Most people put a lot of thought into pricing their services. They worry about whether they’re charging enough to cover costs, earn a good living, and hit their income goals. Then they panic about charging too much and alienating people. But there is one vital element to pricing that is often overlooked, simply because we don’t realise just how powerful it is.
Perception.
In business, perception is everything. How your clients and potential clients perceive you and your brand can often carry more weight than the reality of your company. Perception and reality are seldom perfectly aligned, and when they are it doesn’t happen by accident.
When it comes to pricing your services you not only need to consider elements like:
- covering costs,
- reaching your goals, and
- turning a tidy profit.
You also need to think about how your prices affect the manner in which people perceive your business, your services, and you.
How do your clients currently perceive your business?
How much of that is a result of your prices?
Are you happy with their perceptions of your brand?
Do you need to tweak your prices in order to tweak the impressions your clients and prospects have of your business?
How Pricing Affects Client Perceptions Of Your Brand
There is a strong mental component involved in shopping, purchasing services, and outsourcing things to a paid professional. People are excellent at doing ‘mental accounting’ while they shop, browse, purchase, and make decisions regarding the service providers and professionals they will choose to fulfil their needs.
This may be conscious, like walking around the supermarket and mentally calculating how much everything is going to cost, to ensure you stay in budget. But it’s often unconscious, like clicking away from a website because you can’t easily find prices.
You think you’re doing it because it’s proving too much hassle, but it’s far more likely you have made a subconscious assumption about the price, which has put you off before you’ve even learned what it is.
In order to maximise your profits, you need to learn how to capitalise on client perceptions of pricing.
Related Post: Fixed Pricing – Should I Use It And How Do I Begin?
The Reasonable Price Scale
We mentally evaluate prices according to our own personal, internal scales, and judge a brand or business on multiple things based on nothing but price:
- Affordability
- Reliability
- Quality
- Expertise
- Exclusivity
- Luxury Level
Price your services too low, and people will make negative assumptions, such as:
“What’s wrong with it/you?”
“They can’t have much experience.”
“The quality must be poor.”
“There won’t be much support.”
“They must be really desperate if that’s all they’re charging…”
Price them too high, and they will make more negative assumptions, like:
“Wow. It takes a special level of egotism to think you’re worth that much!”
“I’ll never get a good return on that investment, even if the service is amazing!”
“They’re out of their mind!”
The trick is to find the perfect balance between the two, and find a price that gives people all the positive assumptions you want them to make, while ensuring they don’t make any of these negative assumptions.
As a result, your prospects use an internal ‘reasonable pricing scale’ to figure out whether or not they will buy from you. This may seem like a bad thing, as if you have to convince people you’re worth the price you’re asking, but it goes both ways.
Are you charging a reasonable amount for the work involved?
This is an important question because if your prospect feels you’re undercharging they assume your skill level or quality level is lower than they would want it to be.
Is this a reasonable amount to pay for the benefits provided?
This is the question we assume is foremost in people’s minds when they’re judging pricing. Will they see a good ROI?
Is the problem this service solves bad enough that paying your price to solve it is reasonable?
Finding Your Balance
It isn’t easy to balance the reasonable pricing scale, and it’s different for everyone and every business. It’s also not static – the right price for you right now may not be the right price for you a year from now. This is partly because of people’s perceptions of price change according to current economic and social factors, but it’s largely due to the fact that your business is going to grow, and as it does the perceptions you want to create will change.
There is no one-size-fits-all answer to ‘How should I price my services?’
There are, however, some effective ways of determining the best price for your services in order to give clients and prospects the perception of your business that you want them to have, such as:
“They’re clearly an expert in their field.”
“They’re selective about their clientele, and that makes me feel special!”
“This must be an effective service if they can sustain these prices.”
“This is a luxury brand, and I want the best!”
Your Clients Likely Have Inaccurate Price Awareness
Before we dive into exactly how prices affect perception it’s important to get clear on a few things. The first is this:
Your clients’ awareness of what constitutes reasonable and fair pricing for your services is likely inaccurate.
Studies of supermarket shoppers have found that more half of the people who regularly buy common grocery and household products are incapable of accurately estimating their price within 10%.
And these are everyday items that people buy on a weekly basis.
Their ability to accurately estimate the price of services they think about infrequently, or have never paid for before is likely to be considerably less.
Related Post: Value Pricing – Where Do I Start?
The Question Of ‘Perceived Value’
Every product or service has a perceived value – the amount prospective clients believe an item to be worth.
If your prospects are not familiar with inner workings of your industry it’s very likely that they will not have an accurate understanding of how much it genuinely costs to produce an item, or deliver a service.
Rather than basing their perceptions on factual understandings of the time, effort, skills and materials involved in creating and delivering something, they use a kind of internal barometer to decide if your stuff is overpriced.
Your marketing strategy needs to reflect the perception you would like prospects to have about your services. If you want them to happily pay high prices, you need to create the perception of a high-value service and brand.
Perceived value isn’t a problem as long as you are aware of it, and effectively leverage your marketing collateral to educate your tribe on:
- the true value of your services,
- the return they can expect to receive on their investment, and
- the extent to which your offering provides a perfect solution to their pain.
Multiple Factors Affect Price Perception
Beyond the poor awareness your clients and prospects may have of pricing in your industry or niche, there are a wide range of other factors that will affect the manner in which they perceive your prices.
