The Price is Right

Teacher: Steve Cartwright

Are you selling your services at a reasonable price or are you running around like a busy fool. There is no clear cut or agreed method of establishing a price for your services, however you should clearly aim to set your prices initially at a level that gives you the highest profits possible.

As the Internet has leveled the playing field to a large extent, especially amongst Web Designers, then selecting the right pricing strategy is becoming more and more important, as your competitors are not necessarily even in the same Country as yourself. Indeed to prove this point Website Designs LTD have used their reputation to sell their services to clients around the world.

Some people price by working out the costs and then applying overheads and a margin on top of this, indeed in my previous life within the construction industry this is exactly how we priced for many a multi-million dollar project. However even this method has its drawbacks, for example if your costs are low, does it automatically follow that your prices should be low too? And even working out your base costs is fraught with possible errors.

Another method of pricing is to set your price to what the market can bear, but there are no quick and easy calculations to calculate what this should be. Instead you need to understand your products and services and rate these against similar products and services in the marketplace. However you plan, your competitor pricing policy will have an effect on your own.

It is much more common to price yourself in bands of prices, or price ranges. The lowest price you should consider selling your services at is fixed by your costs. As a general rule you should never consider going below this, if you do your losing money before you start and that is not what business is about. Of course to every general rule there are exceptions and Website Designs have themselves taken on projects at a loss for purely marketing purposes. The highest price will be the highest price the market will bear without sales disappearing altogether. Between the two will be the price which will give the highest possible profits.

The Price Range.
There is a range of prices open to you to charge for your services. It should be every companies aim to get as near as possible to the price which is going to result in the highest possible profits. But this is often a long term aim, and there may be short term considerations which imply that another price could be more appropriate.

The Highest Price.
By adopting this strategy you have decided to go for the cream at the top of the market, in marketing terms its often called prestige pricing. You set your pricing structure to appeal to those of your potential customers with the highest budgets or those seeking the snob value of buying a very high priced service. This type of prestige pricing is often associated with higher quality services, genuine technical advantage or some sort of unique selling point.

Adopting a prestige pricing policy usually means that you understand that you could probably make bigger profits if you lowered your prices, because you would subsequently sell more. However this policy is particularly attractive to many small businesses who don't want to over-trade, because if you sell more you may need to invest in better production facilities or employ more staff. This often results in having to raise finance to fund such expansion and can result in a much larger business, being harder to control. Although adopting a prestige pricing policy, may not give you the highest possible profits, it should give you an extremely acceptable living.

This is an extremely competitive area to operate in and you'll soon find out who your main competitors are, your marketing niche may soon be invaded by competitors offering lower prices, or a better service or indeed both. You need to allow for this competition if you adopt a prestige pricing policy, because no matter what your unique selling points are, they are unlikely to remain unique for long. You therefore need to either plan for reducing your price in the long term or concentrating other advantages and benefits until your own brand image is set.

The Lowest Price.
The lowest price you should consider accepting for your services is one that covers your direct costs and a proportion of your overheads. This must be regarded as the absolute lowest price you are willing to accept and if a client insists that you work for less, it is often better to lose this particular customer than work at a loss.

How to work out your lowest price.
You need to find the direct costs of your services, direct costs are costs which you would not have if you where not working for that particular client. You will also have other costs, indirect costs or overheads, these are costs you will still have to pay whither you work for that client or not.

So when should you use this price, as little as possible has got to be the answer, you should use this price as the absolute minimum that you are prepared to accept, and then only if there is no other possible work available. If this is the case and you have spare capacity in your business, then any contributions to your overheads should be considered as helpful.

However following this minimum pricing policy for too long a period, will inform your customers of this and then you will be forced to sell at this price as best you can. Raising or maintaining your prices can be extremely difficult if this happens.

Should you go lower than this.
Only in exceptional circumstances, for example a project that has high publicity value and will generate future sales leads for your company, or perhaps you need a specific site for you portfolio. Always remember that these should be treated as one off projects and should only be considered rarely.

Setting a Price.
There are no set rules on how to determine how near the top or how near the bottom you should set your price range, however there are a few things that may influence your companies position.

How your Service Compares to your Competitors.
Assuming that you face competition in your chosen market, it is a fair assumption to make that your competitors prices will have a direct effect on your pricing strategy. This does not mean that if your competitors prices are low you need to follow suit, it means that you need to analyze your services carefully in relation to your competitors, the sort of things to look for are unique selling points, such as better quality, better service, etc.

If your service is perceived as favorable when compared like this, then you should be justified in charging a higher price, just don't be afraid of charging more than the competition. If your service really does have benefits, then the marketplace may well accept that your price should be higher.

How Price Sensitive are your Customers.
If you where to put your prices up, do you have any idea of how many customers you would lose?, or if you dropped the price, would you know how many new customers you should acquire? How great an effect changes in prices have on your workload is called "elasticity of demand" or "price sensitivity".

Now as Computer Professionals, we all understand the amount of competition out there, especially if your in to building Web sites, a typical search on any search engine will result in millions and millions of web builders (potential competitors) being listed. If it is difficult to differentiate your services from this multitude, then this implies that the marketplace will react more strongly to price changes. If on the other hand your services can be differentiated from this multitude then the marketplace will be more resistant to price changes.

What Price Conveys to your Customers.
You can also use price alone to conjure up ideas about your services in your potential customers minds. Customer often associates higher quality with a higher price, therefore a higher price can help the image and reputation of your services. If this applies to your target customers then lowering your price may not generate more sales.

The Next Step.
What you need to do before you can decide upon your pricing strategy, is to understand your marketplace. If your looking at the small business marketplace for example price will be of much greater concern than if you deal with the larger corporations where quality and service are considered more important factors.

Once you understand your target marketplace, you'll be halfway to selecting the right price range for your services, there is no magic formula, indeed an old acquaintance of mine once quoted "A free market economy is geared up to getting the best possible service for the lowest possible price, companies need to remain active to just stand still in the marketplace or face ruin".

About the teacher:
Steve is the CEO and executive publisher of Cyber Aspect and is the senior management of the publication. Steve is also a regular contributor to the international edition of Cyber Aspect and Web Builder Bulletin. When not working on matters of publishing and news, Steve serves as the CEO of Website Designs Ltd in the United Kingdom and is the founder of the company. Prior to entering the Internet industry, Steve was involved on a senior management level within the international construction industry, working with super skyscrapers throughout the Middle East and other global locations.