Pricing New Services

My partner and I have been struggling with pricing our new services. We are offering a monthly price to clients for a set range of services, including unlimited phone calls and weekly meetings (if requested by the client). I’ll post more on our full business plan later, but this article on pricing really resonated with me. From the article:

How much should you charge for a new product? Charge too much and it won’t sell — a problem that can be fixed relatively easily by reducing the price. Charging too little is far more dangerous: a company not only forgoes significant revenues and profits but also fixes the product’s market value position at a low level. And as companies have found time and again, once prices hit the market it is difficult, even impossible, to raise them. In our experience, 80 to 90 percent of all poorly chosen prices are too low.

Companies consistently undercharge for products despite spending millions or even billions of dollars to develop or acquire them. It is true that businesses and private consumers alike are demanding more for less; the prices of personal computers, for example, have been pushed downward despite their higher processor speeds and additional memory. Global competition, increased pricing transparency, and lower barriers to entry in many of the most attractive industries have contributed to the trend. But these are not the only problems. Many companies want to make a quick grab for market share or return on investment, and with high prices both objectives can be harder to achieve.

These concerns encourage companies to take an incremental approach to pricing: they use existing products as their reference point. If a new offering costs 15 percent more to build than the older version does, for instance, they charge about 15 percent more for it. Particularly in consumer markets, they might set the price slightly higher or lower than that of their main competitor.

The incremental approach often underestimates the value of new products for customers. One of the first makers of portable bar code readers, for example, calculated how much more quickly its customers would be able to assemble their own products if they used portable readers. The company then took the price of the older, stationary readers and raised it proportionally, solely to account for the time savings. This strategy also fit in with the company’s desire to penetrate the market quickly.

But by using an existing product as the reference point, the company undervalued a revolutionary product. The portable reader not only improved existing processes but also enabled companies to redesign their supply chains. Portability and instant access to information prepared the way for real-time inventory control, vastly improved logistics planning, and just-in-time deliveries, thus eliminating the need for large inventories. Buyers quickly recognized a bargain and flocked to the low-priced product. The company, which couldn’t keep up with demand, not only failed to capture the full value of its reader but also set the market’s price expectations at a very low level. A single bad decision easily erased $1 billion or more in potential profits for the industry.

There is some really great stuff here. I’m not suggesting raising prices is always the right course, but if you offer a revolutionary service or product, don’t sell yourself (or your service) short.

From CFO.com via this post from Rob at BusinessPundit.

2 Responses to Pricing New Services
  1. John W
    June 17, 2004 | 9:33 am

    My $.02 as a GC and consumer of corporate legal services.

    Over the long run, I like the move to flat rate or value pricing. A colleague of mine (former GC) has set up an IP/transactional practice partly built on this model. Basically phone calls/documents/counselling are included; not major transactions or litigation. He reviews the monthly fee with clients every 6 months to see if too high or too low. He finds it encourages people to call and use him without having “sticker shock” when the bill arrives. It also allows the smaller, growing clients to better budget for legal services.

    The flat rate pricing seems to work better with existing clients or those coming with a strong referral.

    I wouldn’t find the weekly meeting an appealing part of the plan; few matters require that. My colleague runs his practice (for now) out of his home; the clients don’t care and if he needs to meet it’s often Starbuck’s and he picks up the Mocha Frap (and doesn’t charge it back!).

    I think the key is to examine what people historically don’t like about lawyers (cost too much, take too long; don’t communicate effectively or often) and make your pricing and service overcome these objections.

    I have been after my colleague to raise his rates, which are now up about 15% from when he started. Even now, he still is well under what the large firms charge, yet he nets more since his overhead is low.

    I don’t think the pricing model necessarily gets clients, but it may help keep them and helps them become strong referral sources.

    Good luck…

  2. f/k/a
    December 3, 2004 | 9:26 pm

    licensing fattens lawyer income says study

    Matt Homann at the [non]billable hour, is once again dreaming up ways for lawyers to extract more money from clients without giving them a better product.

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