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Tuesday, May 22, 2007

Pricing, value and free services -- the balancing act

This is a business paradox I haven't completely resolved. What is the best price to set for your product or service? The answer, it seems, is all over the map -- but if you are seen as pricing 'all over the map', unless you are careful, you can get in very big trouble. For AEC services, as for most businesses, pricing strategies are crucial to your ongoing business survival and viability

The free offer or inducement

"FREE", "no risk trial", or similar deals where the client is not expected to pay a cent are supposed to draw in business. And I suppose these models work, because they are used so often. Some new-era Internet entrepreneurs advocate putting it all out in open, free, and essentially allowing the readers to pick your mind without spending a cent (or even registering, or giving valuable information to you). Their premise is the more generous you are, the more you will achieve voluntary buy-in for paid services of various sorts, and then you can charge what the traffic will bear. (See the really useful stuff from marketing guru Seth Godin, for example.)

The information in free articles, blogs (mine included), and other resources is supposed to result in trust, respect, recognition and business. The paradox is that while the 'marketing funnel' can be measured, in my own business, I don't yet see a correlation between the generosity and income. Should I stop blogging, then? Since I enjoy it, I will continue, but I haven't validated the business model advocated by the marketing gurus, just yet.

Competitive pricing

Here, you price purportedly to undercut your competition and win the work. You see this in the retail world, (Wal-Mart is a great example) and of course in the open public bidding world within the construction industry. (And certainly it applies even in closed bids where the client requests quotes from more than one serious contender.)

Competitive pricing is of course a challenge, if you price too low. You need to have extremely disciplined internal management and cost control capacities to make money in a competitive pricing model -- and thus need to find a way to lower your true costs or be ready to decline work if the market price is lower than your break-even.

Value pricing

The holy grail of pricing, of course, is to be able to charge what a client will pay at a price far greater than your internal costs. You can do this if you are the best (and known as such), have a monopoly (it sometimes happens), or you have leverage over your clients and markets that you can use effectively.

The challenge with value pricing is achieving some degree of stability. You also need to combine it with fairness. The value can diverge depending on the client's experience with your business, or external factors.

The balancing act

I remember well how a successful lawyer charged me a price for data services that seemed fair enough, until I discovered that the price was well above what I should have paid competitively. I was, to put it mildly, angry. The lawyer acknowledged he had priced based on my perception of value rather than the true market competitive price and, to maintain and restore my trust, repaid the overcharge. Later, I needed his professional services. His billing rate was on the high end of the scale, but I paid, without hesitation, knowing his competence was well worth the extra price. (I wish I could tell the 'real' end of this story, but that would provide too much disclosure for this blog, unfortunately.)

So, how do you price your services? Carefully and thoughtfully, I would say. This is one area where a little attention can bring in much return -- you may be underpricing, or you may be charging too much. Take some time, think about what you are doing, and why, and consider some options. You may find your profits increase dramatically.

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