Do You Make These Pricing Mistakes?

For this week’s Guest Post Friday, we welcome Matt Handal for a second time.  As a marketer, producer of the Construction Netcast podcast, contributing editor of SMPS Marketer, co-author of the Marketing Handbook for the Design & Construction Professional, and Twitter.com’s @MattHandal, Matt sure is busy. But never too much to answer your questions at mhan7474@yahoo.com or post at www.HelpEverybodyEveryday.com, where you can sign up to receive his weekly articles.

In the current recession, pricing has become a big issue. I was recently alerted to this blog posting from famed marketing guru, Seth Godin.

The topic of this posting is pricing in today’s economic climate. Seth explains, “Apparently, the bulk of your market no longer wants to buy your top of the line furniture, lawn care services, accounting services, tailoring services, consulting… all they want is the cheapest.”

Then he goes on to say, “In terms of educating the masses to differentiate yourself, the market is broken. Fixing this is almost always a losing battle. Just because you’re good at something doesn’t mean the market cares any longer.”

And his solution is, “It’s a lot easier to find a market that will respect and pay for the work you can do.”

Now I know that everybody likes Seth Godin and I can’t argue with his success (I mean who doesn’t visit Squidoo on a regular basis?) But I often wonder if he oversimplifies things to the point of giving out bad advice. If there is one thing I have learned about pricing is that simple it ain’t.

Let me give an example. Godin’s solution did not take into account microeconomics. In the article, he describes consulting as a commodity. But a commodity is supplied without qualitative differentiation across a market. Rice is a commodity. People, by definition, are not a commodity. Some are simply better than others.

In addition, pricing isn’t a game of setting your price so you can sell the most goods or hours. The goal is to price your goods or services to get the most return (where price, supply, quantity, and demand intersect). In theory, if you lower your prices, more people will buy your services. But supply and demand theory is more complicated than that.

Let’s say that your clients are only willing to buy 750 hours of legal consulting services at $400 or 1,300 hours of legal consulting at $250. But if you drop your price to $150, they will buy 2,000 hours. Would you rather sell 2,000 hours of your services? It would be dumb mistake. You’ll make $25,000 more by selling only 1,300 hours.

But it gets more complicated than that. Studies into price discounting have often shown that lowering your prices for a period of time positively affects your bottom line in the short term, but may have negative effects over the long term.

Godin’s solution also doesn’t take into account how humans are influenced (which I detailed in “what you don’t know about marketing”). For example, many people learned at a young age that “you get what you pay for.” So they mistakenly associate price with quality.

I know a law firm that is headquartered about two hours outside a large city. They wanted to do more work in the city, but were struggling to break in. While some firms might have just given up or tried to undercut the competition, they solved the problem by simply raising the prices offered to clients in the city. You see, clients in the city perceived higher priced attorneys to be better attorneys, so they started hiring this firm over the local competition.

If you are an attorney or consultant worried about a drop in business, don’t give up and start selling stuff on ebay just yet.  And never buy into the notion that your professional service is a commodity. The solution is not always going to be to raise your prices. But it will probably be based on time-tested economic and marketing theory, research data, and a solid understanding of what influences your clients’ buying behavior.

As always, both Matt and I encourage your comments below.  I also encourage you to subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.