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One area that nearly all businesses struggle with is how to price their products and services. Add to that the pressure of knowing that how you price is a direct reflection of your brand’s position and value in the marketplace.
According to Paul Klein, it’s not just a matter of charging more or raising your rates, but rather it’s recognizing the circumstances around your products and services, and then positioning for maximum value for both you and your clients.
Rich: My guest today is a business consultant and entrepreneur. His consulting services are centered on his area of expertise in helping executive level professionals transition from their corporate or government roles, to starting and scaling their own 7-figure consulting or freelance business.
His experience as a principal and CEO of a successful consulting firm, co-founder and owner of a software company, positions him by practical common sense approaches to starting and creating your own consulting or freelance business.
He has consulted and worked with numerous national and international brands including Target, Slack, UC Berkley, Cracker Barrel, Holiday Inn, KFC, Taco Bell, Yum Brands – I’m glad I ate lunch already – JC Penney, Bebe, Dollar General, Sherwin Williams, and more.
More than that, I’m an avid listener to his podcast, so I’m especially excited to have him on the show today where I can pepper him with questions instead of just sitting back and listening. Please welcome Paul Klein to the Agents of Change.
Paul: Hey Rich, how’re you doing? Glad to be here and more than anything, glad you’re a listener to the show. This is awesome. Honored to be here and serve your audience.
Rich: I first discovered you as you were talking on Mike Kim’s show. And as soon as I heard your whole pricings positioning I was excited to hear you had a podcast. Pricing is one of those things that I think a lot of us just really struggle with, so I’m so excited you’re here today.
As I mentioned, the name of your podcast is Pricing Is Positioning. What drew you to focus on pricing, and what do you mean by “pricing is positioning”?
Paul: Well, it’s a couple things. First off to answer your question, your pricing has a direct reflection of how your brand is positioned in the marketplace. If you want to cater towards the Corvettes and ZR1 clients of the world and pricing as a Corolla, it doesn’t work. Just like Mike talks about – I stole this from him – having those three brand identities. Having a visual, verbal, and the value all together in line. And so yeah, your pricing is a big component of that. It’s why we pay extraordinary amounts of money for MacBook Air and Apple products, because it’s a premier product and we’re willing to pay that.
But what got me into the whole pricing realm and just helping people, is just over the years being a consultant, working with professionals, C-Suite executives, whether it’s brick and mortar businesses or personal brand consultants, they all undervalue themselves. Even companies, SaaS companies undervalue their services and their products and solutions that they provide to people. So I just kind of have a passion for getting that out of people and helping them discover their true value and not be ashamed of charging what your worth. And as Alan Weiss says it best, “the first sale is yourself”. Once you get past that, the skies the limit.
Rich: I absolutely agree. And just hearing you say that reminds me that years ago I was looking for somebody to help flyte – my digital agency – with some of our finances. And one of the guys came in and he said that he worked at $50/hour. And that seemed so cheap to me that I was like, if I’m hiring you to help me make more money, you are absolutely not the right guy for the job. And I didn’t end up hiring him. So I absolutely agree with the whole “pricing is position”.
Paul: Yeah. And what he’s telling you by charging you $50/hour that your problem isn’t important enough to him.
Rich: Hmmm, I never thought of it that way.
Paul: Think about it. If you have a really important problem that you need solved, pricing cost can be an issue, but the main thing is the pain and fixing the solution, you’re more focused on that. And that’s why I always say, people buy outcomes not time. And so by only charging $50/hour he’s saying either he’s a subpar professional, your problem isn’t important enough. And a lot of times we’re looking to pay a premium price because we want good service, we want a good solution, and we don’t want to have to do it twice. Sometimes people lose sight of that and they think they made $25/hour working for an employer and now they’re transitioning to their own business, so they just double their rate. It just doesn’t work that way.
Rich: So it’s interesting. The other day I put together a proposal for a prospect. He had specific marketing needs that he needed, I put together a package for him along with pricing, and he came back to me and asked, “What does this work out to per hour?” And I’m curious to know, well what I ended up saying to him is, “I’m really not focused on our hourly charge right now, I’m really focused on the deliverables we’re going to give you.”
Paul: Yes.
Rich: How might you have handled a similar situation, or how should people do that if people are really going after your hourly rate?
