Pricing Thoughts

Via this last week’s CotC comes an excellent pricing post at The Laundry Capitalist. While it makes specific reference to the laundry and fast food industries, the lessons are more widely applicable, and relate to my need to decide on prices. Which are always about more than naked prices, as pricing is part of overall marketing and business strategy.

With the business as beta approach, there’s room to experiment and vary prices, at least on paper. In reality, a customer you attract at one rate may be too price-sensitive to remain at a higher rate. Thus care is needed with what might appear to be the obvious strategy of low prices to break into the market. My father advised me to take that approach, and I have used it in the past, for my first business, mowing lawns in a mobile home park. I got trapped into never being able to charge more than the original $5 each. One customer volunteered $7, so I did extra for them in response. When they found out my official rate was $5, all the extra didn’t matter. Meanwhile, the people who did lawns for $8 had plenty of work and made more. And could afford better equipment. As a side note, inflation from when I started that makes it $20 today, and I can guarantee nobody is paying that. I’d be surprised if it’s much more than $10. Each yard took between 20 minutes and an hour (because they were so uniform).

It also makes a difference what you’re selling and where, as you run into demographics, perceptions, and competition. One company that overlaps significantly the services I plan to provide has explicitly targeted wealthier communities in the state. That has to make it easier to charge a membership fee and $120 an hour in quarter hour increments.

In my old business, the official rate was $80 from 1996 onward. An inflation calculator says that ought to be more like $102 these days. As recently as a couple years ago, I got grief over that $80 rate from someone who called me because the $99 another company had quoted was too high. Around the same time, I had computed that the rate needed to be $95 to be adequate. However, what you need isn’t a good basis for pricing. In either direction! If I needed $95 for it to be adequate, but could stay busy while charging $125, I’d be silly not to enhance my revenue to what the market would bear.

Anything that is charged by the hour seems especially tough. It’s hard for me to get my mind around rates of $80 and up, which is where IT services live. I think there are two factors at work there.

One is that I’d hesitate to pay that kind of money myself. I mean, since I can do it myself, I undervalue the activity in my mind. On some level I can see paying a lot for someone to rescue you from a particularly severe and puzzling problem. Another angle is the cost of service versus the cost of hardware (much like the cost of software versus hardware). Yet it’s not about those numbers relative to each other. It’s about data and configuration accumulated on a computer. It’s about productivity; keeping the machine in use and at speed. It still feels boggling to me, but that’s personal psychology.

Another is wrapping my mind around the price relative to other things and relative to historic prices. I came of age at a time when an annual income of $20,000 was excellent. Not wealthy, but you were doing okay. I remember how shocking it was when candy bars went up to 25 cents, though really the rise from 5 cents to there in my early life was fairly rapid. I adjusted to 25 cent candy bars, but anything more than that still feels excessive to me. At the same time, I have a surprisingly hard time thinking of $20,000 as impoverished. Inflation says it’s the same as $64,250 these days, and I know it takes that kind of money just to manage around here, yet $20,000 is there in the back of my mind as real money. Even a decent downpayment on a house. Certainly not the price of a car!

I hate when I stop writing a post for a while, or overnight, then forget where I was going with it. Not to mention feeling that I’ve gotten off track even before the pause.

As someone pointed out to me recently, the real trick is to break the grind of hourly rates. Absolutely! Everyone can see $200 an hour and think it’s absurd you make that much. If you make and sell 100 widgets and it works out that you earned $200 an hour, nobody cares, because each widget is worth what you got. If you make a million dollars to produce a film, nobody stops and computes that it means you earned $1000 an hour for your efforts. It’s one of the reasons that I was mainly interested in creating “off the shelf” software when we started the old business.

So perhaps the support outfits that charge by the task have the right idea. Need an eighty dollar hard drive installed? That’s $400, thank you and ka-ching! Whaddaya mean that only took an hour? We don’t charge by the hour, bucko. Besides, it could have taken longer, so it all evens out. Lucky you.

The answer, for me specifically, is probably between the two.

Someone suggested an introductory/signup special of checking and cleaning up machines for, say, $50. That turns out to be a common practice. Well, at least one of the local computer shops advertises that for a similar price. Since that would be on-site, it ties into the location post.

Such a checkup would start at about half an hour. If it included a blanket cleanup of any malware found, it could run as long as several hours. Plus as much as a half hour or more each way of driving. Because of the ambiguity, scheduling back to back cleanups would be harder. A disclaimer or ceiling, perhaps? It is likely that some places that offer a checkup merely check and find you need. Cleaning it up costs real money. Given the possible downside, that does make sense. A low flat fee for the whole thing could be worse than $5 undercutting of lawns.

