What You Don’t Learn At University About Pricing. And Why You Struggle Trying To Escape The Hamster Wheel Of Underpricing Your Work.
Uni (and most business) does a shit job at teaching you about pricing.
When asking about what people learned at uni re: pricing, most…
- Don’t remember anything about it.
- Found it too general / vague.
- Remember it being something for consumer goods.
- Say it needs to end with a 9/99 to drive sales.
- Think of an hourly rate.
In a knowledge economy, pricing is what makes it or breaks it for you to run an indie business.
The Myth
Pricing’s been taught from an industrial age era. From a world of commoditized things to get slim profits. To move large volumes. Sounds quite industrial now that you think of it, doesn’t it?
The most popular:
- Margin. Set what you think would a “reasonable” profit margin and add it to your cost.
- Markup. A cost-plus approach. We sell this for 10. It costs 8. The markup is 20%.
- Market reference. The competition charges 10. We set our price at 10. How do we get profitable charging 10? The race to zero.
A Big Lie: Time Is Money.
The “less risky” way: Charging by the hour. Is it, though? Since you have no idea on how to price your work in a knowledge economy, you go back to what you know. This same industrial model. How do you calculate what you pay someone? Your cost divided by the time it took to be done = hourly billing.
The Problem With Hourly
First, it’s not a price. It’s a rate multiplied for whatever time it takes. It’s -at most- a guesstimate. And estimates are not prices.
Second, you can only work or charge so much. It’s quite unlikely someone would pay you 120K per hour. Unless you’re that famous.
Third, you pass all the risk to your client. If you underestimate something, they have to pay for your mistake.
Fourth, you get a moral dilemma. Should you go slower to make more money or faster to help your client get what they want?
A Way Out
Detach the money from your time. There are different models of pricing. Some work better for custom work, some for more productized services, some for products.
A few pricing models:
Inputs. What it costs you (time, energy, resources, etc.) plus a profit margin. [Not the best one, in profit terms].
Outputs. What the price for a deliverable might be. A website, a newsletter, a set of photos…
Outcomes. What the price for a result might be. Lower churn, higher conversions, faster time-to-market…
Value. Based on a percentage of the value to the client. What your share will be. If the project means $12MM to the client, you get a % of that value. You’re pricing the customer here, not the job.
Performance. You charge based on the outcomes achieved. It’s a higher risk and also a greater reward. It requires defined and specific metrics of success.
Subscription. It’s a recurring revenue model that puts the relationship at the core of it all. Your client is not really buying a service, they’re subscribing to your brand. That makes a whole lotta difference. It’s a direct relationship.
What’s your way of pricing?
Hit the comments. :)
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