The Price is ... Right?
Matthew Dashper-Hughes
Global talent acquisition | Leading international operations | Empowering growth and performance through coaching
Keep reading if you’ve ever asked yourself:
?One of the most common subjects that clients talk to me about is the root of all evil.
?You know, the thing that makes the world go round.
?Filthy lucre. Green. Brass. Moolah. Spondoolicks. Wonga. Wedge…
?The list goes on.
?In fact, the only other things I can I think of with this number of euphemistic terms are (sorry to be crude) sexual acts and human genitalia.
?In other words, talking about money is in the same space as social taboos that we’re (sotto voce) “not supposed to talk about”.
?Yet, money isn’t like sex and naughty bits. It’s not something that edgy comedians typically make jokes about on late night Channel 4 or their latest Netflix special, it’s part of everyday life and it’s the language of commerce.
?So, what do clients ask me about most often?
?“How do I get comfortable talking about money?”
?Great question!
?Great because, as implied above, it’s a surprisingly common one. Most people have something unhelpful or even unhealthy in their money concept. It stems from childhood; from the scripts we learn from the day we are born from our parents and authority figures in our lives.
?If you’re in business, it’s not enough to be merely comfortable, arguably you must be fluent in the language of money.
?The first thing I do is reassure clients that they are not alone, and the second thing I do is tell them that their client (or prospective client) probably finds the whole money conversation just as awkward as they do.
?That’s quite a relief for a lot of people, but it does also throw up an interesting point: the opposite can also be true. You can come across as too comfortable talking about money. If you’re really comfortable when your prospect is uncomfortable with the subject, then you might inadvertently make them feel even more awkward.
There’s a fine balance to be achieved in the way you speak about money, and some of that comes down to judging how the other person feels about the subject.
?Getting it right with new clients
?Positioning your price at the start of a new client relationship is one of the biggest challenges that clients talk to me about.
?“How do I get my customers to understand my value proposition?”
?“Why do they always ask for a discount?”
?These are two of the most common questions I am asked.
?The bottom line is this, if your clients see you as a cost rather than as an investment, then they will never understand the real value in what you can do for them.
?When it comes to understanding ‘value’ it is vital to recognise that the ‘value’ is in the eye of the beholder. The buyer buys for their reasons – not yours.
?One of the most famous quotes in marketing is from Harvard Business School Professor Theodore Levitt:
?“People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!”
?This is wonderfully neat and succinct.
?And, sadly, it’s tragically wrong.
?Theodore Levin was way too superficial with his, admittedly very quotable, line.
?Nobody ever woke up one morning and said, “I want a quarter-inch hole” any more than they might have woken up and said, “I want a quarter-inch drill bit”.
?This kind of lazy thinking is where the disconnect between ‘cost’ and ‘value’ often occurs.
?When pursuing something as deep as the concept of ‘value’, you should never stop after you’ve asked the first ‘why’. In fact, don’t stop until you have reached the real reason. Remember that the prime mover for all decisions is always emotional, not intellectual.
?The clue is right there in the word. ‘Emotion’ comes from the Latin root ‘emovere’ – the verb ‘to move’.
?Let me illustrate how you dig for the real value:
?“Why did you buy a quarter-inch drill bit?”
?“I wanted a quarter-inch hole.”
?“Why did you want a quarter-inch hole?”
?“I wanted to put a hook in the wall.”
?“Why did you want a hook in the wall?”
?“I wanted to hang a picture.”
?“What is the picture of?”
?“It’s a picture of my daughter’s graduation.”
?“How does it make you feel to have the picture on the wall?”
?“Proud. Happy. Inspired. A little bit tearful, in a good way.”
?There. That’s the real reason they bought the drill bit. The desire to see a reminder of their daughter’s triumphant achievement every day. It’s emotional and it’s real.
?Never accept the ‘lazy’ why – ask the five ‘why’ questions to get to the real root cause.
?When you have your initial discovery meetings with prospective clients your business development (aka ‘sales’) process must allow you to build a truly collaborative and intimate ‘trusted adviser’ relationship with them.
