The art of pricing

Recently we have been getting a lot of questions about how to properly price a service. We decided to do a little blast from the past, and revisit a previous article that many new subscribers haven’t seen.

Blast from the past: Pricing Strategies

Pricing can be incredibly ambiguous, especially when we’re talking pricing for services.

If you have a product then it can be very easy to get to what you need to charge.

Take your Cost of Goods Sold(COGS) and add enough to cover all your overhead and turn a profit.

You can do the same math to find a markup and standardize everything, but it gets messy quickly. For example:

A lawn takes 2 hours to mow and edge.

2 hours * $15 an hour = $30

But then there’s fuel, equipment maintenance, insurance, and all sorts of other overhead that needs to be dealt with. You could easily charge $100 or more to mow that lawn.

Let’s look at a more complicated example of a self storage facility:

Say you have a property with 100 self storage units. For simplicity they are all the same size and rent for the same price. At 100% capacity, our rent roll would look like this:

100 units * $100 each unit = $10,000

Conventional wisdom would show this as the perfect scenario.

But, let’s try raising the rent a little. Some people will move out because of the higher prices, so let’s call it 98% occupancy.

98 units * $125 each unit = $12,250

Just like magic, we’re making $2,250 more this month! As a bonus, there are even less renters which actually means less work.

You can keep doing this equation all the way down to find out the right “occupancy rate” for your business.

90 units * 150 each unit = $14,250

Let’s take a look at another example.

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We used to manage a rental vehicle on Turo.

By using variable pricing we were able to extract more income from the vehicle depending on how full the schedule was.

The schedule started out completely empty, with a booking set at the lowest price per night that we would expect. As bookings rolled in, a software would increase prices due to the demand at that time. The higher the demand, the higher the price. If a customer booked 6 months in advance with no other bookings near it they got the best price.

We used a software tool to manage the pricing and automatically adjust due to demand, but a simple Excel model could be built to do the same thing if you are on a budget.

It won’t make sense to do this in every situation, but variable pricing can be a great way to manage demand and increase profitability.

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Pricing Strategies

Let’s talk pricing strategies. There are certain ways you can position your products in order to help customers lean towards your more profitable or higher priced options.

The Pricing Decoy

We’ve all seen this one before. You find yourself saying “why would I get a medium when it’s only 40 cents more for a large?” No small boy stuff here. It’s always the large.

It’s going to be a little different through the lens of each business, but here’s another example with landscaping.

Complete lawn maintenance, including mowing and trimming: $50

Complete lawn maintenance including mowing, trimming, and fertilizer application: $55

A pricing decoy takes advantage of a psychological phenomenon "comparison bias".

When faced with a choice, humans have a natural inclination to compare the options available, weighing the pros and cons of each. Always give a second option to compare to.

The Bundle

Bundling can be extremely similar to Pricing Decoys, but can be used on its own. Think of every infomercial you’ve ever seen. But wait there’s more!

There’s a reason all the infomercials use that move. It actually works, people love a good deal where they feel like they are coming out on top.

Use bundling to:

• create a sense of urgency

• reduce marketing costs

• help customers save money

• get buyers to purchase more products

• create scarcity because it's for limited time

Use the word FREE to show you are adding value at no cost.

To continue with our landscaping example, throw in that fertilizer treatment for free for a first time customer.

You don’t have to go full infomercial cringe, but a subtle bundle can work wonders.

Price Anchoring

Recently there was a great example of price anchoring in the tech world. I don’t know if you heard, but Elon Musk bought Twitter.

When Elon was in the process of buying Twitter, he told everyone that Twitter Blue was going to cost $20.

Then, when it was time to release the new Twitter Blue product, everyone found out it was only $8. Yes! Daddy Elon to the rescue.

We’ve all seen it at the grocery store too.

Price anchoring can go wrong. You have to be subtle about it or it will just turn customers away.

My sister was recently in the market for a new furnace and air conditioner. She called one company to come out and they gave her a bid for $45,000. But wait, if she committed right away then they would take $4,000 off the purchase price.

Being subtle about price anchoring is important. Avoid “sticker shock” and coming across as excessively manipulating.

At the end of the day, price is arbitrary

Many business owners(especially service businesses) just end up picking a price that seems like it will work. Often, these prices just exist as the “status quo” and they never change.

I worked at a small service company making a sale for $150 and occasionally $99. At one point to increase the revenue we decided to raise the price to $250 and $199 for discounts.

And what do you know? No one batted an eye. My close rate was exactly the same even with the higher prices.

My point is, don’t be afraid to increase your prices. As long as you provide quality work there will always be a market for your products or services.

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