December 2019 issue
It's that time of year again - a time when pricing is important to your business. Of course, when isn't pricing important to your business?
As the new year approaches, don't forget to make a resolution to improve your pricing - and your profits.
Pricing Question from a Reader
I just received a relatively small request. It will take me around ten minutes to address it. Should I ask for payment or perform the work for free?
This is a great question, and it shares the same answer as every other great question: it depends.
As a general rule of thumb, if you're delivering value to a customer, you should probably expect to receive something in return. Author Harlan Ellison made that point quite clear in his famous rage-induced and profanity-laden rant Pay the Writer.
I agree with much of his argument, but it's important to note that payment can take many forms. Here are three of the most common:
- Money - The traditional focus of accountants, MBAs, and, yes, even many economists
- Trust - A measure of faith on the part of an individual customer
- Reputation - A potentially valuable commodity that has been tainted by insincere offers from cheapskates and hucksters
As Harlan Ellison was quick to point out, value received in any form other than cold hard cash is only worthwhile if it can be converted to cold hard cash. The occasional bit of work without remuneration might seem like no big deal, but over time it can lead to financial death by a thousand cuts.
Let's take a look at a few questions that you might want to ask yourself before performing a small task for free.
Does the effort heuristic apply?
The human mind makes use of many mental shortcuts when determining how much something is worth. One that is particularly important in this context is known as the effort heuristic.
Customers tend to believe that the price they should pay should be commensurate with the perceived level of effort a task requires. Does this make sense? Of course not! Nevertheless, it factors into shoppers' decision-making processes.
- Did a customer request a referral for an expert in another field?
- Did a client request a change of color for his logo?
- Did a patron ask for his salad dressing on the side?
These are all examples of cases in which additional work is required for the vendor, but that work is expected by the buyer to be free.
Unless vendors are able to convince buyers that seemingly small tasks are actually quite effort-intensive, they will likely be unable to charge for such actions.
Is the work merely administrivia?
As a general rule, administrivia that is not aligned with the primary value being created cannot, and should not, be billed.
Imagine that a client needs to change his billing address. Charging for such an action would leave a terrible taste in a customer's mouth.
As a project manager, I didn't feel guilty charging for administrivia, because writing up reports and collecting data from staff members was literally the job for which I had been hired. That said, in most cases administrivia has another name - overhead. Overhead costs should be estimated ahead of time and invisibly factored into a firm's normal rate structure. Yes, overhead work has a cost, but no, the cost need not be blatantly pointed out. No one feels comfortable with firms that appear to be nickle-and-diming them.
If you discover that much of your time is being taken up by administrivia, you may need to either reevaluate the importance of the individual tasks, automate their execution, or change your workflow.
Will the work create a desirable beachhead?
The easiest client to sell to is the one who has been pleased with your work in the past. Those who aren't familiar with your capabilities and who lack trust in your work are great candidates for small bits of free work. The key here is small. The world is full of cheapskates who are happy to take advantage of your generosity. The work should be highly limited in scope, naturally lead to additional work, and not be a complete solution to a customer's pain point. Many businesses use the concept of a "free consultation" in this way, although the exact nature of this offering may fluctuate on the spectrum between pure sales pitch and pure consultative meeting.
Ideally, this bit of free value delivery can be created once and then re-used ad infinitum. Early readers of my blog may remember when I released the automated pricing advice robot. I haven't even looked at it in years, but it's a bit of "free work" that required a small fixed cost but continuously offers value to my visitors. Because it was built once and made available to everyone at the same time, the average cost per use continues to drop closer and closer to zero.
Has the customer been trained?
One of the key failings of many businesses, large and small, is in the area of managing expectations. When expectations are not properly managed, customers may expect that you won't just go the extra mile but that you'll go the extra light year. The better you've trained your customers to understand that your output isn't free, the more easily you'll be able to charge them for your work.
New clients are often the easiest to train. You can set expectations early - and your clients' minds will be blank slates when it comes to your work and your billing methodology. Existing clients will present more of a challenge when it comes to training. You may have to wean them from their expectations of free services by affecting gradual changes over time. Sudden shocks to your workflow may prove overly jarring due to their internal Overton windows.
Are you in relationship debt?
We all like to envision ourselves as professionals who don't make mistakes. That said, mistakes can, and do, happen.
- Maybe you took longer on a project than you had promised
- Maybe the software you had written contained an embarrassing defect
- Maybe you tracked a bit of mud into a customer's office
Whether the fault is yours or only appears as such, you may find yourself in relationship debt. The greater the level of debt, the less likely your customers will be to sing your praises and funnel work to you.
Going out of your way to comp some work may serve as a partial means of repairing the damage. Doing so will not only help make up for the financial costs of your shortcomings, but also serve to demonstrate an alignment of incentives - a sign that you care about the level of value your customers receive.
It is important to note that promises and guarantees signaling your willingness to address problems before any work has been performed (and any relationship debt accrued) often cost little to offer but prove quite valuable to potential customers who are weary of taking on risk.