?In part this is so you have the trust and the permission to respectfully ask some probing questions.
?You must do this because if you don’t truly understand the personal, financial, and emotional roots of what matters to them, then you cannot do your best work on their behalf, and you cannot help them to understand why working with you is an investment, not a cost.
?“Time to put on my big girl pants”.
?This is a phrase that one of my long-standing coaching clients uses every time she must steel her nerves for ‘that’ conversation about money with a potential new client.
?There’s an old saying, “the least you’ll accept is the most you will get”.
?You will only ever get paid as much as you really think you’re worth, and never a penny more. The problem is that most people have sufficient inner demons and self-esteem issues that they often believe themselves to be worth a lot less than they really are.
?What you are worth can only be defined by the ROI that the client will have from investing with you … so, what is the personal, emotional, and financial impact to them of not having your solution?
?What happens when your self-doubt clouds the issue and infects the ‘money conversation’?
?Let’s say you work out how much a piece of work is going to cost and what margin you need to make. For the sake of argument, let’s say the total comes to ￡15,000.
?When ‘that’ conversation comes around with the soon-to-be client, you suffer a twinge of imposter syndrome and, instead of saying “￡15,000” you hear the words “￡12,500” floating out of your own mouth. You’ve just dropped ￡2.5k off the price you had worked out…
?…and it doesn’t stop there.
?The prospect winces, as if in pain (a move that professional buyers are taught to do, by the way).?With a note of incredulity in their voice, they repeat the number back as though they’ve been wounded by it.
?“￡12,500?!”, they say.
?“Erm… I meant ￡10,500”, you reply.
?You’ve dropped ￡4.5k in the space of 30 seconds and you’re now going to be working for next to no margin at all. You walk away, punch drunk, having stepped into the ring leading with your chin.
?If this scenario sounds familiar, you may take some comfort in knowing you are far from alone. It is staggeringly common to feel like this.
?The good news is that it’s something that can be overcome.
?It takes some work on your own self-esteem, and your own negative self-talk, but you can get there. A coach may be able to help with this.
?When you learn to say “￡15,000” (or whatever the real price is) with absolute conviction, you're communicating something more than just the price. You're communicating your belief in the value that you're going to deliver. It's not just being clear about the price, your tone and body language also indicate something deeper about value and trust.
?Ultimately, the prospect is never going to have conviction in your price if you don’t have conviction in your price. Why the heck should they believe it if you don’t?
?Like Stella Artois used to say in their advertising: ‘reassuringly expensive’.
?You must occasionally remind yourself that, like Loreal, you're worth it!
?Remind yourself that you do what you do because you’re bloody good at it. Clients come to you for a reason … and it isn’t because you’re cheap. When the client has a real reason to invest in your product or service, it’s never (or rarely) about price.
?You are worth it, so you should be charging appropriately. Not ‘rip-off’ pricing, but a price that is commensurate with the value you deliver to the client.
?Right upfront in my very first meeting with a potential new client, if they say they are talking to other trainers or coaches, I often say, “experience tells me that we will not be the cheapest option. Should we continue talking?”
?When they say “yes” (which they usually do) I ask them, “why?” because I want to know what really matters to them.
?How should I calculate my price?
?This is a huge question, and the answer is, ‘it depends’.
?It depends on a range of factors to do with your business, your sector, your cost base, the value that you deliver to your clients and so on.
?The last of these is the most important.
?There is a temptation to work on a ‘cost plus’ model (you start with your costs, add on the mark up or margin you want to make and from that you derive your price).
?As a general principle, though, pricing should ideally be based on the value to the client rather than the cost to you. Win business based on the value you deliver – this will move any ‘money’ conversations away from ‘price’ and towards value. Think of your product or service as an investment that your clients are making. What return can they legitimately expect?
?The client should be able to see and appreciate what they are getting for their money – again, this should be couched in terms of an ROI rather than justifying your price with reference to what it costs you.
