The Price is Right

UPDATED: June 14, 2012
PUBLISHED: June 14, 2012

Pricing is something where one size does not fit all: What works for Tiffany & Co. would probably not fly at Target. At Spark & Hustle, my conference series for current and aspiring entrepreneurs, I teach thousands of small-business owners how to set appropriate costs. I hope that the advice I give them can help SUCCESS readers, too.

Always Listen to Your Dog… Walker

A simple reminder about pricing effectively—base your fee on the desired result, not the time it takes to do it—came courtesy of our dog, Marly.

When we got the adorable beagle, we knew we’d have to hire a dog walker—because back yards are few and far between in New York City. We chatted with neighbors in our apartment building and got the same referral and glowing remarks from several people about one particular walker.

I met Mariuza, loved her energy and then asked the all-important question, “What do you charge?”

Mariuza told me she gets $20 per walk, so I naturally asked if that was for an hour. “It’s for as long as I think your dog needs,” she replied, somewhat coolly. Ouch.

I immediately told my husband, Peter, that we weren’t hiring her. “She’s mean,” I said. “No, she’s not mean at all,” he shot back. “She’s doing exactly what you advise thousands of people to do!”

He was right, and she got the job.

Months later, as Mariuza and I became friendly, I asked why she’d bristled when I inquired about the time. “When it rains and the dogs only want to be out for 15 minutes, owners expect to pay me less,” she said. “I still show up, so I shouldn’t be nickel-and-dimed because the weather is bad, especially since it’s a lot more challenging to work when it pours.”

She also said if she returned a pooch after 45 minutes, people complained. These are the same people who don’t offer compliments or more cash when she takes their pup out for 90 minutes, which she does routinely. Instead Mariuza delivers value and results. Your dog won’t pee in the house if you hire her and he’ll get plenty of fresh air, exercise and playtime, too—no matter how long it takes. Plus, you can trust her with the keys to your front door.

Different Businesses, Different Pricing Strategies

For a product business, you must consider costs of raw materials, packaging, labor, shipping and distribution, plus your time and talent for creating and developing your product. For a service business, fees are more subjective, with even more options to consider. You might charge an hourly, a retainer or a project fee.

While quoting an hourly fee isn’t wrong in all cases—obviously it works quite well for lawyers—it can pose a few challenges, chief among them being that it limits your earning potential based on the maximum number of hours you can work and the maximum number of people you can serve. The other issue: Hourly rates can create uneasiness for your prospects if they’re unsure of how many hours it will take you to get the job done.

If a graphic designer told you it would cost $50 an hour to create your logo, you’d want to know whether that was an hour-long job or a 10-hour one. If you were told it would take 10 hours, you might balk at why it required that much time. But if you were quoted $500 to develop and refine the logo, you might bite because you would understand exactly what you were committing to. That value proposition feels right.

As the business owner, you’re the one who must know how much time it takes to get the job done, but your prospective client doesn’t have to be privy to those details. Sell solutions, not time worked. You’ll probably earn much more, and the client won’t be stunned by surprise costs. Everyone wins.

Discounts and Fire Sales

I’m not against sales or discounting in general, but too many “buy now discounts” can train your target market to wait for your next big sale rather than pay full price. That said, you can participate in daily deal sites such as Groupon, LivingSocial, Gilt, ideeli and countless others, or even my weekly “Secret Deals & Steals” on ABC’s Good Morning America, where it’s possible to expose your business to a large audience to boost your bottom line. You can also create your own flash sale if you have a list or following to market to.

But before anticipating a big payday, be clear about your objectives and the potential pitfalls. I worked with a gym owner whose unique selling point was the feeling of community she built within her own four walls. With all of her competitors offering bargain-basement daily deals—significantly undercutting her long-standing pricing—she felt pressure to join them. She got new customers as a result, but they were only there to save money. They disrupted her loyal client base and had very little intention of sticking around for the standard fees.

So my client eventually stopped steeply discounting and focused on more traditional marketing instead. That served her best in the long run because she was able to attract more clients who joined because of the special experience, not the rock-bottom pricing.

On the flip side, discounting has generated ample business for makeup artist Lora Condon. She used a daily deals site to promote eyelash extensions at her New Jersey spa, which is regularly a $250 service. Even though she doesn’t make as much money when offering it at half-price, eyelash extensions must be maintained. Women who buy the initial application at the discounted rate get hooked on how good they look and become long-term clients who pay for lash maintenance services and other treatments, too.

Had Condon offered a deal for a one-time service such as a facial or massage, she might not have built a profitable new stream of loyal customers.

Use deep discounts or deal sites to jump-start awareness of your business, brand or product. Like Condon, do this strategically by going into the deal with a plan to keep those customers coming back. Exceptional customer service, which may require bringing in extra hands to handle the volume, should be a priority. You may also use this strategy to get rid of product that has a shelf life. You can move out items at cost while gaining new fans and customers in the process.

