When in need of a quote from a service company, a lawyer, an accountant, a plumber, a nursing home, or a web design company to build your website, do you ever wonder what pricing strategy they use? Also, as a customer or as a service provider what’s the best way to charge and what’s the best price you should accept? Many businesses find out what their competition is charging and they charge that. Vice versa, some clients seek for the lowest price and go for that. This concept assumes that price is the major influence in the client’s decision making process, but, as I’ve previously discussed, it is not. Despite that assumption, a prospective client is more often interested in value they will receive for their hard-earned money rather than the actual cost.
In the same way, the market demand pricing method is based upon price, encouraging the client to compare prices between competitors. That’s fine, but more often you’ll be out beaten as there will always be somebody with a lower price. Thus, what you want is to have the client compare your quote based on the quality and the results and solutions that your expertise can offer to their problem.
Sometimes we have used the logic of charging what the client will pay, and it has worked on a number of occasions. For example, a larger client will usually expect a higher price. If you don’t charge a higher price, you risk giving the wrong perception that you didn’t understand the project brief. Even worse, you may be seen as risky and give the wrong impression that your business can not do the job properly because you are too small or lack the knowledge to carry out the project. Charging what the client will pay will work most of the time but is a bit tricky. Clients will equate quality with the price quoted. If your quote is high, make at least an effort to explain why and educate the client on the value of what they are getting for their money. Doing so demonstrates professionalism and trustworthiness. Consequently, price will not be an issue.
Let’s assume we are an accountant who has a hypothetical client that is in big trouble with the IRS. We, the accountant, have worked hard and have extensive experience with tax laws and regulations. We have all a client needs from an accountant and in the past we have gotten many clients out of trouble. We’ve done this before, and to implement and solve this client’s problem it would take 20% of the time it took with the first five clients. Why? Because we have prepared the forms already, we know who to call, from our previous experiences we can give even better legal advice, and we can estimate accurately how long the whole process will take. So the question that arises is: Should we charge this client the same amount we charged the first and the second client? Or should we charge less because we’ve done this before and it will take us less time to complete the required work.
Neither! Calculate your charges on the value you provide to the client.
Having helped other clients before we now have accumulated a vast amount of knowledge, which we can provide an even greater value to the next client who has a problem with the IRS. We also know the tremendous value that our knowledge and skills are worth. Therefore, the best and most profitable way to charge is by taking into consideration the value we provide to the client, in this case the amount of dollars our knowledge is saving or making them, not how long it would take to implement that knowledge. The client receives tremendous value, and we can and we should charge more because of that. Quoting on the value we are providing is simple. Quantify the benefit the client will receive when using us. To do so we first need to estimate the value we provide.
The previous five clients who had a similar problem tell us that we have already saved them e.g. $2000 each by educating them and $1000 each by filing their returns on time. The value we offer then is an issue of perception and it is difficult to put a value on the benefits we provide. Only by practicing and demonstrating to clients the perceived value of our offerings we will become proficient. Once we can do that we are able to educate the client on the value benefit and sell that added value. If we are capable of educating and prove to our clients the excellent value they get by working with us, our accounting business will boom. The more business we will have the more we can charge, while the value to our client increases.
Finally, a concrete example from my own business. We just built a software that was very sophisticated and it saves the client a lot of money. Previous to that, the client was paying a minimum of ten thousand a year to use some third-party inferior quality software, which he didn’t even own. Our expertise will save this client tens of thousands of dollars over the years. Do you think we charged an hourly rate? We would be crazy if we did. Our skills and knowledge were of tremendous value to our client, and we do not just give that value away.
As far as what price you should accept, think first what value that price will deliver to your business. Keep in mind the saying “you get what you pay for”. If not done right the first time, it will cost more in the long run to fix it.