Setting fees and prices

[ParaTed2k]

When I started teaching guitar, research for setting my fees was easy. I simply asked other people who either taught lessons, or took lessons; compared the experience and techniques of the other instructors to my own, and set my fees accordingly.

But I'm starting a new business, and things aren't as cut and dry. The fact that no one in my area does what I'm offering with my new business is one of the reasons I chose it, but it also makes it harder to gauge what to charge for the services.

While marketing consulting is far from new, advising business people on better appreciation marketing strategies and solutions is very new.

I'm basically taking something that is part of a business I have been doing, and creating a business around it. So I have experience doing it, but because it was just a tool for promoting the service, there really wasn't any charge for it.

So I'm turning to the consultants, advisers and business strategists here at the forum for your ideas. Any help would be greatly... Appreciated. ;D

[huggytree]

first step in setting your price is writing down all your expenses and paying yourself a wage w/ benefits....also include some office time for phone time/accounting/misc

thats your break even cost....you never go lower

now all your left with is your profit....i originally prices out my competition and found a top and bottom hourly rate...i priced myself in the middle and typically make 10%-35% profit

i personally feel its not worth being in business if your not making 10%

i would start with 20% and see how it goes.....when you get more work than you can handle you can then decide whether to raise your % to 30 or 40% or hire employees instead

without knowing what the product/service is its hard to give you any exact opinion or answer

[ParaTed2k]

If I did that with my first business, I would have priced myself right out of the market.

[Steve B]

HT - your method of setting prices is not really in line with the laws of capitalism (and I know you are a very conservative capitalist from all your previous posts). I understand that it has worked for you, but that is probably more a result of the trade you happen to be in and the fact that the unions in your area (and trade) have thwarted the typical market forces that often determine prices (i.e. - it's hard for you to hire a non-union and perhaps much cheaper helper).

Prices are ultimately determined by what the consumer thinks the price should be combined with the consumer's other options (your competition) for the same or similar product.

Your method however, is what someone should do after they find out what the market price for a product or service is when determining if the potential profit of a particular venture makes it worthwhile for them to go into that business. Most businesses have to take the "price" that is already determined by the market forces.

For example - what if someone loved making dolls and decided to sell them. Let's assume it takes them 5 hours to make 1 doll. If they accounted for their wage (let's go with $12 per hour and not the wages you used to think was the norm), and their expenses, and a little for office and administrative time, then added 10% for profit. I would guess they would then set the price at around $100. They could easily find that nobody is going to pay more than $30 or $40 for their doll because there are so many similar dolls coming out of China (where the wages are a whole lot less)etc. So, this doll maker just doesn't have the luxury of setting the price given your method. However, they can use your method to determine that they can't make enough money to compensate them for their time so they might decide to just make dolls as a hobby and give away as gifts instead of making a business out of it.

[huggytree]

if you arent making 10% then there is no purpose for being in business...i stand by my pricing

my pricing is a More Conservative way of doing it......if the market is 10% under cost then there is no purpose of having a business

thats where the market is right now on new homes for me....i still dabble in it, but i typically dont even bother trying anymore for that segment....i refuse to work for less than 10% profit

i guess im lucky my market has a decent profit built into it.....its nice when i have projects that i make 30-40% on

[huggytree]

HT -

For example - what if someone loved making dolls and decided to sell them. Let's assume it takes them 5 hours to make 1 doll. If they accounted for their wage (let's go with $12 per hour and not the wages you used to think was the norm), and their expenses, and a little for office and administrative time, then added 10% for profit. I would guess they would then set the price at around $100. They could easily find that nobody is going to pay more than $30 or $40 for their doll because there are so many similar dolls coming out of China (where the wages are a whole lot less)etc. So, this doll maker just doesn't have the luxury of setting the price given your method. However, they can use your method to determine that they can't make enough money to compensate them for their time so they might decide to just make dolls as a hobby and give away as gifts instead of making a business out of it.

sure they can set the price for $100.....or even $200....make it a luxury item....American Doll is a perfect example...my daughter just won one at school....$120 was the list price on the stupid doll.....its marketed as a high end product....no you cant compete w/ the $40 doll....so you make your own market......every rich girl has a few American Dolls and the moms probably brag that they paid $125 each for them

you CAN make the correct profit, but it wont be for the masses

this is why i typically dont even attempt to sell my service to the bottom 50%...they wont pay my prices....its taken years to figure out how to market myself so they dont call and screen calls to get rid of them asap....i market myself to the upper middle class who is willing to pay for quality/service

[billbenson]

This strikes me as just a business model thing. Sell a lot of product cheap or less product for more. You will end up with some sort of bell curve where your maximum profit will be at price X. Personally I price high. I think that I maximize my profit that way and even priced high I have more customers than I can keep up with. But that is only gut feel. I have no data to back it up.

[Steve B]

HT - you missed my point - if you go for the American Doll market - you are not making the same doll anymore. Your expenses and advertising are going to be far different. And the quality of the doll is going to be much better. My example was just to show you the way the market forces work in an open market. You just can't justify the price you think you SHOULD get or would LIKE to get and make it happen. You can ask any price you want - but, the consumer is going to consider their next best alternative - which may or may not influence them to choose your product or service at the price you have set. Perhaps this person is a true artist and the percieved value of the doll is greater than $100, but that's pretty unlikely.

