The average company spends fewer than six hours in its lifetime setting and modifying its prices.
And I’m assuming you’re not reading this because you want to be average, so it’s time to put the work in: Starting today, you need to develop a pricing strategy and commit to iterating on it until you’re confident you can scale in any direction you want.
Please accept my following experience as a poignant example of the import role pricing plays in your business:
I spent years working at an agency. Most recently, I had the role of director of client services, and I thought I had pricing figured out.
Sure, it always took a bit longer to outline a project than we would have liked, and we still got companies who bailed out at the last minute due to the budget, but that’s par for the course, right?
I recently had a mind-bending conversation with a friend who runs a PR agency. When I asked him how he was growing so quickly, he responded, “We tell everyone we only work on retainers, and the bare minimum we charge is $10,000 per month.”
To which I replied, “What?! You’re growing this fast because you lead with the price tag? How does that make any sense? Aren’t you concerned about losing clients before you've even had a chance to sell the value of your agency?”
His response baffled me. “Either they can afford us, or they can’t. We don’t spend any time working on the companies that can’t afford us, and we spend 100% of our efforts in the companies that can, which gives us a 90% close rate.”
A 90% close rate? He fired up his CRM and showed me the deals. That is when my chin hit the floor.
I realized then that I needed to take a long, hard look at how we approached pricing and make some dramatic changes in the way we both set our prices and communicate price to our prospects.
I know what you’re probably thinking: Isn’t it awkward to talk price too early?
It may seem awkward, but when you’re upfront with your pricing, you get down to business right away, allowing you to skip the price dance during the beginning of a professional relationship. It’s better to discuss budget upfront before negotiating on the specs of the project because even if you agree on that perfect solution, it isn’t going to magically transfer money into the client's bank account or add a budget line item.
You may say, “But we only get so many leads. I can’t afford to lose a single one of them.”
The thing you can’t afford is spending two weeks preparing a proposal only to find out you’re not in the ballpark from a budget perspective.
When you build the perfect project overview and proposal, get the sign off from everyone on your team, and then present it to the client only to hear: “Oh, this is great, but it is way out of our budget,” it's a complete waste of time, energy, and resources. You're better off having that awkward conversation first.
Commit to Your Pricing Strategy
In order to be in a position to talk about pricing up front, you need to have your pricing figured out before you talk to your prospective client. Every client is different and has specific needs and wants, but you have a business to run, and you know what it takes to get the job done.
One thing that’s worked well for me is having defined price points organized into "packages" that we can talk through to help clients narrow in on a project and scope quickly. The details of every project are completely different, but with these budget starting points and loose project guardrails defined, we can start discussing goals more quickly and set expectations from the start.
Focus on the Clients That Matter
The major benefit to having these packages is that you weed out unqualified clients early.
If a company can’t meet the table stakes of a $50,000 project, you can get the client on the right path elsewhere. From here, you can refocus your time to spend it with your ideal prospective clients -- those who can afford to work with you.
You’re also being specific. Maybe the client can’t afford $50,000 today, but he may be in a different spot six months from now. If you did a good job of providing value along the way, clients will qualify themselves when the time is right and come back to restart the conversation with your agency.
One other trick we use is to give a budget that will start the conversation, then work backward toward an acceptable amount. I’ll frame the conversation by saying,“Our most successful clients spend around $300,000 a quarter, and they work with us at least six months out of the year.”
This sets the correct expectations, both in terms of budget and that success is tied directly to budget. If the client were to counter with, “We were thinking $200,000 over two quarters,” you can start there and work them through your custom process.
If you feel like a prospect is the right fit, but the client needs a final push to commit, you can go the extra mile in proving that it's going to be a profitable engagement to work with your agency with a “business case” document. This model outlines where the client is today and where you’re going to get them in the first 180 days of your engagement. WebMechanix provided a sample template so you can create your own business case documents for your clients.
Now that I’m on the other side of the table running a product company, I’ve realized that agencies have dedicated people scoping projects, writing proposals, and getting projects completed -- product companies don’t.
I need to make sure my time is always being spent on the most high-value activities for my budget. Discussing the ROI of a project (and providing case studies that show you have a track record of achieving these results) and stating the price from the beginning will help clients make the decision more quickly and say "yes" with less buyer's remorse.
Let a Retainer Do the Heavy Lifting
When thinking about the service your company offers and how to price your services, first consider the value of your agency's "product."
If you have a firm grasp on the “product” you provide for your customer (which could be more leads on their website, PR buzz, or software), you can consider the benefits and then price accordingly.
A retainer model can tremendously simplify the pricing conversation. When talking to my friend’s PR agency about pricing, as soon as they dropped $10,000 per month, I knew three things instantly:
We can’t afford them now.
I know when to come back.
This is the scary one -- they’re probably legit.
Time makes retainers shine. Generally, clients have an uneven workload over the course of many months, so being able to balance busy times with lighter workloads gives your team and your client some predictability in what to expect.
For better or for worse, companies associate retainers with companies who have their operations figured out.
Experiment With Your Pricing Strategy
The best product companies are constantly testing and experimenting with their pricing, making tweaks to optimize revenue.
Now that you’re going to have your own pricing strategy, why should the product companies get to have all the fun? One thing you can experiment with are pricing anchors.
For example: SurveyMonkey has plan sizes which give the illusion of value per price plan, though there may not always be a difference. The highly simplified version of their plans are as follows:
Free for just a handful of features
$26/user/month for even more features
$25/user/month, billed $300 annually, for a TON of features
$85/user/month, billed $1,020 annually, for every imaginable feature possible
There’s a lot that's great about these prices. SurveyMonkey's largest plan is three times more expensive than its standard paid plan, creating a great anchor for pricing. This makes the middle plan, the more reasonable plan, look like a bargain.
Additionally, in another stroke of pure genius, the product has two plans in the middle range: one plan is $26 per month and has 8 features, and the next is $25 per month and has 11 features. Seems like a no brainer, right? Well, the trick is that the plan for $25 per month is billed yearly.
It’s still a great deal, but most companies give at least one or two months for free when paying yearly. SurveyMonkey has figured out to give less than a half of a month away for free and still ring the register.
Once you have your prices planned out, you can also run experiments and test what works, using techniques such as anchors and upfront payments as a way to maximize your agency's profit and increase your stability.
Find What Works for Your Agency
It took me a long time to get my agency's pricing structure to where we had a scalable model and a process for making improvements. And then, when I started a product company, I had to begin again with a completely different set of requirements and model.
Not all the pricing strategies mentioned above will work for you company, but it's something you should consider. Ignoring your pricing will only leave you in a world of pain and missed profits.
Have you tried this price-first approach? Are you timid to talk price? Let us know how you approach the price conversations and what experiments with pricing you've tried in the comments below!
Special thanks to our friends who gave us advice on their pricing techniques: John-Scott Dixon from Aiden Taylor, Mike Belasco from Inflow, Leslie Albrecht from Social Driver, and Arsham Mirshah and Chris Mechanic from WebMechanix
Originally published Apr 27, 2016 7:00:00 AM, updated February 01 2017