Paul: Well you’ve got to counter with and shift the discussion from time and materials, task and time, to value and the solution. And you did an excellent job of that. And just pivot the conversation. The more you can stay away from focusing on time, tasks, and being paid for that, the better. Because again, people by outcomes, not time. So that’s really what they’re after. Sometimes they’ll go through that justification process because the hourly billing is so ingrained in our society, it’s been around for 200 years, it’s antiquated, it’s not conducive to the knowledge economy we have now.
But we still have those inherent assumptions and justifications, especially from clients, that want to try to justify and so forth. But all you’ve got to do is pivot the discussion and that’s exactly what you did. Do the pivot and say you’re focused on the solution, they’re hiring you for your expertise. Yes, there may be other people that can do it at different rates, but they’re hiring you for all your skills, knowledge, and expertise.
And then sometimes you can counter it with, if they really push back and they really dig in and really trying to work you on the time thing, you can just ask them, “Well if you only value time and you don’t value the outcome or the solution we’re providing, then I’ll spend 1,000 hours on it, I’ll spend 8 hours a day for the next 6 months and we’ll bill you for that since you only value time.” So that will help shift that discussion and show they’re not really paying for time. You’re not paying a brain surgeon for the hour or two that he’s there, he’s getting paid thousands of dollars for years of education and all he has done to be able to perform that task. And in the professional services it’s exactly the same thing.
Rich: Alright. So as we’re putting together – a lot of us put together proposals or pricing stuff like that – should we give people just one price, or should we give them options? Should I say here is the price of a website, or should I say we have websites in different ranges and here’s a few different options for you? And if it is the latter, how do we keep them from overload of too many choices so they go elsewhere where the choices are easy?
Paul: Yes, absolutely. Always, always use options. That’s one of my strategies that I preach all the time. You don’t want to only provide one price. So many people – especially in the more traditional brick and mortar services – contractors, specifically. You know they’ll only provide one bid or one price for a service and you’re missing out on a ton of opportunity. Because what they does to the client when you only give one price for your product or service, it basically is like giving them an ultimatum. And we as customers and clients do not like ultimatums. We like to have choices and options and feel empowered.
So how to counter that is you provide them with options. So two is always better than one, and never go more than four pricing options, but three is the sweet spot. And you see this all the time and you just don’t realize it. When you go to the carwash there is a “good, better, and best”, and when you do that with your pricing options for your services, it just empowers that client to make a good pricing option. And more importantly now in their mind it just switches from “should I work with Rich” to “how I’m going to work with Rich”, because now they’re going to pick the option that works best for them.
And it’s just like flying first class form New York to LA, we decide whether we want to pay for first class or coach or business class. There’s tiers in there and all the big brands do it. You see it with Apple, carwashes, Starbucks, and so why don’t we do that as a small business or personal brand. It’s just to your advantage to do that, absolutely.
Rich: No you talk often about one of my favorite psychological tricks, anchoring. Can you explain what ‘anchoring’ is and how we can use it to increase what people are willing to pay for our services?
Paul: Yeah, absolutely. I don’t like to call it a trick.
Rich: A tactic or strategy.
Paul: Yeah, I like tactic or strategy better, because we all want to serve from a heart of what’s best for our client. And I always predicate this discussion as if I’m not the right fit for you even though I might have a big fat contract on the other end, if I’m not the right fit or the right person I won’t hesitate to refer you to someone else or my competition. So I think ethically that’s where we have to start.
And I know you’re not like that Rich, and we weren’t insinuating that at all. But I like to predicate that for our listeners just because there is some psychological behavioral economics behind it. And like anything, if it’s used in a bad way it can do harm to people, and that’s not what it’s all about.
But yes, to answer your questions, anchoring is absolutely based in behavioral economics and there is lots of books out there about it. But basically the first price you see or hear always anchors the price or the value in the client’s mind. And so what I always advocate is that you anchor high.
So if I’m on a discovery call with a client or something, and we’re talking about services and solutions and so forth, before I end the call I’ll always throw out an “anchor bomb”, as I call them. I’ll say, “Yeah, this looks great, I think we’ve got some solutions that will work for you. It’s going to be somewhere in the $25,000-$35,000 range.” And then I just go silent. And let them react because then what happens is you anchor your value and you also know whether you’re in the ballpark. And if they flop on the floor and start foaming at the month, then you know it’s probably not a good prospect. And then it also helps you tailor your proposal after you get off the phone. So if you hit them with that high anchor you can adjust accordingly, cast them out don’t waste your time, or adjust your options to fit into their budget.