Is the client desirable?
Let's face it, some clients are more of a pain than others. If such a client needs your skills, you shouldn't hesitate to charge them for each and every interaction. In fact, you should probably be charging them at a rate above and beyond what you typically charge. Doing so will provide your business with one of two possible positive outcomes:
- If your demands for payment are met, you'll not only receive additional money but gain insight into customers' willingness to pay for your services
- If your demands for payment are not met, you'll lose a customer that you didn't want anyway
Does the client often ask for little jobs?
If a long-term and desirable client asks for a single small favor - why not help him out? A loyal client may presume that he's earned it - and likely he has. If you're running with margins that are so tight that you can't afford to provide a freebie now and again, you may need to start charging higher rates.
That said, the performance of unpaid work should be the exception, rather than the rule. This fact should be made clear both at time of service, and on the invoice for services rendered.
No customer will ever become upset when he looks at his invoice and sees
Such an explicit itemization can serve as an important reminder that value was received at no cost to your customer. In other words, the customer will owe you a bit of reciprocity in return.
Is there an opportunity cost?
Sometimes it isn't so much a question of the time required to perform a task so much as the time of day required to perform a task. When engaging in work that would prevent you from earning money elsewhere, you probably should be charging for your efforts.
Can you gain valuable insights while performing the work?
I witnessed an amazing bit of salesmanship recently. A consultant contacted a company and offered to perform a few hours of data analysis for free in the guise of a road-mapping experiment.
Did he make a terrible mistake? Had he wrongly offered to give away too much value in exchange for an indeterminate chance of future paid work?
Of course not! In fact his actions were nothing short of brilliant.
His analysis necessitated that he be granted permission to view a large quantity of proprietary and secret data.
Not only could the consultant use the information gathered to improve his pitch to the company at hand, but he could also use it to draw conclusions that could then be sold to other firms in the industry (without sharing specifics of the data itself). The few hours of work he offered might well have been worth millions of dollars to him - and best of all, his customer felt like he was the one coming out ahead.
Why would he, or any vendor, put such an opportunity at risk by demanding a relatively small and insignificant fee?
Is the person you're speaking to paying with his own money?
Economist Milton Friedman presented a model (that I expanded upon in my book Premium) for how careful people are when spending money. You can hear him describe it, but for our purposes, his essential message is this:
Always know if the decision maker is a company owner or a company staff member.
Does the work provide a high degree of perceived value to the client?
If the client understands that the output of your efforts is valuable, he'll be more willing to pay for your work. Imagine a software engineer who has the know-how to quickly restart a stopped assembly line. A work stoppage on the factory floor could easily cost its owner thousands of dollars per minute. Not only could an engineer charge a high price for a quick fix, but the owner would be happy to pay for it.
Is the charge customary and expected in the industry?
If people expect to pay, and are willing to pay for a service, why not let them pay?
You'll probably face little resistance in such cases, but, depending upon the details of your situation, it may be beneficial not to request payment at all.
In Pricing Matters: The Smoking Gun, I examined one business that reduced a very customary, yet nominal, fee. The result was instantaneous differentiation and a greater opportunity to sell complementary goods.
Whether you should charge for small tasks is contextual. As I pointed out from the start, whether you can and should charge for small bits of work depends upon your individual circumstances.
Some will argue that the question is unfair and potentially moot. They will say that true professionals shouldn't be billing for their time in the first place. True professionals should be billing for outcomes instead.
It's true that many firms are, rightly or wrongly, attempting to move in that direction, but value-based pricing shouldn't be seen as a one-size-fits-all solution. As I pointed out in my article Stop Badmouthing Hourly Pricing!, sometimes charging by time can, and does, make sense.
In any case, whether the poser of this month's question should be using retainers, value pricing, or another system entirely is yet another topic that can be explored. Perhaps it's one that we'll revisit in a future issue of this newsletter.
Questions come from readers like you. If you'd like your questions answered, send them my way.
Pricing in the News
- Lone Bitcoin Whale Likely Fueled 2017 Price Surge, Study Says - E pluribus unum - out of many bitcoin traders only one matters
- Wine Moguls Destroy Land And Pay Small Fines As Cost Of Business, Say Activists - Wine producer is driving residents to drink
- A Warning About Every Nintendo Switch Black Friday Deal In 2019 - Is Nintendo playing games with its pricing?
- The Problem With Diamonds Is They Keep Getting Cheaper - Maybe diamonds are for never
- A copy of your property deed costs $3. This SoCal firm will do it for $89 - No good deed goes unpunished
- This government price-fixing case makes the tuna industry sound like the mafia - The fishermen's story is no fish tale
From the Blog Archives
- Low Barriers to Entry Are the New High Barriers to Entry - War is peace, freedom is slavery, and now easy is hard
Notable Pricing Quote
"Fun is like life insurance; the older you get, the more it costs." -- Kin Hubbard
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