TFT: How to Stop Undervaluing Your Work
Price for the Value you Bring, Not What the Market Thinks it Should Be
Do you know your value?
Spoiler alert, probably not. It will take you time to determine the true value of your offering. In all reality you will likely underprice your offering to start with. You will want to get revenue and you will want to have customers. This will lead to a lower price than you should be charging. The key is as you start to fill your capacity you need to raise your prices. Will you lose some customers? Yes, you will but that is ok. We’ll talk about that today. How to start out pricing, how to value your pricing and when to Raise your pricing. Let’s dig in.
Why most founders prices are too low
The short answer here is that you want business. You may not be sure what the market price is. You may just want to entice customers to try your service. You might have to have a low price just to get attention. There are a number of reasons that you will start with lower pricing. That is not problem. Just remember you do not have to stay low. You can start there and then move up as you gain market knowledge and understand your value. While you are starting out and your prices are low, remember you want to be learning the following things:
How many hours are you saving them?
How many dollars are you saving them?
Build case studies to help you see the value, then use them to market to new customers.
This information will help you start to understand the value you bring to the table. This will help you move from a cost-based pricing to a value based pricing.
The difference between cost-based and value-based pricing.
This section is a little more tactical in nature. But it will help you understand how to think about your pricing and what will help you transition to a value based approach to pricing. This is where your margin and profits will start to rise.
Cost-based pricing: You are selling your product or service by adding up your costs and then adding a margin. You may decide that a 20% margin is good so you take your cost times 1.2. Not a bad way to start, but completely leaves money on the table. This assumes that the market is more commodity based. If you stick with cost based pricing you will want to focus on reducing your costs. Compare that to a valued based approach.
Value-based pricing: You are now selling your product based on the value it brings the customers. You are no longer looking at the cost plus a margin. You are now looking at what does this bring to the customer in terms of savings or cost reduction. That means that your focus going forward will be more on what the customer is getting from your product or service instead of the cost of the product or service. Consider items like:
What does it mean to not have to carry a phone, MP3 player, and computer with you at all times?
We had all these items at one time until Apple introduced the iPhone.
When you work with a client how are you adding value to their business?
What processes are you making easier?
What processes are you helping them do without hiring more head count?
You will have to work with your customers to understand what this value really means to them. This could also affect our you pricing structure. Should you sell a monthly subscription, an annual subscription, just a flat fee, Or a flat fee plus premium offerings. As you work on your value ask your customers about the value you bring to them. They will help us improve your pricing for the future. Because your pricing will change. Hint, it will need to go up.
When and how to raise your prices without losing customers.
As you get into business more you will find that there is more value you are bringing to the table. You will also find that your costs will go up and that you will need to increase your pricing. The key question is when to start and how to do that. As you reach capacity and you are trying to understand how you can take on more customers, increase your pricing. Yes, you are still growing and you do not want to scare away customers, but you started with a price that is too low. You need to increase your price to weed out the wrong customers and make room for the right customers. You may go through this cycle a couple of times as you grow. There will be customers that are with you for a season or two and then move on. That is ok. You want customers that understand the value you bring and are ok to pay for that value.
Review your costs and your pricing on a regular basis, I would recommend once a quarter, maybe twice a year. The key here is you want make sure your costs are not creeping up and your prices staying the same. Say something like tariffs are going into affect. You may agree with them or not, either way you have to deal with them for your business. That will mean absorbing them and taking the margin hit or passes them on to the customer and having higher prices. Another reason to review pricing, you might have introductory pricing for new customers, is that pricing increasing? If you tried out a new pricing model is it working? This does not have to be a long review, but regular take the time to review your pricing and make sure it is in line. Keep in mind, if you are too busy to schedule time to have this review, you need to raise your prices.
Also consider charging for new services, instead of including them. When your customer says, “you know what would be nice?” Create the new feature, but take a moment to reflect on the value add to the customer. If it is high enough consider asking for some of that value back for yourself. Upselling will be great for your continued innovation and your growth.
Action Step
Now what do you need to do? Review your pricing that should be pretty obvious. Take 30 mins today to look at your lowest priced accounts.
Do you still want these accounts?
How much could you raise their prices tomorrow?
If you were to price your product based on the value it brings, what would that price be?
Then pick 3 accounts and increase their pricing next week. You can give them a month before the pricing goes into affect, but tell them next week the price is going up.
Additional Reading:
Pricing is key to your firm’s success. Here’s how to get it right - The Times
Luxury is too expensive. What should brands do? - Vogue Business
From train tickets to concert tickets, the unstoppable rise of dynamic pricing - Le Monde