The #1 Reason Why You’re Getting Your Service Business Pricing Wrong

I’ve been reading so much over the past couple of years about pricing and billing for service business, and how you should do it. I think we’re going about this all wrong. We place all of this emphasis on what the client wants, and somewhere in the process we lose sight of ourselves. We forget why we’re doing this.

We find ourselves trying to please everyone around us, and in so doing, we become like the hole in the donut.

Time to become the munchkin!

Dunkin Munchkin Jelly Donut Holes

I get it. It’s all about the client. We need to make clients happy. This is why we need to make sure we go to extreme lengths to be sure we’re providing a remarkable service. This is not, however they way to approach our pricing.

You can bill hourly, flat rate, track time, don’t track time, progress bill, bill percent of completion, get a retainer, don’t get a retainer, bill on a schedule, bill 50 up front and 50 on completion.

None of that matters, when it comes to how you price your services.

First of all, let’s get clear on the important difference between billing and pricing. Many people get this wrong. They talk about “value billing” and there is no such thing. It’s a really important distinction. Value Pricing is a concept that was defined and established a while back, and it has some very definite implications. One of those implications is that there is no room for tracking time. They just don’t believe in doing it, for a lot of reasons.

If you’re inclined to charge a flat rate, but still track time, that’s ok. That is your right, but you can’t call that value pricing. You have to call it something else.

Pricing is what you charge for your services. Billing is what you do long after you’ve established your pricing.

How do you become a munchkin?

If you want to stop looking, and feeling, and acting like the hole in the donut, then you must become a munchkin!

The #1 reason why we’re all getting the pricing thing wrong is that we have lost sight of the one most important principle of economics.

A principal is a basic law or truth. It was true 1,000 years ago, and it will still hold true 1,000 years from now. That’s the kind of firm bedrock I like to stand on. When it comes to pricing my services, this very definitely holds true.

Economics 101: The Law of Supply and Demand

This, and this alone is what drives the price of a product or service. The sooner you get this, the sooner you’ll be on track for setting your rates, or pricing at the best possible level.

Next we’ll need to have a conversation around how to drive demand for your service, but that is another story.

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An important distinction between products and services.

A product is the same, no matter who’s selling it. Not who MADE it, but who’s selling it, makes no difference.

With Services by contrast, there is a HUGE difference from one provider to the other. Experience matters. Marketing matters. The people behind the service matter.

What’s Value Got to Do With It?

Earlier today (as I am writing this ) I was in a private education session with a client. Let’s call him Mike. Mike told me that my service was priced JUST right. Mike appreciates that what he pays me is well worth it, because he knows I have the experience and what it takes in terms of drive and determination to get it right. When we ran his Balance Sheet, and his Profit and Loss, I went through it with him as if his banker was there, and explained the numbers.

As we looked at Mike’s financial reports, and compared what we know about the operations of the business with what the numbers showed, everything lined up perfectly. If Mike’s company gets the loan, because they are able to explain the numbers properly, and the loan helps Mike drive an additional $5,000,000 in annual revenues, what is that worth? Who cares? Clearly what he pays me pales in comparison to that. There are other factors. I cannot attribute all of that success to what I did for Mike. Mike runs his company well. That, coupled with my work, added to a good staff, and a good bank all contribute.

Mike told me that my services were priced JUST right, because I charged enough to make him stop and think about it, but not too much to scare him away. This is because I have created a large demand for my service. There are others who could offer the same service, and could never get away with charging half of what I charge for it, even though they may have as much or more experience.  Why? They haven’t created the demand, and experience plays no role in creating demand. None.

Then there is the woman from Fla who called me a while back, and after explaining what I do, and what the price is, she offered that someone local to her was willing to come and do it in person for $75/hour. I as much as suggested that she call that person. Her perception of the value of what I offer was way out of line with Mike’s.

Value has absolutely nothing to do with it.

It’s too subjective.

Always and forever.

How to Price Your Services

The #1 reason why you’re getting your service business pricing wrong, is that you are basing it on the wrong things, and overlooking the one and only thing that truly drives it. Supply and Demand.

Price your services just outside your comfort zone. Take what you think is fair, and increase it more than you actually care to.

Leave your current clients alone for a minute.

When the next new prospect walks through your door, offer them your new pricing. When they don’t hesitate to agree to it, then your confidence will immediately increase. You may even want to increase it some more, for the next new prospect. Keep doing that until clients stop signing up for your services.

At a certain point, when you’re getting all of these new clients, at these higher prices, it will become clear when it’s time to go back to the older clients and increase their prices. That’s the point when you’re no longer afraid to lose them, because you have all of this new business at higher prices. You might even reach the point, where those older clients, at the lower rates are holding you back. Then it becomes really simple. Grow with me, or go with someone else.

When you are busier than you care to be, and not getting paid what you think you should be for what you are putting out there, then it’s time to raise your rates. This is an extreme analogy, but it makes the point well. If you double your rates, and lose half of your clients, you are making the same amount, for half of the effort. That may be just what you need to get your weekends back, and have the money to do nice things with family and loved ones.

You owe it to yourself, and your family, to put yourself in a position to be able to spend time with them, and really enjoy yourself.

What gets you excited to do the work?

When Mike tells me that he’s happy to pay me the $250/hour to do the work, I’m excited to get up in the morning and work with him. I also, never stop to think about whether or not it’s worth my time (yes I said TIME) to do the work with him. I am being compensated more than well for the time, from my own perspective.

By contrast, when the woman from Florida told me she wanted to pay me $75/hour, I started to yawn. I made one effort to explain why I charge what I charge. I even offered that having someone in person, is not only not a benefit, it’s a de-valuing factor, when I can record the entire session remotely. The one who comes in person leave behind nothing more than a memory of what was covered and some notes that you take. A recording can be reviewed entirely, as many times as needed. She didn’t get it, and I didn’t have the drive to convince her. Not when I have a dozen Mike’s contacting me every day willing to pay me the $250/hour. I went back to sleep, and waited for my next session with Mike.

Do you see how supply and demand is the ONLY factor in pricing?

If you choose to ignore this, you are practically guaranteed to get it wrong. You might get lucky.

You’re a service based business. Your calendar is your inventory bin. Fill it up with client work. Each person you hire is another calendar to fill up with work. When it’s full, increase your rates. Start seeing openings? Do something to get the demand back up for what you offer.

Next we’ll talk about how to raise the demand for what you offer.

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