?Beware the salesperson in the team that wants to slash prices because “the competition is cheaper” or “we’ve got to be in it to win it”. You must be prepared to ‘lose’ (more accurately, to disqualify) some sales to increase profits and to only take on the clients you should be working with.
?So, what kind of ‘pricing strategies’ are there?
?Answer … there are dozens! I’ve already mentioned ‘cost plus’ above, but here are a few more:
?…and many more besides!
?The most important thing, as mentioned above, is to look at the value you deliver to your client. Start there to stop the conversation being all about price.
?Remember this basic rule: if you win the business purely on price, you will lose it on price. Someone, somewhere, is always prepared to work for less.
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Price Increases
When and how should you apply a price increase?
?Arguably, you should have a client review at least once a year, especially if you’re in professional services like consultancy, the law, accountancy, or finance.
?When inflation was relatively low, many businesses would let the opportunity for an annual review slip past. Over the few years leading up to 2022, it was not uncommon for me to be talking to small business owners that had not imposed a price increase for four or five years or more.
?They took the view each year that, as it was only going to be about 1% or 1.5% (maybe less) that they would need to pass on to the client, it was unnecessary to go through the awkward rigmarole of contacting the client to talk about a price increase.
?Instead, they let sleeping dogs lie.
?A year passed, and then the next, and then the next. Each year saw the same rationale and no price increase until, suddenly, they realised that several years had slipped by, and inflation was skyrocketing, and they now must impose a 10%, 15% or 20% price increase all in one go … just to catch up.
?The rule is that, even during times of low inflation, an annual review is a good idea.
?Critically, the price increase should come as no surprise for the client. It should be part of a normal cadence of quarterly and annual client interactions and reviews in which you genuinely seek feedback about performance and service levels. If the only time you ever speak to a client is once a year to put your prices up, that’s not a review; that’s a drive-by shooting.
?You should have the annual review and talk about service levels and satisfaction. You should talk about price, even if you have made the decision to keep prices the same this year. You should do this because it's a good discipline, it keeps you honest, and it manages clients’ expectations that this is something you will always talk about.
?With what is going on in the world right now, we've reached the point where every client is expecting a price increase. I can almost guarantee you, if you are still on the fence about putting up prices, it will come as a surprise to your clients if you do not put them up.
?As a brief aside on this, when I used to buy any B2B services in my corporate days, my cynical way of looking at it when a business didn’t need to pass on cost increases of this magnitude was this … ‘if they can swallow the increase into their margin and still be comfortably profitable, they were probably ripping me off before!’
?And the time is right, right now.
?As you hit the end of one calendar year and the start of a new one, it’s one of those ‘line in the sand’ dates that may be arbitrary but seems like the natural time to have a review.
?So, how do we go about applying a price increase?
?Well, here’s what you should not do:
Send out an impersonal letter or email, explaining all the increases in costs your business has suffered, give some slightly tortured, embarrassed, and awkward bits of justification, and then finish by telling them “…with regret” what the increase is going to be.
?If you are too embarrassed to meet them face-to-face, or even pick up the phone, you send an impersonal written missive packaged with a load of ‘justification’ the implicit message is that you are embarrassed about the amount you’re asking for and you feel that it needs to be ‘justified’.
?It tells the client that you’re not confident in your message.
?Far better to have the conversation in person, as part of a review.
?Naturally, in any review, you will ask the client about their business. In the current climate it would be normal to ask them how they have handled their clients when it came to passing on the more-than-90% increase in energy costs, plus all the other price hikes we’ve all had in the last year.
?When the client tells you about the pain they’ve been through, you can empathise. You’re going through the same thing, after all!
?It puts you both in the same foxhole together.
?You’re both experiencing this and, just like every business, you both know the costs must be passed on.
?You may have noticed that, in the suggested course of action above I specifically mentioned the “more-than-90% increase in energy costs”.
?That was deliberate.
?It’s a genuine number, and it is also a huge number. Chances are that the price increase you need to put to them is way lower than 90%.
?The 90% number serves as an ‘anchor’ psychologically so whatever you put to them that is lower than that now looks and feels more reasonable. It maybe even looks cheap when measured, unconsciously, against the anchor.
