The Magic Price Point
In previous blog posts I described how I started up my business by:
defining my offering,
figuring out who wanted to buy it from me, and
coming up with a plan for marketing to them.
I also described how I refined that customer engagement by listening to their needs and adapting my offering. Yet, after a few years at this I still had some time to spare and wanted more billable clients! So, I cast about, looking for ways to get busy.
I saw 3 possible reasons why I wasn’t getting enough work at this time, including:
Not enough prospects due to a weak strategy for marketing the business.
A deficient sales and closing strategy, leading to an inability to convert prospects to customers.
A gap between value delivered and the price offered. (Do prospects think what I am selling is worth what I am charging?)
In this post I am going to focus on #3, Setting the Price Point.
What do you have to charge? What is a reasonable rate?
The complex topic of consulting rate can be looked at from two perspectives:
What do you need to charge?
What can you charge?
What do you NEED to charge? This process starts with what you need to maintain your lifestyle. If you were going to look for work, what is the minimum salary you would accept so you could meet your needs and minimum expectations for luxuries, savings and giving?
Next, you need to figure out how many hours a week you are going to be able to do billable work. It is not going to be 40 unless you are putting in a bunch more hours above that for all the stuff you need to do to keep your business running, such as:
Bookkeeping, accounting, government compliance
Keeping administrative systems (CRM, personnel, timekeeping) running
Marketing and sales
Professional development
Time off, vacation
Family and volunteer commitments
For me today, I am primarily responsible for much of the household upkeep, and I also care for a 9-year-old son. I am highly active in my church and will continue to be. I also outsource little of my administrative services. I can bill 20 hours a week at the most.
Once you have the income factor nailed down, there’s still work to do before you can set your billing rate. Your next step is to calculate the fixed costs of doing your business – little things that add up, such as:
Office supplies
Self-employment taxes
Cost of insurance, licenses from the government
Software, subscriptions to databases
Legal and professional services
Marketing and advertising
Conferences and meetings
Paying outside resources to do things on the previous list of bullets, so you don’t have to
And on and on….
What CAN you charge? Figuring out the market price for my service was not as hard as I thought it would be. I enter into partnership agreements with other consultants all the time and we share billing rates. I ask clients what they are hearing. There are online marketplaces for independent consultants that can help you, but I have found these rates to be lower than what people like me charge in the real world*.
I took a look at what big companies in the proposal support business would pay me to be part of their consultant pool, what they would charge for my type of service, and how much of that I would receive. I have not felt like I could charge the large consultancies’ external billing rates for what I do, because these companies offer a great deal in terms of reputation and depth that I cannot as an independent. Still, it is good to know what your customer will pay if s/he goes to one of the big players for what you do, and to keep that in mind during the price negotiation.
After asking myself these questions and answering them, I landed on what seemed to be a reasonable price for what I do. All the time and work that I put into that due diligence would pay off later.
Discounts to increase volume.
Anyone who has taken an economics class studied the relationship between supply, demand, and price. According to this model, the lower the price, the more demand for the product or service, and the higher the sales volume. In short, drop the price, and get more sales.
When I was in the slogging phase, and I did not have as much work as I wanted to have, I thought that if I lowered my price, then I would get busier. But I found that while the classic economic model works well for buying a gallon of gas or a loaf of bread, the relationships are more nuanced when it comes to selling professional services.
For the first few years of my business, I put together packages that offered discounts off my hourly rate. I did my homework (above) and determined a reasonable hourly rate, then I provided discounts for volume, for prompt payment, and sometimes just to raise my chances with a customer whose work I really wanted. Most retail models that you find online say you should make the customer aware of your list price and then offer discounts to get them to ACT (i.e., sign the daggum contract!). I had plenty of “potential” customers that never crossed the line to signing up and committing to pay me.
Since I was not overly busy at this point, I spent a good deal of time chasing after these hesitating “potentials” and trying to convince them they should move ahead with what we talked about (which was what they said they needed and wanted to do). I thought that perhaps a price nudge would get them to act—like “Buy this week and I’ll give you 10% off.”
But I had misunderstood the issue; for many, price was not actually a top factor in why they did not make the jump from “potentials” to paying customers. The reasons for this failure-to-close were many including:
not all the decisionmakers agreed that they should move forward, and there was not a strong-enough sense of urgency to overcome the lack of consensus;
a lack of present company funds to cover my services (“Will you work on commission?”);
vacillation over whether pursuing federal work was worthwhile (or even desirable) given all the admin baggage and detail-mongering that comes with a federal contract;
the customer could not see this effort resulting in a contract in a reasonable timeframe; or
competing priorities, just being too busy to think over the options and move forward.
Discounts alone didn’t overcome these obstacles to Yes; they only made Yes cheaper. There were a few customers for whom the total cost was an issue, but a 10% discount was not what they were looking for. The price point they wanted was way below what I was willing to work for.
So next in this seemingly never-ending quest, I needed to know who those “potentials” without a budget were, and get them out of my pipeline so I could focus on the ones with a budget and move them through my pipeline.
That is when I started bringing up the price earlier in the conversation with prospects -- and if this was a showstopper, so be it. Better to save my time for those potential customers that had the wherewithal to engage a consultant like me and see if we could hammer out a match between my offerings and their needs.
Ultimately, I came to the realization that discounts were just reducing my hourly take and not increasing my stream of work. Over time I dropped all the discounts and even raised up my base hourly rate. I did not see a drop in demand for my services.
Where does my price fit in the marketplace?
Still, I regularly lose out on business regularly because of price. Straight proposal writing is something I do not get asked to do often because I know that there are writers out there that can charge less than me. People with much less experience can provide proposal writing at approximately the same quality level than I can. Or at least that is the buyer perception and I have not figured out an argument to overcome that perception. When I realized this, I had 2 choices:
lower my price for proposal work, or
keep my rate the same and just work on the higher-value services (research and capture management)
I chose 2. As a result, I do not get as much writing work as I could get but I get more higher-level, more lucrative jobs.
A third way is for me to take on associates and manage their work. While that is one way I work, it is not a big part of my business model currently.
What about a different delivery model to provide more services at a lower unit cost?
I have also thought about ways to offer bulk services at a lower cost. How could I convert what I know into downloads, or online offerings that provide value but do not have much of a unit labor cost for me? Could I attract enough buyers to make this pricing model work? I see other firms in my space doing this with paywalls to access their content, and various subscription schemes. So far, I have not figured out how to make this a profitable model for my business. That means that most of what I am selling is still my own time and the time of associates. I usually set my minimum for an engagement at around $2,000. If I had a compelling, one-size-fits-many offering that could be downloaded or shipped out in an envelope for $50 to $200, then I could adopt a completely different customer engagement strategy in order to generate the volume of prospects and customers needed for this size package.
THE TAKEAWAY: Stay the course.
During the slogging period I found myself getting discouraged at times. That is when I would turn back to my original plan and its rationale. I had to believe in it. I’d also take solace in listening to the success stories of other entrepreneurs on podcasts like How I Built This. The owners of what are now billion-dollar brands like Spanx and Airbnb encountered the same setbacks as me. Then one day the “flywheel” described in Jim Collins’ excellent book “Good to Great” kicked in and the company took off. Sustainable business success does not come by accident, by means of your sparkling personality, or as some sort of miracle. Nothing good happens without effort, and occasional disappointment is just another door to making progress.
Next up in the series: partnerships for success.
*before COVID, I would have said the “real world” is the world of one to one and in-person interactions. These days it might mean the traditional world of service provision that does not involve a gig-working intermediary where one competes with everyone on the planet that can provide your service.