The only situation I can think of where a product would have the price set by the seller was in state run (communist) economy.

Your pricing method works for you because there are effective price controls in your trade due to the union forces. It's also influenced by the law of supply and demand. Plumbing is hard to do and requires several years of study/training that most people aren't willing to do. Because of that, there just aren't an abundance of less expensive alternatives available. You are constantly talking about price (you lower it in the winter to get business). Why would you do that if you were just able to use your formula and decide how much you wanted to charge? What happens to you in the winter, or what would happen to you if the Union decided to fold up and go away and stop giving people like you a hard time for hiring a non-union helper is more typical of other businesses. If the Union went away and getting a plumbing license turned into a 6 month course, then, you would likely face a situation where you just couldn't get the price you want for your time and you might have to choose to do something else. You just can't apply your experience in the plumbing industry to other businesses that don't have the same set of circumstances.

[huggytree]

if the union folded up i would be slashing prices

you are correct!

the original poster has to start with 'the going wage' for his type of job....as long as he uses that 'going rate' and ads 10-20% onto the total he should be correct for his market (give or take a bit)

my going rate is set by the union...his going rate will be set by the free market....

i see exactly where your coming from Steve, but believe my way of pricing still works whether union or non union

i agree that the market determines the price in the end....same with the market im in...right now the market is 'undercost' on new homes...so ive abandoned that market until enough companies go under and it corrects it self... sometimes the market charges too little and its not a business worth being in...

ill say it 100x...if you cant make your wage + 10% profit dont go into that business.....preferably 20%+ is best

[ParaTed2k]

Thanks to both of you for your input, you both made some good points. The thing is, no one else is doing the same thing I'm looking into. As I said, there are plenty of business consultants, and an abundance of marketing consultants, but I haven't found anyone (even online) who does Appreciation Marketing consulting (which is one of the things that attracts me to starting this business).

A few things I have started doing in the way of research. I'm checking out the fees charged by marketing consultants, that will give me a ball park figure to work with. I'm also talking to small business owners how have used appreciation marketing. Finding out what they consider the increase to their bottom line will help me market my services, and get an idea of what they are worth to my clients.

[Steve B]

You're welcome. Creating a price in a market that does not exist comes down to the perceived value you may add for the client.

One tip I would give you is to describe what you do better in your title. I'm guessing nobody on this forum (including me) knows what an "Appreciation Marketing Consultant" is.

[huggytree]

if no one in your market is doing it you need to go to another market to find what going rates are

without a current market you may need to put more into advertising

Steve the fence guy was one of the reasons 4+ years ago i decided to get out of the gutter and into being a quality/higher priced company...when i did i found success....whatever YOU decide to do i recommend strongly NOT to be the company for the masses....being a specialty company gives you a better customer base and more loyal customer base.....give your customers an 'experience' not just a product or service

good luck!

[LFinkle]

Pricing depends on a variety of factors. Your costs, how you are funding your new business, what you need to get clients, your confidence and more. When I first started my current business I charged way above my competitors and had no difficult getting business. I also made adjustments on fees based on my desire to work with that particular client, what I expected in terms of a long-term relationship etc. One thing to remember it's difficult to adjust client's upward fee wise if you start too low.

I used to have 3 fee options. Bronze, silver and gold and they each had additional offerings attached as the fee went up. The silver was priced at something I could live with. Statistically people are more likely to say yes if they have choices and over 60% will chose the middle range. Just a thought.

This is a great topic for one of the products I am creating. I'd love your insights and questions. Submit to incedogroup.com/market-research and you'll automatically be entered into a drawing to win the product

[huggytree]

I used to have 3 fee options. Bronze, silver and gold and they each had additional offerings attached as the fee went up. The silver was priced at something I could live with. Statistically people are more likely to say yes if they have choices and over 60% will chose the middle range. Just a thought.



i learned this a couple of years ago...when a customer is given a choice of (3) low/medium/high they almost all choose medium...i also find the medium option is typically just a bit more, so extra markup can be added and it doesnt matter...they will still pay for it....when given a choice most people wont pick the low option....for me its probably 66% will pick medium or high

[Patrysha]

Another way to develop pricing is to base it on your projected income generation or cost savings to the client. With appreciation marketing you have the immediate cost savings simply based on client retention vs. client acquisition costs (cheaper to keep a customer than find a new one) I imagine you can also use projections of increased business through referrals that come with appreciation marketing along with direct increased sales based on the offers made and so on. Use other marketing/advertising methods as barometers if you can...ie newspaper ad vs your methods.

[ParaTed2k]

Patrysha, Thank you! I have already started taking your advice. While this is a new business concept, it is based on other experiences and businesses I have done. So I have gone to clients and others I've done business with to see what dollar amount they would put on the appreciation marketing they have done in the past. It's helping to guide me on what I will charge once I get this business started.