Why Your Low Price Is Killing Your Business
by Jason Kanigan
Start with Price
After you’re done reading this post, that’s what I want you to do. Go back and start with Price. So why would I want you to do that?
After four years of experience running my own business, and the fifteen years of corporate management experience before that, I’ve figured out a secret.
Just about everybody, including me at first gets it wrong. We started with a product, or a service. Maybe a market, but I doubt that…it was almost assuredly a product or service. And we used that to determine what we would charge. This really is the dumbest way we could have gone about it, now that I know better. And soon you will agree with me about that, too.
So what was the problem with allowing our price to be determined by the product or service? With a product, you’re limited to the price of that product. With a service, you’re limited to a flat fee or hourly rate…and we’ll see how absolutely nuts those are in a few moments.
In either case, you have unwittingly limited your income. And limited it to a low level. Small. Struggling. Unhappy. Oops. What’s worst of all is we almost never wake up to this fact, and keep clawing our way long. But the game is rigged against us. Disturbingly, we rigged it against ourselves.
Say you get all excited about an “opportunity” to sell template websites at the low low price of $297. Aww, heck, let’s make it $497 (see that? I just doubled your profit. I’m magic! You should hire me.) So, regardless of who you work for…what size of problem you solve…you’re only going to make that paltry $497.
Now how many of these sites can you—will you—truly make in a month? You’re struggling, remember. So how many? Two? Four? Let’s get crazy and imagine you sell SEVEN of these things.
7 x $497 is a whopping $3479.
Busting your butt, working your tail off to find and sell to those seven customers, which eats up 100% of your time as a struggling freelance web designer, grosses you less than $3500. And the Tax Man wants his cut.
Let’s take a step back here and review
As a struggling freelance designer, the best you can hope for, having an exceptional month, is barely paying your bills. That is, if you mindlessly follow the pricing “advice” sacredly handed down from generation to generation.
Have you ever really thought about how you’re supposed to figure out what to charge?
I should interject at this point and say, if you’ve been limping along saying to yourself, “My goal is to earn as much money as I can make,” you’re dead in the water. That’s even WORSE than the freelance rate calculation methods I’m going to be talking about next. To manage, you must measure. And you ain’t measuring.
Turns out there are two main methods.
Method #1 – Flat Fee
The first is a flat fee. You know how most people arrive at this figure? They take their monthly bills and total them up. Rent, car payment, food, utilities, and goodies for the cat. This is usually somewhere between $2000 and $5000. Then they divide this total by a “reasonable” number of customers. Say…four. One a week is reasonable, right?
So let’s say you’ve got a monthly bills total of $3000, and you figure on four clients walking through the door. Now you know you need to charge $750 per site to hit your target. If you did this, I commend you on doing some math. That’s far beyond where many people take it.
So what’s the problem here? You’ll never make it.
A few categories of expenses you forgot about will drag you down into the abyss. Unexpected expenses. Taxes. Oh, and did someone say, “Profit”? You do want to make a profit, don’t you? (Then why didn’t you build it into your pricing?!)
Method #2 – Hourly Rate
The second common method of figuring out what you should charge is by hourly rate. You’re not sure what your hourly rate should be. So you do some “research”. What are other designers charging?
Within a few minutes you have some data. We love data! Some newbie is charging $20/hour. An experienced gal is in whopping contrast advertising at $125/hour. Makes you blink. Take a break to think about it. What do you do?
You’re newish, but not brand new…you have skills, and experience, and MOXY gosh darn it! Thus you settle somewhere in between. At the $55/hour level. Congratulations. You’re broke.
Think you’re gonna work 40 hours a week and be able to bill all those hours? In my experience, you’ll be lucky to bill 8 or 10 hours in the whole week. The rest of the time will be spent finding customers.
You cap out around $2500 for the entire month. Dumb, dumb, dumb. Your result is even worse than the flat fee. This absolutely arbitrary figure is based on a brainless method perpetuated by people who did…what? Exactly the same thing you did!
Both methods set you up to fail
Both pricing rates arrived at by these methods are absolute FICTION. They have zero basis in reality. They set you up to fail. Every month you run this equation, you fall short. And every month you’re forced to dig into savings or rack up more credit card debt to survive. Sooner or later, your business is no longer going to be sustainable.
So what can you do instead? What method can you use to arrive at a figure that doesn’t just keep your business afloat, but actually gets you AHEAD? This is the secret I have learned after many years of painful trial and error.
Start with Price. Price, it turns out, leads everything. Price leads the amount you earn, obviously. But not-so-obviously, it chooses the customers and projects you get. Price is a powerful sorting tool that works for you 24/7. Did you know all that about Price?