?You may want to strengthen the anchor further by specifically mentioning some numbers relating to some other chunky price hikes – rent, rates, staff costs, transport, fuel etc. They’re all meaty cost increases that every business is facing.
You can both discuss what efficiency measure you’ve put in place to mitigate the costs, how you’re both doing your best to use processes and systems to shield customers from the increase but that, in the end, you both know that some of it is going to be passed on.
?Remember, this is you asking them how they are passing on these cost increases. It’s not couched in terms of you justifying the cost increase that you need to impose. The answers they give means that the pertinent facts are coming out of their own mouths – which means they’ll have far more conviction in it than anything you could say.
?Just asking these questions and quoting these numbers positions the client psychologically so that he or she is ready for you to tell them you are imposing an increase.
?And, when you tell them that it’s 10%, because of the “90%” anchor it won’t seem quite as steep as it might have done!
Other psychology-based price-positioning tips
?I spent a couple of decades of my career in retail, and the first couple of those years were spent in Marketing. It will not surprise you to learn that the psychology of pricing plays a huge part in how retailers drive up product sales.
?Price communication plays an enormous part in shaping a client’s perception of value, and perception is reality.
?The ‘anchoring’ effect I mentioned above is something you will have seen many times in retail environments.
?Have you ever bought something on ‘sale’ in a store? If so, it was probably listed with the old price (the ‘was’ price) still listed but scored through with a red line, and the new price boldly listed as ‘now only xxx’.
?The ‘was’ price serves as an anchor, making the ‘now only’ price look like a bargain.
?But the anchoring effect is not the only cognitive bias that marketers use when positioning prices.
?The framing effect is also very powerful and can be used in a multiplicity of scenarios, a couple of examples are below (and have relevance to B2B as well as B2C pricing).
?What is the framing effect?
?As the name suggests, one of the ways that our brain works is that we infer a certain amount of meaning from context.
?For a good example of how this works, as far as price is concerned, cast your mind back (if you’re old enough) to the days before the proliferation of coffee shops on our high streets.
?Before Costa, Caffé Nero, Starbucks et al came along, it was normal to buy a coffee in a local café. It probably cost 40p or 50p – value that seemed appropriate because it was framed as a hot drink, probably a simple mug of something that gave a quick hit of caffeine that you were buying along with your breakfast or a toasted tea cake, or similar.
?Then the Starbucks effect kicked in – with the advent of the coffee shop revolution it’s no longer a ‘hot drink’ – it’s now a lifestyle choice.
?You’re sipping on a statement – your beverage choice says something about who you are, and you’re consuming it in an environment that is an extension of your working environment. You plug in your Macbook Pro, log in to the WiFi and happily pay ￡3.50 for something for which only a few years previously you would have balked at paying more than half a quid.
?This use of ‘framing’ is what marketers refer to as price positioning – changing perception is the same as changing reality. If you want to change your prices materially away from your competition, then you need to reframe the service or product you provide.
?Another use of ‘framing’ is price bundles.
?This is a ‘cost plus’ based way of calculating a pricing structure. It’s not what I would typically advocate, particularly for service-based businesses, but it’s very common in retail so it’s worth mentioning.
If you have high fixed costs in your business, then you need to drive up transaction values so could use a ‘bundle’ price that shows the advantage of buying a group of products vs buying the individual components separately. This drives customers to buy the bundle, which increases the average transaction value (“ATV”) which contributes to covering the fixed costs.
?If, alternatively, you have high variable costs then you might use a bundle price where the consumer cannot easily compare it to purchasing the components separately (and, indeed, the ‘saving’ for buying the bundle is negligible or non-existent). The bundle price becomes the standard selling unit, which drives up the ATV and the margin.
?Closely related to the framing effect is ‘decoy’ pricing.
?Decoy pricing is an example of what psychologists would call an ‘asymmetrically dominated choice’. In simple terms, it is a way of presenting a range of options that drives up the purchase of the option that the seller wants to favour (because it is the most profitable choice, or whatever).