Exactly what constitutes a ‘reasonable’ prices is greatly affected by factors like:
- Scarcity
- Convenience
- Size
For example, supermarkets work on the principle that people are happy to pay more for something if it means obtaining it quickly and easily. This is why you can go in two versions of exactly the same store, buy precisely the same product, but pay more for the item bought in the city store compared to in the suburbs.
Likewise, local petrol stations frequently charge more at peak traffic times because people like to be able to fill up their car on their way to or from home, without going out of their way.
Beyond the perceptions people have relating to the manner in which they see your service itself, there are other factors that can change the way people perceive your prices. And as a business owner, many of these things are outside your control. For example:
- Client experiences with a similar service in the past
- Client knowledge of what other people are charging and paying for services like yours
- Client perceptions of the quality of your service and brand
- Client knowledge of your niche, industry, and what is realistically involved in delivering the service
- Common sense
- Political and economic factors such as interest rates, a downturn in the economy, or an unstable government
- Client budgets and cash-flow
Some of these issues can be managed by you if you effectively educate your tribe. You can’t control the situation that caused their perception, but you can change it.
Other factors, particularly economic and political ones, are often bigger than your ability change. If your prospect doesn’t have the money in their budget to cover the cost of your service, it doesn’t matter if they think it’s worth it or not, they’re not going to be able to buy it until they have more money.
Despite this, there are tactics and strategies you can use to find a price that engenders the perfect perception of your business…
The Truth About ‘Just Below’ Pricing
A common psychological tactic to use in pricing is the ‘just below’ method. Rather than pricing something at $10, you mark it up at $9.99. It’s basically the same price, but because it’s ‘just below’ $10, it feels like more of a bargain.
However, according to Robert Schindler, one of the world’s top researchers on pricing, just below pricing may not be a good way to go. Schindler’s research demonstrates that the final digit in a price is not nearly as relevant to client perception as the first digit. An item can be priced at $20, $25 or $29 dollars and people will view it in much the same way, but the difference between $29 and $30 is significant.
The motivations and priorities of your clients are also of paramount importance when it comes to deciding if ‘just below’ pricing will work for you. If they’re after a bargain, the .99 will work well. But if they care more about finding a high-quality or luxury service it will actually put them off.
Clients who want luxury do not respond well to just below pricing!
How Pricing Affects Your Business
When calculating your prices there is usually a fairly small window to work with. It begins at the price point representing the lowest amount you can charge while making money (your break-even point) and ends at the highest price your industry, niche and market allows you to charge.
That is not to say you can’t price above or below this window, but to do that one will cost you money, and to do the other will generally result in the perception that you are overpriced and send your prospective clients to your competitors.
There are three important elements you need to factor into your pricing from the perspective of your own business, which has nothing to do with your clients and everything to do with you:
- Profit – The price you settle on will determine how much profit you generate for each sale.
- ROI (Return on Investment) – You have invested a lot of time and likely money into your business and brand, and you need to see a return on that investment, ideally quite quickly. Your pricing directly affects the length of time it takes you to recoup the investments you made in getting the business running. It will also affect how much you can continue to invest back into your brand moving forward.
- Marketing – You prices have a surprising impact on your marketing strategy and tactics. Price can determine huge elements of your marketing, such as whether you’re promoting yourself as a luxury brand or affordable solution everyone needs. How much you’re charging will also affect the success of your campaigns, and the return you make on your advertising and promotional expenses. But it can also determine smaller factors, such as whether the price should be included in promotional graphics.
Perceptions Of Brand Value
Just as prospective clients have an internal measure of the value of your services, they also have a perception of the value of your brand as a whole.
A strong brand is capable of commanding higher prices, and evokes a deeper sense of the value of what’s on offer.
Becoming known as the go-to brand for your particular zone of genius is a great way to boost the perceived value of your brand. If you’re a specialist in one particular ‘thing’ people will have confidence that you do that one thing better than anything (and anyone!) else.
You can also increase perceptions of the value of your brand by developing signature services and methods that are completely unique to you. That way, even if you’re offering a service that is available elsewhere, the way you do it is unavailable from any of your competitors.
A signature service instantly raises the value of your brand, and allows for positive perceptions of higher prices.
Raising Your Prices Improves Perceptions Of Value
While it’s a difficult juggling act to be sure, raising your prices can actually have a very positive effect on perceptions of your business. There is a general misconception that putting your prices up is always a bad thing, and it will negatively affect how people see your business. But the opposite is often true.
Higher prices create positive perceptions in several key ways:
- It positions you as a luxury brand
- It demonstrates that you have a thriving business
- It indicates you have an exclusive clientele and only work with people in a certain income bracket
- It reinforces that you are an expert in your field, as the notion that high pay equals high skill is deeply ingrained in our psyche
There’s always the risk of taking it too far and going too high, but generally speaking, an increase in your prices will only improve perceptions of your business.
Yes, you may lose the odd client here and there, but the odds are they are not clients you truly loved working with to begin with. This works the opposite way, too, you can lower your prices to position yourself more as an ‘everyman’ brand and less as a luxury service, if you prefer working with people who can’t afford expensive solutions.
The upshot of finding the perfect price for your services is that you strengthen your brand, improve perceptions of your business, and refine your tribe to ensure you’re working with exactly the right people.
And Finally…
Knowing how much of a minefield pricing can be, I’ve created a super-easy Price Perceptions Cheatsheet to help keep your pricing decisions as simple, stress-free and profitable as possible!
Download it now, and if you need any additional help with your pricing book a curiosity call with me here.
