I have a theory as to why some service-based entrepreneurs stay stuck in survival mode. They ask this fundamental business question – “How much do I charge for X?” – at the wrong time.
Given that I’ve been guilty of doing this in the past, I get why solo and small team businesses start with price. After all, it does play a critical role in the overall financial success and health of a business.
It’s just that starting with price is an unwise approach.
You’ve likely heard the parable about how building a house on sand is imprudent because the foundation will be weak and unsteady, making the house susceptible to damage. This seems so blatantly obvious that you’d probably never do this.
Yet, this is exactly what a lot of new and experienced business owners are doing each time they lead first with price when creating a pricing strategy for the services and products they offer. What’s worse is doing this and not even realizing you’re doing so!
Three Mistakes of Price-First
You might wonder what’s wrong with a pricing strategy that leads with price, especially given the role it plays in the overall financial success and health of your business. Here are three (3) common mistakes that tend to be the result of price-first thinking:
You trade time for money
When you lead with price, there is a tendency to base the price you charge almost exclusively on time. Therefore, in order to make X dollars you have to work X hours. However, because time is limited, your income will also be limited. Granted, there’s no way to completely escape the role of time (it takes time to create and deliver whatever it is that you offer), but here’s a better trade: value for money.
As I mentioned before, since “value” can be abstract, one way to bring some clarity to it is to define it this way: how are you using your skills, knowledge, talent, strengths, ideas, resources, connections, etc. to help someone solve a problem, address a challenge, meet a goal or satisfy a desire.
You price based on the worth of a transaction
When you lead with price, you run the risk of focusing on a single sale – aka transactional selling. This typically means you’ve entered into a one-off, short-term relationship with your customer.
As the name implies, relationship selling is based on having (or wanting to have) a relationship with your client. It’s not about what you’ve just sold them, but also what you may be able to sell to them in the future.
You don’t consider the impact of a sale on your entire business
When you lead with price, you tend to set a price without considering the full scope of responsibility of that sale. This is a wonky way of saying that a portion of every sale you make needs to go toward the expenses required to operate your business – creating, marketing, selling, operations, taxes, salary, healthcare, etc. You may charge $1, but you never get to keep $1.
Price-first thinking is unwise because of what it costs you literally, in terms of actual dollars and cents, and figuratively, in terms of sales efficiency and business management. And, it’s one of the reasons a business can remain in survival mode much longer than desired. Because while it may get cash in the door (and probably quickly), it can also unwittingly stunt your ability to grow and scale your revenue and who you serve.
Essentially, when you operate with a price-first approach and mindset, you give short-shift to your business model and sales process.
That is why your answer to the question – “How much do I charge for X?” – ought to be a derivative of your business model and sales process – aka, model-first.
The overall financial success and health of a business is dependent on how well-integrated are these three pillars of business:
While there are many definitions floating around for what a business model is, the simplest one, in my opinion, is in the form of another question: How do you plan to make money?
Even if you’re only selling one thing, the answer to the above question is not as simple as the question appears. In fact, the answer has nine (9) components. I like using the framework proffered by Strategyzer.com for myself and clients because it lays out the components you need to consider for what you offer in a very user-friendly framework.
I’ll spare you a deep dive into each component, but here’s a list so you can see what can easily be overlooked when you use a price-first model:
- Customer Segments
- Value Proposition
- Sales Channels
- Types of Relationships
- Key Activities
- Key Partners
- Cost Structure
Again, whether you sell one thing or several; whether you sell to one client type (e.g., consumers) or several (e.g., consumers and companies), the price you charge ought to be set with these components of your business model in mind.
Your sales process is a repeatable set of steps you take to…
- Identify prospects for what you offer – aka lead generation
- Connect with them to gather information about them and their needs
- Evaluate/assess if moving forward makes sense for all vested parties
- Close the sale/deliver your promise
- Follow-up – with prospects to stay in touch and with clients/customers post the sale and delivery of the promise
- Ask for referrals
For some businesses, there are two additional steps nestled between connect and evaluate/assess: research and proposal or demonstration.
So, what happens when you lead with price is that you miss out on the chance to pause and factor into the price the expense of the business model blocks and sales process steps! And that can have a huge impact on your bottom line.
Every product and/or service you create ought to be in service to your business model. How does it support it overall; how does it fit with other products/services, if any, you provide?
Yes, “How much do I charge for X?” is, indeed, a critically important question. But to get your pricing right (and send the right message in the process), it helps to embrace the perspective of model-first as visualized below. This will ensure you ask this important question at the right time. After all, the overall financial success and health of your business needs you to get this timing right.
p.s. If you believe diving deeper into your pricing strategy will help you improve the overall financial success and health of your business, then join us on March 26th; click here to RSVP. The theme: Pricing Strategy For Serviced-Based Entrepreneurs (it’s not just about the numbers). As I write, we are a table of 8; our max is 12. Can’t make it? Please spread the word by sharing the RSVP links (and, thanks!)