So anchoring does that. And anchoring also works even when you know it’s being done to you. I do workshops on pricing, but one of the things I do is I like to provide 2 questions. And I’ll give half the class a question that will just say, “What do you estimate the average billable rate of all consultants in this room to be?” And then the second group I’ll use what I call ‘anchoring’ and I’ll anchor that same question. But I’ll anchor it with, “Do you think the average billable rate of all consultants in the room will be higher than $500 or lower than $500?”
Then I ask the same questions and inevitably the second group – the last workshop that I did here – Group B had an estimated hourly rate of $1,840/hour, whereas the group that was not anchored only estimated $200/hour. So I mean it absolutely, I do these all the time and it works.
And you see it again also if you go to the carwash. They’ve got the Super Deluxe $35 carwash, and then we settle for the $12 or the $7 one. So it works universally.
Rich: And it sounds like when you’re talking to people, you’re first getting an understanding of what their needs are before you start throwing out that anchored price. So it’s not like you’re just saying $35,000-$45,000 in this example. You’ve listened to what their needs are, you know the kind of value that you’re going to be able to provide for them, and then probably on the higher end of $25,000-$45,000, and that kind of how that process works for you. Am I correct in that?
Paul: Yeah. Because I’m definitely in the consulting and professional services world – what I call “customized professional services” – every client is different and I price the client not my service. And so then what I’ll do is I’ll use that anchor. Whereas my friend Blair Enns says, “Always say a price before you show a price.” And it just helps you anchor that value for that solution. Sometimes it takes more time, at least you know you’re in the ballpark. You have an idea if this is a $1,000 or $1,500 solution, or is it going to be something in the higher end in the $20,000 or $30,000 or $100,000. So you can kind of just gauge your prospect at that point.
The only unreplaceable resource that we all have is time, and so I don’t want to spend a bunch of time putting together proposals and thinking about solutions for a client if they’re looking for a Toyota Corolla and my solution is a Corvette ZR1, it’s just not a good fit and it’s just better for them to go somewhere else at that point. The sooner you can discover that or get that out in the discovery call, the better.
Rich: You said something interesting back there, something along the lines of “you price the client, not the solution.” What do you mean by that?
Paul: I always break down all of services into three different types; there’s commoditized services, product services, and customized services. We can talk about that more, but to answer your question, in the customized service world where you’re doing a lot of one-on-one client work, very custom work – and I got this from Blair Enns and his book called Pricing Creativity, I’d recommend that you and your readers read it – but in that book one of his rules is to price the client not your service. I’ve followed that for years and I didn’t realize it until I saw it in his book, and I say the same thing.
And that is, what you’re going to charge a mom and pop shop is going to be totally different than what I would charge Nike, or a mid-tier restaurant franchisee with 200 restaurants. I’m going to charge that client different and there’s all different levels. So that’s what we do, we price the client not the service.
So oftentimes as professionals, business owners, and so forth, we just get so focused on our product or our solution that we think there’s only one flat rate. And again it goes back to the options thing and flying form New York to L.A., people pay different prices. Pricing discrimination is a good thing because you want to have options. What somebody pays for a first class flight booked 6 months in advance is going to be totally different than what someone pays 2 hours before the flight because they need to get there for an emergency. So that’s the same kind of thing, you price the client not your service.
Rich: And I would guess similar to the mom and pop versus Nike example, something you do for a mom and pop shop may only create a small amount of value for them just because they’re only serving so many customers. Where if you provided a similar service to Nike, the value they would get from that service could be 100,000 times the value that the small mom and pop might be able to generate.
Paul: Yeah, exactly. It all comes down to whether you’re providing revenue increases or cost reductions. So if your solution is cost reduction-based, the mom and pop that’s generating $200,000-$300,000 a year revenue, the value to them is going to be totally different than a multimillion dollar conglomerate that’s doing $100 million or $200 million dollars a year. So that same cost savings solution is going to be valued different to both those clients. So therefore you’ve got to price the client not your service.
Rich: Now Paul I heard you say something before about putting together short proposals. I’ve heard you talk about this before and I’m embarrassed to say I currently send out often a 10-13 page proposal to prospects. Tell me why I’m wrong, and maybe tell me how I can shorten it up a little bit.
