Many businesses go under because they don’t charge what they are worth. When I was a teenager, my brother and I mowed lawns during the summer. We set our prices by looking at a yard and deciding how much we would want to pay to have it mowed. We did a better job than many of the other people who mowed, so we had a lot of clients who were doctors or lived in the country club addition.
Unfortunately our method for setting prices kept us from making much money. We would do a lot of extra work to make sure the yards looked perfect, but we weren’t charging enough. We finally quit because it wasn’t worth it to keep mowing the yards.
What we should have done is concentrated on the customers who were willing to pay a premium for our service. Mowing half the number of yards at double the price would have been a better use of our time.
Instead of focusing on how much mowing the yard was worth to us, we should have focused on how much it was worth to the customer. To a doctor who makes $100 per hour and hates to mow, our service would have probably been well worth $40 so he wouldn’t have to mow himself.
When setting prices for your services or products keep in mind how much it is worth to the customer. You want to go after the high margin business where your product is worth the most possible.
This type of mindset is especially true if you do consulting. If you focus on selling your time, you are likely to drastically undervalue yourself. If you focus on the value you provide for your customer, you’ll arrive at a much better fee. For example, if you can do 20 hours worth of work for a client that provides them with $100,000 worth of savings every year, does $50 per hour ($1000) seem like a reasonable price? For the customer it is a steal. A more reasonable price to charge would probably be $20,000 to $50,000. For the customer it is still a good deal. If you provide them with $500,000 worth of savings over the next 5 years and only charge them $20,000 they are getting a great return on their investment.
Non-commodity products should be priced in the same way. If you sell a product that your customers can’t get anywhere else you need to make sure you understand the cost of going without your product. Light switches that automatically turn off when people leave the room are a good example. When there were only one or two companies that made them, their price could be based on the amount of money they saved the customer instead of on the cost of the components.
By focusing on the value to the customer of your value or service, you will be in a better position to set appropriate prices.