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14 Jul 2005

by Noel

Pricing and Differentiation

Tom Evslin writes a great post on the importance of pricing, and in particular not under-pricing oneself:

I won an argument with an IBM SE on the very
good grounds that I was more expensive than him; my
recommendations for system changes were implemented
(grumpily) and some of them worked. We got a much bigger
consulting job after that which I’ll probably blog about
some day because it’s an interesting story.

The moral for today is one that every maker of luxury
goods already knows: price can create a perception of value.
As a consultant, you need high perceived value or no one
will give you the time of day let alone their watch. And,
if you don’t have the respect you need to get information or
to have your recommendations tried, you can’t succeed.

It’s a good point. Particularly when starting out, and
overheads are low, it is very tempting to sell on the basis
of price. We’ve done so in the past and the results have
been bad: the client hasn’t respected our time and
has given us the run-around.

If you’re in this situation you’re probably thinking
“if I raise my prices all lose all my
clients!” Particularly in fields such as web
development, where there is so much competition, this is a
valid concern. So what to do about it? Well let’s think
about why high prices work. As Tom says, it is because of
the perception of value they create. Which is to say it
seems to the client that your high-priced service is better
than the competition’s lower-priced one. There are many
other ways to give the client this impression. For example,
you can write articles that show the breadth and depth of
your learning. As you’ve probably guessed, Untyping is just
such as effort. Management gurus call this differentiation,
and the more competitive the market the more essential it
is.

So there it is. You can’t charge high prices if the
client thinks they’ll get the same service from your
lower-priced competitors. You must differentiate yourself.
Paradoxically price indeed is one way to do this, but in
many cases not the best way, and can be deterimental if you
haven’t already established a reputation in other ways.

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