April 25, 2007

A Fair Price

Now in the seventh week of my own business, I have to continually think about what a "fair price" is for the services I provide.

Maybe the market will let me charge $2,000 for a project. What if a "fair" price is $400, given the actual amount of work I have to do? What should I charge? $400? $1,200? $2,000?

Jaffe Juice talked about this topic today. Is it ok for Starbucks to charge $3.00 for a cup of coffee? Is it ok for Nordstrom to charge $350 for a handbag? Is it ok for a plumber to charge a high hourly rate because nobody else performs the services he performs in the town he lives in?

Your thoughts?

5 comments:

  1. Anonymous3:59 AM

    Kevin,
    Price is a matter of perception of relativity and value.
    Does Phillies Ryan Howard deserve to make $900k when compared to a cardiac specialist? Probably not. But when you compare him, Rookie of the Year 2 years ago and National League MVP last year, doesn't he deserve more than the other guys on his team who make much more(Burrell, for instance?).
    Independent consultants, be they network engineers, software consultants, mangement consultants, etc., are ALWAYS going to be perceived as "too expensive" by the person paying no matter the value they actually bring.
    In a weird example, a friend of mine was a supervisor at the USPS many years ago tells the story of dinner at his gf's wealthy parents' house. They had a huge mcMansion and all other signs of great wealth, and as they sat to dinner the father, a stockbroker, launched into a discourse against the USPS for raising the cost of a stamp(at the time 1 cent). So after taking it on the chin for over 10 minutes, my buddy says to the guy--"Sir, how many letters and bills do you mail personally each month?" "About 10-15" "And Christmas cards?" "About 200" "So total you use about 400 stamps a year?" "Yes" At that point, my buddy takes a five from his wallet, hands it to the father and says "Sir, I have your postal increase covered for this year...please pass the salt...thank you."
    So you see, no matter how much value(in this case, a postal carrier at your door 6 days a week, a post office in every town across the country, mostly 3-5 day delivery time and all for a cost much cheaper than UPS/FedEx/DHL), people will still perceive USPS 1-2 cent increases as too expensive. And the USPS receives no Federal tax dollars(and in years where there is high profit like mid-90's, that money went to the govt).
    Trick is, Kevin, you have to prove the value that you bring. I would imagine, when most people have very little understanding of datamining and multichannel thinking, your job is occasionally much harder to prove worth the cost as someone sits there quoting Churchill on statistics or giving you a huge blank stare.
    Good luck!
    K

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  2. "Hitting: $10. Knowing where to hit: $990".

    In other words, price based on value to customers. That's really all that matters -- is the price a fair value to the folks who wish to purchase it.

    <snip>
    Old story: railroad expert is summoned because a brand-new diesel locomotive would not start, no matter what the engineer did. After a short time studying the situation, the expert gave the locomotive a light tap with a hammer. It started right up. When the railroad received the expert's bill for $1,000, they asked him to itemize it. The reply came:
    * Hitting the locomotive with hammer: $10
    * Knowing where to hit it: $990
    </snip>

    (various cites, see for http://www.google.com/search?sourceid=navclient-ff&ie=UTF-8&rlz=1B2GGIC_enUS204US204&q=knowing+where+to+hit)


    Cheers --


    Alan

    PS Thanks for the kind words on the other post!

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  3. First of all, yes it's ok for Starbucks and Nordstrom's to charge what they charge. They can charge whatever they want. The laws of supply and demand will dictate how successful they'll be.

    As for your own fees, to simplify things, I think it boils down to three alternatives: 1) markup from labor cost (this takes into account "the actual amount of work you have to do"; 2) what the market will bear (if other consultants are charging $5000, maybe you should too); and 3) perceived value on the part of client (i.e., what does the client perceive to be the value of the effort).

    Alan argues for #3 (I think, I hope he'll jump back in if I'm wrong). I couldn't agree more. Even if - and especially if -- the market could bear a higher price, you'd build long-term goodwill with clients by charging by what they perceive the value (not the cost) of the effort.

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  4. When I was on the other side of the equation, at Nordstrom, I found that I generally paid a fee that didn't vary a whole lot for analytical projects. In other words, 80% of analytical projects varied between $"x" and $"y". Less than "x", I felt like something was amiss. More than "y", I didn't feel like I was getting value.

    So, I've applied Ron's well-written advice to my Nordstrom experience --- so far, so good.

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  5. Per the first comment --- proving the value is pretty easy. If a project cost $100, on average, a company has to generate between $350 and $1,000 of incremental net sales, in order to cover the cost (depending upon the flow-through from sales to profit for each individual company).

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