As an accountant I get asked “can you tell me the price I should be charging for my services?” and my short answer is no.
I can calculate the direct costs required to offer the service. I can tell you how much you’re spending on overhead, and I can even give you multiple ways to assign those overhead costs to your services. None of which is overly helpful in determining a price for you’re services.
Don’t get me wrong, those are all good things to know so you can be sure you’re covering your costs with the prices you do set. But I don’t recommend using them as the first things you consider.
Buying Pain Relief
Costs are only 10% of the information you need to price your services. The other 90% is the impact, or perceived value, for your customers.
If you only use your costs to come up with a price, you haven’t accounted for the impact your services have on your customer. A cost-based pricing strategy will always produce a lower price than a value-based strategy, which means you’ve left money on the table. Your customer would’ve happily paid you more than you charged them.
People will make a purchase to avoid pain more often than to gain something.
Think about the last time you bought something. Why did you buy it? Chances are it was to relieve or avoid some kind of pain. Maybe it was gas for your car to avoid the pain of walking for an hour to get work, or maybe it was an email marketing app to relieve the pain of spending hours trying to manually send emails.
When you decide to purchase a specific product or service, you do it because you believe the value (pain relief) you’ll receive is more than the money it will cost you.
That’s why it’s not an accounting question. It’s a psychology question. What is the perceived value of the service?
Buying is Emotional
This is not an easy question to answer because it’s all relative and the person setting the price feels differently about the service than the person buying it. Their perceived value is different than that of the customer’s.
On top of that, every customer will have a different perceived value, so setting one price for every customer won’t work. You’ll either be too high or too low for almost everyone.
If each customer will have different specific needs and a different maximum price they’re willing to pay, how do we get the best price for our services?
By conveying the value to your customer. The difference between the pain they feel now and how much better they’re going to feel after our work together.
All of this is to say, buying is an emotional decision and we need to account for the psychological factors at play. Big business spends millions every year to understand the best way to exploit those factors because we, as consumers, are mostly unaware of the way our brains process price.
I’m not saying you should be trying to trick your customers, I’m saying to convey the value per dollar you provide, you need to understand how our brains comprehend price.
Buying into Sales
As humans, our brains have a hard time understanding price as an absolute. It’s like if we had two kittens, and I asked you to tell me which one was heavier. You could lift them both and give me the answer without too much difficulty. You wouldn’t, however, be able to tell me that one of the kittens was exactly 900g because our brains can’t measure absolute values. (Want to see an version with octopuses? Watch this: https://www.youtube.com/watch?v=4sr3Rqs42XE)
What they do measure is relativity, this year is better or worse than last year; today is hotter or cooler than the yesterday; this price is higher or lower than that one.
Big sales like Boxing Day and Black Friday are great days to look at examples of how businesses will use this to their advantage.
They use what’s called anchoring. They give us a higher price, the “original” price, put a slash through it with a lower price underneath, and post a big % off sign. That higher price is now anchored in our minds and the lower price seems like we’re getting more value for our dollar.
Canadian Tire does this to the extreme. There are items that say 95% off on the tag. Did they ever really sell that can opener for $75? Probably not. In fact, the “manufacturer’s suggested retail price” is almost always fictional.
Aeropostale for example, always has a sale on – they don’t ever actually sell their clothing for the non-sale price.
Anchoring is so effective our brains don’t even care if the higher priced item is related to what we’re buying. There’s a restaurant in the UK that has a scooter on their menu for $15,000. That scooter has nothing to do with the food they serve, but the $15,000 price tag makes everything on the menu seem relatively cheaper.
Buying a Feeling
I’m not suggesting you offer a scooter for sale on your website, I’m not suggesting you inflate your prices so you can use fake discounts. I’m not even suggesting you use discounts. What I’m saying is our brains don’t measure price logically, so we need to account for that in the way we price and the way we convey value.
The take away here is to understand the problem you solve for your customers. Speaking their language to express how much better they’ll feel after working with you, will communicate the value of your service. When your customer understands your value, you can charge higher prices.
Ultimately the answer to “what should I be charging for my services” is how much value will your customer receive and how much is it worth to them to be rid of the pain they’re experiencing.
Attaching a number to an emotional problem is not easy because it requires the logical side of our brains to be in tune with the more fluid side. There are quite a few ways to make the process easier, but in the end it’s about testing and re-working your numbers until they feel right.
If you need help with pricing, I’m here for you. Fill out the contact form to book a free, no-obligation call to get all your questions answered. www.kirkcpa.ca/contact