Paul: Yes, we need to talk. That’s, uh, I mean you probably spend…you probably have a template but it still probably takes you and hour or so at least to put something together like that I would imagine.
Rich: That’s pretty close to it, yeah.
Paul: Yeah, just getting all the fonts just right and filling in all the blanks if it’s a template. And if we go on the opposite end, I’m sure you have over the years as a professional, you get RFPs or proposals from firms. The first thing we do is look at the coversheet and see who it’s from, then we go right to the last page with the pricing sheet. We skip all 45 pages.
So what I advocate is don’t spend all your time putting together big, long proposals that nobody reads anyway. So I advocate using a 1-page proposal with your three options and keep it super simple. And what happens is – I learned this form a behavioral economist for ADP, and he was talking about System 1 thinking and System 2 thinking – and Psych majors will know this well, but most of the time System 1 thinking is super-fast, super simple, and easy. That’s where we like to stay most of the time, it’s like buttoning up your shirt, you just kind of do it on autopilot and you don’t have to think about it or burn a bunch of brain cells to perform the task.
System 2 thinking is more analytical, labor intensive, it really takes a lot out of us, we don’t like to stay there. It’s crunching spreadsheets and whatever at tax time. And so by using a 1-page proposal that gives your clients System 1 thinking and able to make a decision quickly without having to burn a bunch of brain cells. It’s so easy a caveman can do it!
It’s the grunt test that Donald Miller talks about in StoryBrand Marketing. It’s the same kind of think in the pricing. It’s simple for the clients to make that pricing decision and don’t overload them with too much information, too many options. Because then what happens is with too many options and that much information, they just shut down. They’ll go somewhere else, they’ll say it’s too complicated. And we do that, we just move on.
So by keeping it simple to just one page, basic bullet items, my logo on the top, my high anchor on the left, put my deliverables just real generally, and then I put my terms on the bottom right above the price. And then once they come back with the option they’ve chosen, then I spend the time in my contract with all my qualifiers, all the deliverables, specifications, dates, all those kinds of things in case there’s a disagreement. We save all that for the contract because now I now I’ve got a hot prospect that’s ready to engage.
Rich: That makes a lot of sense. A lot of what we’ve talked about so far has been more on the consultant side, and I know there’s a wide variety of listeners to the podcast and a lot of people just own businesses, maybe even retail. So these tactics & strategies work across the board, or are they specific to consultants? Is there anything you can share with us that maybe would help a more “traditional” business do a better job of pricing out their products and services?
Paul: Yeah, absolutely. I mean there’s kind of two other pricing psychologies or methodologies. There’s one that’s more for the professional services; accounting, creatives, website builders, consultants. And then there’s a whole other pricing realm in physical products, like restaurants, car washes, contractors, retail. And so the options and anchoring methodology applies to both. You can do that absolutely.
One of the things I think more traditional brick and mortar businesses are missing out on, and you see the bigger brands doing that, is using subscriptions for their services. This whole subscription-based economy, most people think of it in terms of SaaS products or online stuff, but you can absolutely use subscriptions for a painting service or a window cleaning service, a car wash.
I’ve seen a car wash the other day where you just pay a flat fee and you get to go 5 times a month. I’d rather do that than have to get change or dig in my car. You just put a sticker on the thing and go through the car wash whenever you want and you just pay a flat rate. So I think subscriptions are a great opportunity for brick and mortar, along with pricing options and so forth.
And the other one that I think a lot of people overlook is providing extraordinary guarantees. There’s a case study, Ron Baker who writes a book and has a podcast, he has a book on value-based pricing and he’s a really well-known pricing author. But he talked about on his podcast this company called Burger Bug Killers Exterminators out in Florida, so it’s an extermination company.
They basically have a commoditized service, but what sets them apart is they have an extraordinary guarantee. So what the guarantee basically says is you don’t pay initial charge for them to eliminate every roach, and if you’re every dissatisfied with the roaches, rates, whatever, they will refund up to 1 year of your service charge and they’ll pay for another exterminator of your choice for up to a year to come out and make it right. So they have what’s called an extraordinary guarantee.
