excel spreadsheet for your own use (link below).

There are 3 areas of impact for pricing.

The first impact is the psychology of the work itself.

If you’re an expert, it’s nice to feel like you’re getting paid like one. Top pro athletes don’t want giant contracts just to be greedy– they often make more money from endorsements, anyway– but they feel it’s about pride. When I was a kid, I didn’t understand this. Now that I have to work for a living, I do. Even if you aren’t making millions putting a ball through a hoop, it helps to be paid what you’re worth. You’ll get more respect from your customers, and feel better about what you do. And although I can’t prove it, I suspect you’ll actually perform better. This also applies to your people. If you charge more, you can afford to pay them more, which makes them perform better, which helps you charge more…

The second impact is your bottom line.

If you can charge $150 instead of $125, your 20% price increase could increase profits by 25% or more, depending on your variable costs. Nothing you can do will increase your profit more than raising your rates. You can see this by playing with the number of billable hours and the rates.

Impact of price change
Price change has a big impact on profit.

Now let’s suppose you start hiring people, either subcontractors (which will mostly show up as hourly costs) or employees (will mostly show up under fixed costs). You can play with different scenarios, but here’s an example with subcontractors. In the first scenario, we pay them $90 per hour and bill at $125 (note that the $90 may not be straight payments, but may also include taxes and other variable costs). In the second scenario, we bill at $150 and bump up their cost to $100. Which scenario looks better?

Price changes have even more impact as costs increase.
Price changes have even more impact as costs increase.

Note that our 20% price change now has a 69% impact on profit!

The third impact is your quality of life.

Many people started their own business because they were tired of “The Man” controlling their life. They wanted freedom to do interesting work, while having weekends for family, time for travel and hobbies, and so on. Many of us found that the joke was on us. If you are commoditized, it’s hard to make enough money to have freedom. If you can charge true market rates for what you do, you can make more money in less time. Here’s another illustration, this time going back to one person, just to make the math simpler.

Premium Pricing Gives You Much More Freedom
Premium pricing gives you much more freedom.

If the “big competitor” in your market charges $200, what if you found a subset of the projects where you can deliver better value, and charged more? Sure, you’ll work less, but you can make the same money or better, while working less.

Here’s the Services Pricing and Profit spreadsheet.

I thought I wasn’t supposed to be pricing hourly…

Some of you who have read some of the other posts are saying “wait a minute, you told me not to bill hourly.” That’s true, and I don’t recommend it, but if you have to, make sure you charge the right amount. The difference in outcomes is so huge that it’s worth a little value-based sales practice (and a compelling online proposal would help, too). Better yet, you can use the spreadsheet to think about how to charge, how much your time is worth to you, before translating the quote to a fixed fee.

Would love to hear comments on what people are doing now, and if anyone has results based on using the spreadsheet, how it worked out for you.

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