Another reason the location post comes into this is the relative value of a given amount of driving for a given amount of money. If a typical housecall is two billable hours, it’s more compelling to drive a given time for that at, say, $120 and hour than at, say, $80 an hour. Which, incidentally, is my floor. There is no way I will set an hourly rate below the one that was reasonable ten years ago. I’m thinking in the $90 to $100 range, to the extent that there are hourly rather than fixed rates. For housecalls, anyway; it might be worth my while to do remote support for less.

There’s also the matter of volume. If someone is paying $80 an hour for help with a large upgrade project at a business on a Saturday, it’s worth extra driving for 8 – 10 hours of solid work in one place.

I have reservations about the whole housecalls model at all, but I neither can nor want to open a computer store, and at least initially won’t have a place for people to drop computers off for service. It’s worth trying out. It may only be worth doing at particularly premium rates, though.

Since I started the post and got it to the above paragraph days ago, I have actually had the same experience cited by the Laundry Capitalist in the link in the first paragraph. We had not yet tried any of the local sub shops, and I remembered there was a D’Angelo’s nearby; a known quantity. The online menu listed no prices, which I know is because some shops are franchised, and prices may vary. I ordered two of the famous “Number 9″ subs, which are what might be called a steak bomb or steak combo elsewhere; steak, cheese, onion, pepper, mushroom. Confusingly, D’Angelo now has something they call a “steak bomb” that contains extraneous meat. The small turned out to be $4.99, which is even more shocking than the $8.99 for the large. In both cases, the subs seemed to be smaller than the same size was in the past when I was a more frequent customer of the chain. For slightly more than the combined price, I could have bought enough Chinese food for two meals for the four of us (my large was to share with the kids).

That answered the question of why the store never seems to be that busy.

They also inexplicably had no takeout menus available to grab so I would have one for future reference.

The counterpoint to the bleeding edge pricing I encountered is that the wife’s first encounter with a Number 9 was not disappointing. They were indeed as outstanding as ever, to the point where it at least bordered on worth the price. Presumably it’s worth extra for the best steak & cheese sub ever.

Which is another point about pricing. If you charge $80 an hour, spend three hours, can’t solve the problem and then are found to have not done customary and obvious things implicit in the work described, how is that better than charging $100 an hour and doing a thorough job solving the problem in two hours. Or even the same three hours, so it nets out to greater cost but you don’t have to go hire someone else or live with it. Pricing is a multidimensional aspect of marketing and the broader customer experience. It may be tougher to attract customers initially at the higher price for quality work, but you’re not the only one for whom that is better.

All of which doesn’t really lead to specific conclusions, apart from leaning higher than lower, the premise with which I started the post. Pondering while this lay fallow, I’ve concluded I probably won’t post rates on the web site, much as I think it’s great when companies do that. If only because it makes experimenting or charging situational rates easier. I already knew I’d go lighter on certain people I already know; ones I anticipate sending me referrals. By the same token, I’ll go out of area more readily for those people. All of which makes me wonder if I should try a referral fee, kickback, or discount. If word of mouth is going to be vital, encouraging it seems to make sense. Using discounts as the referral currency could be ideal, benefitting everyone without cash outlays for me. But I am digressing here.

What do you think? What’s it worth for someone to go to your house and service your computer if it’s seriously balky or down? What’s it worth to be able to call or e-mail questions to help you work on it yourself? Or the same, for to help you use or solve problems with your software? Would you buy prepaid support at a discount? Would you buy prepaid support as a gift for a less tech savvy relative? Do you think it’s better to have fixed prices for common items? This blog is, in part, about working out some of the details of the business in pretty raw form, so feedback is great.

2 Comments

  1. Carmen Van Kerckhove

    Hi there,

    I just wanted to let you know that the latest edition of Carnival of the Capitalists went up yesterday on my blog, Race in the Workplace, and that I included your post.

    Here’s the link, in case you’d like to post it on your blog:
    http://www.raceintheworkplace.com/2007/05/07/carnival-of-the-capitalists-is-right-here/

    Thanks!

    Warmly,

    Carmen

  2. Pingback: Bizosphere - Home of Carnival of the Capitalists » Blog Archive » Carnival of the Capitalists for February 19, 2008

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