There are many different pricing strategies in marketing and it’s essential to spend some time working these out in order to get your value right when selling your time in a crowded marketplace.
I recently sat down with a friend and former client who has launched a new venture. That venture offered two hours of his time for $120. He’d had some success with it already but felt that he needed help with his marketing. And he was right.
But first he needed help with his pricing.
Pricing Strategies In Marketing
On the face of it, $120 for two hours of someone’s time, might seem a good deal, especially if you’re selling 8 hours in a day. That’s $480 a day which, if you were to book out 48 weeks of the year, would be $115,200, give or take. That’s a good income, isn’t it?
But the likelihood of him being booked up to this level is slim to none. In fact, even if he books out only a quarter of the time, he’s down to an annual income of $28,800. And we haven’t even taken into account marketing and administration costs.
So he needed to charge more. He’s got children to feed for god’s sake!
And by the time we’d finished, we’d got that 2 hour rate up to $495. Here’s how we did that.
Time & Experience
First of all, we accepted that this guy is selling not just one thing, but two things: his time AND his experience. They’re very different things. Anyone can spend the same amount of time doing what he does. But very few people can do it with 20 years experience. So it’s important that we mentally separate the two right from the start.
So first of all, we decided to settle on the fact that his time, at it’s base rate, is worth $60 an hour. Why $60, and not $50 or $70? Well, simply because this was felt in the marketplace, this would be the lowest point a professional in this space would price themselves, with 2 years training or 20 years experience.
Then we concluded that his experience ups that $60 by 50%, making his hourly rate $90 an hour. One could argue this was still wholly undervaluing his experience, but you’ll see as we progress that we probably over-compensate for that later on down the line.
Then we added in one of the most basic things he’d forgotten – profit. We decided that a 25% profit margin would be acceptable, take the hourly rate to $120. In the space of a few minutes, we’d take his service from $120 to $240.
The final thing to add in here was the cost of his overheads. This includes things like his marketing, accounting, travel, mobile phone bill and so on. Basically any form of essential cost incurred in running the business. So for that, we added in another $30. This brought his hourly rate up to $150.
Next Step: Padding
Now, $150 an hour for his service is good – if we go back to the original projection and book out 25% of his time, we’re delivering an annual revenue of $288,000. Or again, if he only manages to book out 25% of his time, $72,000. Not a bad salary for 2 hours work a day!
But the problem is, this still doesn’t give us room to move. How does he offer a discount? What happens if he wants to create bulk deals? There’s no opportunity to use price as a driver to encourage someone to book. What if he wants to offer a different rate for a charity for example?
So instead of settling on $300 for a two hour session, we settled on $495. Does that sound a big jump? Sure. But now he can comfortably offer someone a ‘sign-up now’ discount without fear of hurting his margins. He can also throw in added value – ‘how about we do interest free credit?’ or ‘how about I give you another hour for free?’ without damaging his long term profitability.
This is the padding. Giving a discount at the original $60 and taking into account costs, he’d have been pricing himself close to below minimum wage.
Features, Advantages & Benefits
Of course, upping the price for the sake of upping the price isn’t sensible. You have to have a reason for upping the price. So we decided to find five reasons that would justify the spend on his services.
Now I’m not going to give specific detail of those features, advantages and benefits but I’m going to categorise them.
- Length of experience
- The people he has worked for in the past
- The quality of the tools and equipment being used
- Added value included in the price
- Speed with which the final product will be delivered
Look at those five steps and see if those are the sort of benefits that you could apply to any of the services or the products you offer.
Sure, if you don’t have 20 years experience, you can’t say that. But even 5 years experience is a positive. It’s about how you frame the language in context with the other points. Maybe some of them don’t seem as great as others but a list like this is always greater than the sum of its parts.
So now we’ve got the pricing right and we’ve reinforced that with the features, advantages and benefits of the service, the next step is to expand the pricing to deliver more choice to the end user.
Expanding The Price List
When you step into McDonalds you can look across the menu and pick yourself a burger. Let’s assume you like a Big Mac (interesting fact: 80% of millennials have never eaten a Big Mac) but you also want a drink and a portion of the finest French Fries. We all know by now that you don’t have to buy those items individually. You can buy them in a ‘meal deal’ and you can save money doing so.
A service business can operate their pricing strategy much the same. And should.
In this case, we started to look at some of the other products that customers might be keen on; either products that this business could directly service and upsell on, or products that they could source and plug-in at low cost and high return.
This game us a ‘menu’ of services and packages that we could offer to the end user, giving a clear upgrade path from the basic $495, right up to packages worth several thousand dollars.
Applying the principles of pricing strategies in marketing has given the client a much broader list of services, that can appeal to a wider market demographic, with a clear upgrade path and a much higher profit margin.
Execution is the next step and remaining firm with the structure is vital. Yes, there will be people that have been priced out with the implementation of these pricing strategies, but there will also be just as many that see the value in investing money with a true experienced professional.