How to Know When Your Price is Right

When recently discussing pricing strategies with my graduate students, I couldn’t help but think of an example I came across on a trip to Europe last fall. Celebrating a milestone anniversary in Paris, my wife and I dined out every meal. Now, after the second or third time of receiving the “l’addition” or check, and paying nearly the exact amount that was shown on the bill, she asked, “Aren’t you going to tip them?”

Before you call me a cheapskate (I actually did tip every time), understand the nature of this very good question. You see, in Paris, like a lot of other places around the world, the service is built into the price. So typically what you see on the bill is what you pay, give or take a few Euros here and there. Why do they do this? Why not incent the servers to “earn” some of their pay via tips like here in America?

Well, for one, Parisian servers take an extraordinarily high level of pride in their work. So much so that the proprietors of the brasseries and restaurants are confident enough to price their offerings (food and service combined) without differentiating themselves so much on service. It is assumed that it will be “approprié”.

They follow a classic “value” pricing strategy, assuming that the customer will be willing to pay the price shown on the menu with the expectation that the service will be sufficient to meet or exceed their expectations. In other words, their perceived value of the product (food, service, ambience, wine selection, etc.) will be greater than their cost, or the final bill.

Which brings up a question I get from many students working on marketing plans, and clients working on pricing strategies, “How do I know if I’m charging too much, too little, or just the right amount?”

That is the golden question. And how you answer it can mean the difference between how much gold you keep and how much you leave on the table.

So what I recommend is a two-pronged approach. First, use a cost-based pricing process. Add up all the costs associated with creating or developing your product. If you are baking cupcakes, add up all the ingredients and don’t forget indirect costs such as utilities and the cost of owning or renting the ovens. Or if you are providing a service, add up the hours it takes to provide your service plus the costs of any needed tools whether they include software licenses, or physical tools such as computers, or even travel expenses. Then, add in any percentages for overhead, etc.

Next, stop, sit back and ask yourself: Is the price I see before me fair, meaning, does it seem too high compared to referent prices of your customers (the going rate)? Or does it seem too low, meaning are you leaving money on the table? Here, you are applying the concept of value pricing. Is my price equal to the value I am providing my customer?

In the past, I have worked on quite a few strategies, developed brands, created taglines, websites, collateral, sales tools, direct marketing programs… you name it… that have earned my clients or the company I worked for literally millions in sales over a period of time.

In many instances, I was left wondering if I had charged the appropriate amount of money for my services. Many times, the answer was yes. Other times, I was filled with a sense that something was missing. This feeling of “something missing” leads me to believe that I may have, indeed, left money on the table.

In these instances, you are applying value pricing to your fees. This is the ideal way to price. If you know that you will be giving away greater value than you will collect in fees, you are pricing too low. If you know you are providing a value equal to or less than your fees, you are capturing more of the value.

Does this really happen in real life? Well, I recently watched a video on branding from a well-known designer who spoke about the woman who developed the Nike swoosh. Did you know that back in 1973 she was paid a whopping $35 for her handiwork? And that at the time the Nike executive team didn’t even really like the swoosh logo? What… were they idiots? Did they cheat her blind?

In their defense, at the time, Nike clearly didn’t realize the value that was inherent in this mark. And now, of course, hundreds of millions of marketing dollars and decades later, the brandmark stands on its own, an icon that needs no explanation and no introduction. The designer was later given some undisclosed amount of Nike stock but you can rest assured that unwittingly she left just a “little” bit of money on that golden table back in 1973!

This is a classic challenge that daily confronts any marketing or consulting firm: how to capture the real value of your work today without having a crystal ball to see what it will be worth in the future.

So, here’s what to do the next time you get the question, “What exactly should I charge?” First, employ the cost-based pricing model to make sure you won’t lose any money with your final price. Then, put the value question to work by asking:

– Am I giving away something truly monumental or revolutionary here?
– What is the potential benefit of my work?
– Can the client afford, or will the client pay, what I think it is worth?
– How badly do I need this piece of business?

All these need to be considered carefully.

Then, trust your instincts to capture the value you deserve, and know that you’ve done what is necessary to have the best chance at making sure your “price is right”.