And so those kinds of little things can help you set yourself apart from just competing on price. So you might look head to head to one of your competitors, but if you mix in subscriptions and extraordinary guarantees to set yourself apart, then you can charge a lot more money for the same type of commoditized service.
Rich: Those are two excellent ideas. I do have a question on subscription model, definitely something that we’ve thought about in the past, and I think this is where our fear comes from, and maybe you can talk me out of it. So we charge by the hour for updates. So we thought about doing a package deal like you pay us x dollars a month and we’ll take care of all your updates. But our concern has always been that we’ll get a couple of clients who will literally have us change things on a daily basis and completely upend that business model.
What kind of protections can we put in place so that we can offer a subscription model and know that we’re going to be making x number of dollars per month, but at the same time people aren’t able to take advantage of us? Or is that just the price of doing business?
Paul: No, no. We’ve faced that same problem in our SaaS company, and you have to have caps or limits. It’s just like if you’re subscribed to iCloud storage, there’s a cap on the storage, you have unlimited until you hit a point.
I think some of the streaming services are that way, maybe some of the movie – Prime or Netflix – I don’t know, but you basically have to have guardrails. So what you’ve got to do is find that sweet spot that allows…you know, I would look at your metrics. What type of clients are we spending the most time with, what are some of the ones we’re spending the least time with, and look at those tasks and divide them out and try to find that sweet spot so that you can hit the most amount of your clients. Because what’s easier, retention or acquisition?
Rich: Retention is always easier.
Paul: Exactly. So if you can move them, even though you might have one or two that might go out of those guardrails – but you have that very well stipulated in your subscription plan that you then bill for that separately or it’s a change order – but your base subscription that does like 80% of the work, they’re going to be happy and you’re going to be happy, and it helps ride out those highs and lows. And now you’ve got a retained customer that you continue to provide value to and you don’t have to focus so much on getting new ones.
So just having good guardrails stipulated, look at your existing clients on the metrics of what services you’re providing that you’re not spending a lot of time on, and try to find that sweet spot. But you can’t just leave it open-ended because you’re right, when we developed our SaaS we said if we just open this up unlimited if someone asks for a complete re-write of the user interface, we just can’t do that.
So what we did is we just put that you get up to two customized reports that we can provide per month, and then we had a certain number of hours, even though I disagreed with my business partners on the hours part, the reality is they pushed back on me. But we offered a number of customization hours that they can use towards any project. So if thy said they want a whole new user interface for this screen over here, then we would say you’ve got up to 10 hours for customization, we estimate it’s going to be 7 or 8 – or we estimate it’s going to be 20 – they would get the first 7 or 8 for free, and then we would just charge the difference for that.
Rich: That’s awesome. And I think I’m going to take a look at our potential updates/subscriptions. Paul, this has been great. If you’re listening at home and you think that this was good information, I can’t stress enough that you should totally check out Paul’s podcast where he goes in much more detail on a lot of these subjects, and even more. They’re great listening if you’re trying to figure out your own pricing.
Paul, why don’t you let everybody know where they can find you online?
Paul: Yeah. Well I took a page out of Mike’s book, too, and that is you’re listening to this on your podcast player so go over and subscribe to my podcast, it’s called, The Pricing is Positioning Podcast. And if you would like a copy of my one page proposal, it’s a Word document that you could use for your own proposals, go listen to Episode 3 and there’s an opportunity and a link in there to get that Word document sent to you for free. I’m happy to share that with you.
And then if you’re not listening to this on a podcast player and you just want to find my webpage, it’s just paulklein.net. And then of course I’m on Instagram, and Facebook, and Twitter, and all that stuff, too.
Rich: Awesome. Paul, thank you so much today for coming by and talking pricing with us.
Paul: Absolutely, Rich. I’m honored to be here, thank you so much and hopefully I’ll either get up to the conference coming up or I’ll do a virtual ticket and join you there.
Rich: Sounds great, thanks Paul.
Paul: Thank you.
Show Notes:
Paul Klein helps businesses create pricing models that make sense for both the business and the client. Definitely check out his podcast where he covers everything from pricing, to why a 1-page proposal is the best option.
Rich Brooks is the President of flyte new media, a web design & digital marketing agency in Portland, Maine, and founder of the Agents of Change. He’s passionate about helping small businesses grow online and has put his 20+ years of experience into the book, The Lead Machine: The Small Business Guide to Digital Marketing.