?You’ll be familiar with this if you have ever decided to treat yourself to some snacks at the cinema.
?You might see popcorn is available to buy in three sizes: small, medium, and large.
?The small looks, well … small.
?The large looks … kind of huge.
?The medium, meanwhile, looks pretty sensible. Based purely on the snacking requirements of the average cinemagoer you might think that nobody in their right mind would choose anything except the middle one… until you look at the prices.
?The small is ￡4.00, the medium is ￡6.50, and the large is ￡7.00.
?Suddenly, the large is looking like the ‘prudent’ option.
?This is because the ‘real’ choice the cinema wanted to give you is between just two options – the small and the large. The ‘medium’ one only exists as a decoy that serves to hide the big price difference between ￡4.00 and ￡7.00.
?If there were only two options available (the small and the large) the small one would outsell the large one for most people making the decision at the checkout. With the introduction of the ‘decoy’ the large one becomes the biggest seller. Popcorn is cheap to produce so the increased transaction value is mostly profit. The cinema has scored an extra three quid of your money.
?The point of this is that all prices are relative. ?
?When we encounter a price in isolation, we trawl through our memory banks and pull up any time we might have previously bought the same thing, or something equivalent, and at a subconscious level we ask ourselves if what we are now seeing is a reasonable price.
?But our brains are wired by evolution to be as energy-conservative as possible.
?If we don’t have a good reason to engage our higher brain functions, we won’t engage them. If there is a short-cut to thinking (a heuristic, a bias, an autopilot that we can run) then we will use it.
?When someone puts three prices in front of our eyes, our very lazy subconscious thinks, “great! I don't have to do all that heavy lifting by remembering past examples and working stuff out … all I need to do is choose between the prices in front of me!”
?Another example of the framing effect in pricing can be seen when there is a list of options with a range of prices on your website or (if you’re old school) your catalogue or leaflet.
?To illustrate this, let’s use the hypothetical example of selling wine (yes, that was one of the things I used to do).
?Let’s say you have five different New Zealand Marlborough Sauvignon Blancs in your range. All very drinkable:
?Listed like this, from cheapest on the left to most expensive on the right, the Villa Maria is the biggest seller.
?Now change the listing to the other way around (most expensive to least expensive):
?Now, Cloudy Bay becomes the biggest seller.
?This basic principle works in business-to-business as well. It's not just a consumer pricing tactic. Businesses may think they are more analytical than consumers, and professional procurement teams may well be, but everyone (even professional buyers) are prey to the cognitive biases that I’ve illustrated above, and many more besides.
?Conclusion
?Price positioning tactics - using anchors, the framing effect, and similar cognitive biases - may seem a little manipulative and unethical.
?Certainly, it’s possible to abuse an understanding of human psychology if you choose to. Many people do and it’s worth being aware of this when you are faced with your own buying choices.
?As a sales writer called Arthur Dunn wrote as long ago as 1919, “If the truth won’t sell it, don’t sell it”. (Thank you to Todd Caponi’s ‘Sales Historian’ Podcast for that gem!)
?A more ethical approach is to adopt a philosophy of what Richard Thaler and Cass Sunstein, authors of ‘Nudge’, called ‘Libertarian Paternalism’ – that is to help people easily make the decision that, all things being equal and if they had the time and the mental energy, they would probably make for themselves.
?This means that, ideally, you position the ‘best’ option (economically and practically) as ‘low hanging fruit’ that is easy for them to pluck. You use your language, and skilful positioning as part of the ‘choice architecture’ (again, Thaler and Sunstein’s terminology) to ‘nudge’ the prospective client in the right direction, whilst ensuring that they are not coerced into anything, and they have a very genuine way of choosing not to follow the route you’ve suggested.
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1 年What a great article you wrote Matthew Dashper-Hughes. I am confident in the value of what I give to my clients so discussing price is not an issue. There’s an area that you’ve not mentioned which is your returning clients; those organisation who keep booking you. What’s the price of loyalty?