How Much to Charge Clients: Earn More Money with Perceived Value Pricing
I made a video about How Much to Charge Clients and How to Earn More Money with Perceived Value Pricing. It’s posted on my YouTube channel. You can watch it or read the transcript below.
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As mentioned in the video, here are some of the relevant resources that that I’ve learned from:
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Markup and Profit by Michael Stone (book)
Value-Based Pricing by Harry MacDivitt and Mike Wilkinson (book)
How Customers Perceive a Price Is as Important as the Price Itself (Harvard Business Review article)
Per Bylund on Subjective Value (Hunter Hastings’ podcast and blog)
Watch the Video
Read the Transcript
If you’re wondering how much to charge your clients for your work and how to earn more money for your work, I’ll help you answer that now. I’m going to pack a bunch of valuable lessons in this video. Some of these lessons I’ve learned from my mistakes. Some I’ve learned from other people. Hopefully I can save you from learning the hard way.
This is an overview intended for beginning contractors, but even if you think you know it all, you might learn something from this. I’ve been working with contractors for almost 25 years and just recently learned some of these lessons.
Before figuring out how much to charge, it’s important to understand what value is. I’ll talk about value in different contexts, meaning importance, worth or principles.
Now getting to the point, this is the most valuable economic lesson that I know value is subjective. That’s basically all you need to know about economics class dismissed. Seriously though value is subjective and that concept helps understand how to earn more money doing basically the same thing that other people get paid less to do.
Communists hate that. Anyway, that’s just how it is. Value is not simply labor and materials. Value is not necessarily the lowest price probably is not even the same as cost or price value is in the eye of the beholder in the mind of the consumer. It’s an emotional feeling of satisfaction. Everyone has their own value scale.
When someone is deciding whether to purchase your service or product, they evaluate where your goods fit on their scale of values based on what they want now.
So each customer has their own values and each customer’s values can change. They may adjust as situations change. For example, what the priority is today might not be important tomorrow.
You can ask customers about their values. Sometimes they don’t know, or they won’t tell you. They might say that a certain value is most important to them, but they may act differently against that value.
Some of the most successful entrepreneurs use empathy to figure out customer’s wants and needs. You can observe how customers behave and try to see their values from their perspective.
Often a person suppose that ideals do not align with their reality. So ultimately actions demonstrate true values.
Now moving on to some common values. This is an old saying, we offer three kinds of service, good, cheap past, but you can only pick two good and cheap. Won’t be fast, fast, and good. Won’t be cheap, cheap, and fast won’t be good. I think there’s some truth to that, but it might not be accurate for every situation. It’s an oversimplification. You don’t have to completely disregard one of those values.
I’ve seen a bunch of different diagrams of that. I like Venn diagrams. So I made this one to show those good, fast and cheap dynamics in a visual way that makes sense to me. I also wrote a lot more about this topic on my blog if you’re interested.
Now let’s talk about perceived value pricing.
The way you do things, and the way you represent your company can be your unique selling proposition, what makes your business stand out from the others. This can take some trial and error to determine.
You can appeal to a type of ideal customer in general. And specifically you can try appealing to each individual customer’s values.
When you’re starting out, you might have to offer low prices if you don’t have much else to offer, but that’s a game where winning is losing. Eventually you should learn to provide more value.
You can charge more for our customer’s priorities, unless the customer’s primary value is low cost. If the cheapest price is all they’re interested in and you can afford to miss that opportunity, then let them find someone else competing to be the lowest paid contractor around.
Really, most of the people that I deal with are not focused on getting the lowest price. For example, in my remodel business, I found many customers highly value communication and cleanliness. Believe it or not, some customers would rather pay more than most other people for various reasons.
In fact, the National Association of Home Builders surveyed buyers in the US and found these criteria were the most common responses. The list is an order with the most voted items top, you can see price is down there at number seven.
Of course different customers have different priorities and different situations, but I already went over that.
Now, getting into specifics of pricing.
There are situations when a rough estimate to get paid for time and materials may be preferable. That’s an easy way to start quickly or to work with uncertain circumstances until the situation can be clarified.
I generally recommend quoting an exact price or a definite scope of work. In my experience. It’s usually in the best interest, for both parties, if the contractor makes sure that price is enough to deliver a good value to the customer and to get paid well for it.
You should keep accounting records of your work and project your future costs based on your recent history and any new information that you can get. Don’t just copy an old estimate or use someone else’s numbers. To be honest, I’ve done that. And I know other people do it too, but it’s better to adjust continually or you’ll end up losing money and you might not realize it until you’re bankrupt.
If you’re having a hard time figuring out costs and pricing for construction or remodel projects, you can get an idea of market rates for various tasks from Craftsman cost books, RS Means cost books, Homewyse website. There’s a lot of resources out there. Those are not perfect, but they seem better than some of what I’ve seen. Don’t rely on those for all of your estimating, but those can provide a market price check, or some guidance about tasks that you haven’t priced before.
You need budgets. Obviously you need to earn enough money to support your personal life. And of course you need to charge enough to cover labor materials and other expenses. Plus you will need profit to sustain and to grow your business.
There are a lot of overhead expenses that can be hard to realize, do your best to keep track of those.
You should also include a contingency for risk insurance will not cover all that can go wrong.
Essentially, what I’m trying to say is that you should probably charge more for your work. Of course don’t be pushy and don’t rip people off. That way you can get more repeat business and referrals, which can become the core of your business.
I encourage you to be fair, honest, do good work, and communicate clearly. You should make a good living.
Wrapping this up. I mentioned different ways of doing estimates and price quotes, those being time and materials or perceived value pricing. I’ll dig deeper into that topic in another video. I’ll also do another one was specific tips about how to negotiate your value upward.
For now, I’ll give you a spreadsheet that will help you calculate your cost of doing business. You can download it for free from my blog. That blog post will also list some of the reference material that I’ve learned from. Check the description below for a link.
Let me know in the comments if you have any questions or suggestions.
And if you feel like I provided value in this video, please click the like button.
Thanks for watching!