Let’s see why price is the way to go
Before we get into WHY leading with Price works, let me give you the formula for calculating the right rate for your situation. That’s right: I didn’t say “your business”. I said “your situation”. Your situation is happening right now. It’s live. And it will change. Someday, you won’t be happy with this Price any longer. And that’s fine. At that point, you can recalculate it for your new situation. I find myself doing this every six months or so, nowadays.
So here are the elements of the right Price that you need:
- Typical Expenses
- Unexpected Expenses (+Safety Net)
These four factors are what make up the right Price. And used correctly, they ought to produce a grand total of monthly revenue you need to bring in that should scare the crap out of you. I’m serious. If the number isn’t at least TWICE what you thought before, you’re doing it wrong.
You see, if you’ve been struggling, that’s where your comfort zone has been at. Struggling. Want to change your results? Stop struggling. And to do that, you will need more money. Plain and simple. This number should shock you.
For example… What you thought you needed to charge before was:
- Typical Expenses – $3000
- Number of Customers – 4
- Rate – $750/project
- Typical Expenses – $3000
- Unexpected Expenses – $1000 (gifts, medical, car repairs) + $500 Safety Net
- Taxes – $900 (eg. 20% of total Expenses)
- Profit – $500
* Profit is a fund you plan for and include in your pricing! How else do you ever expect to be able to afford those fancy tools, software, advertising and other goodies to help you grow your business? But for nearly everyone, Profit is this magical fairy dust idea that they’ll get “someday”…
Total Actual Revenue required – $5900.
I hope your heart skipped a beat when you saw this total and how much greater it was than you first thought.
Result: every month, even if you hit your $3000 target, you fall $1000 further into the hole. That money has to come from somewhere. And after so many months, something’s gotta give…
See the difference? See why people fail at business? When you see the stat that half of all new businesses fail within the first couple years, and of the remaining half, half of them fail in the next couple years, is it now any surprise? Far from not finding enough customers, the problem is likely not having figured out Price correctly…and slowly slipping further into the quicksand of debt.
Price determines your market
Now that I’ve made the point that Price is where you need to begin, let me wrap up with a few words on what else Price does as it works for you.
First, it determines your market. Maybe you’ve been charging low rates because you feel you can only compete on price. Well let me give you a wake-up call: Many people, like me, won’t buy from you or any low rate provider because your bargain basement Price demonstrates a lack of confidence. And a lack of confidence translates directly into a lack of ability.
This is perception, to be sure. And perception is reality. If it walks like a duck and quacks like a duck…it probably is a duck. If you have a higher Price, it shows higher level buyers confidence, and that display of projected competence shows you can do it.
You see, for higher level customers, it’s not about the money. What we want to feel is not that we got a great deal, but TRUST. We want to trust that you are the right person to do the job. And if you have a weak Price, we don’t trust that you can do it.
“But what about competition?!”
I hear this whine frequently. And I don’t pay any attention to it. That is the whine of the unconfident. Are you starting to see how this low Price thing starts a vicious circle of self-doubt and poverty? Use the right Price to find your market. Use it as a sorting tool. Niche down. Solve a problem large enough to warrant your involvement.
When you know you need to make $6000, and your per-project fee is $1500, you look for projects where that investment in you is 5-10% of the size of the problem you’re solving.
That means you’re looking for a $30000 problem to solve. You know how common $30000 problems are? They’re lying around all over the place! In fact, MILLION DOLLAR PROBLEMS are lying around everywhere! Think about how you can use this fact to raise your price.
Use Price to separate people you should be talking to from those you shouldn’t. If they don’t have a problem big enough to justify your involvement, move on. Scared about these out-of-your-comfort-zone numbers? What’s “a lot of money” to you is NOT a lot of money to someone else. Like…your customer.
And a truth that sounds so dumb when I say it is:
People who have money HAVE MONEY.
People who don’t have money DON’T HAVE MONEY.
Yet how do you see freelancers behaving? As if the exact opposite was true! They chase broke, desperate clients instead of finding wealthy ones who have no problem paying larger fees—and in fact WANT TO because they want that feeling of security that you will competently do the work!
Here’s a final secret
Price your first project of the month to pay your Typical Expenses. When your first customer pays all your bills, that equals R-E-L-I-E-F.
Now get your spreadsheet file open and figure out your right Price. Don’t delay. Every moment you let slip by is another moment your business is slipping into quicksand.
This article was written by
Jason Kanigan, President of Sales On Fire
For Power & Profit In Your Marketplace