Know Your Risks

Before getting involved with any mass-promoted deal, be sure you know the risks. Plenty of businesses have been burned because they couldn’t meet the demand or their customer service was lacking. The good gesture backfires, and they lose customers instead of gaining them.

When you are planning any kind of sale, consider:

Giving a reason for the sale or discount. Is it tied to a grand opening, a holiday or other special event?

Finding a peg that lets customers know this is an exception, not the norm.

Sticking to a limited time frame for the sale. Don’t be one of those businesses that offer a steep discount for “24 hours only” and then continuously extend the sale over and over. That’s similar to the many merchants who would run yearlong “going out of business” sales until local governments cited them for false advertising.

Discounting something specific instead of all services. Create a special package only for this promotion so you don’t compromise your standard pricing over time.

Offering additional value rather than slicing prices is a better option. Add-on services and free shipping are better options than routinely giving 50 percent off. Lowered pricing through fire sales should not be a knee-jerk reaction to slow business.

Even at the height of the recession, when many companies were laying off, we didn’t slash rates to participate in my Women For Hire career expo events. Instead, we acknowledged that budgets were tight and offered special upgraded packages that delivered additional value and incentives at the standard price. For example, we provided more promotion and visibility for each employer that committed to spending with us. We also introduced new, lower-cost options allowing employers to stay top of mind with candidates even if they weren’t currently hiring. These included sponsorship opportunities for our Mentor Match and Perfect Pitch programs, which provide jobseekers with career services. Those simple tweaks saved my business from becoming another casualty of the economy.

You Talkin’ to Me?

Always make sure your brand, product or service aligns with the audience you’re talking to. If I sell high-end women’s shoes and talk them up at an event for struggling single dads and leave without a single sale, does that mean my product or business stinks? Of course not. It simply means I’m talking to the wrong people about what I offer. If you’re struggling with sales, make sure you’re connecting with the right audience.

Second, look at your pricing and the perceived value of what you’re charging. Lack of sales doesn’t necessarily mean it’s time to lower prices. In some cases the opposite is true: Clients look at your cheap prices and assume you’re no good. At that price, they assume what you’re selling isn’t up to par.

Years ago, for our side hobby business, my husband Peter and I scoured English country flea markets then returned home and sold antiques at small, upscale weekend shows. At first, Peter priced our merchandise to sell—knowing that we had paid very little. That mentality—price it low, they will come, and the volume will be grand—works at Walmart. But in the antiques world, many buyers expect high prices because, to them, hefty price tags indicate that the merchandise is authentic, unique and worth buying. To them, the low-priced stuff—no matter how interesting—is probably a reproduction or junk. High prices command respect.

So we shifted gears by putting fancy tags and high prices on our cool flea market finds—and sold a bundle. We took anything we didn’t sell to less expensive flea markets and priced to sell, which it did. In both cases, we aligned ourselves with our customers.

If you’re unsure about how to price your product or service, redo your marketing study: Ask a fresh group of people in your target audience what they would pay for your service or product. Then price it based on what they tell you—assuming it covers your costs and allows a profit. If that price doesn’t cover costs and allow a profit, rethink your hard costs and profit expectations. You may need to tinker with one or both.

Answer honestly: Are you shouting at clients or engaging them in real conversations? Are you blasting a lot of stuff at them or talking with them?

When she founded 600lb. Gorillas Inc., a frozen cookie dough business, Paula White of Duxbury, Mass., spent thousands of dollars on billboards, radio and TV ads—you name it—to get her company name out there. Her phone didn’t ring. So White began a grassroots campaign: She approached food buyers at trade shows, handed out samples in stores and talked directly to shoppers. All of that one-on-one chatter got the fledgling business off the ground. It’s now a multimillion-dollar nationwide enterprise.

Along the same lines, in the early days of SurePayroll, president Michael Alter bought an expensive email list, having been assured that people on the list were the perfect target market for his new payroll service. Alter and his team were so confident about the anticipated results of this email campaign that they set up extra phone lines and customer service operators to handle the flood of anticipated calls.

The phone never rang—and Alter realized that SurePayroll had zero brand recognition. No one knew anything about this new service, which meant they weren’t going to sign up for it based on a single email blast. Alter decided that, before he could sell it, he needed to educate prospects about the benefits of SurePayroll. Today SurePayroll is the online payroll company of choice for small businesses, including mine.

Last, you’ve done a great job getting people interested in you, but you’re still struggling when it comes to converting interest into sales. Tackle this with a simple question to yourself: are you asking for the sale or merely hinting at it? Many of us find it difficult to ask directly for the sale, which leaves money and sales on the table. Force yourself to ask for the sale. Practice your pitch and memorize it, so you enter into any sales conversation brimming with confidence. If you’re not willing to put yourself on the line to sell your product or service, why should any customer buy it?

At some of my Spark & Hustle conferences for small-business owners, one of our popular exercises is nicknamed “Spark Tank”—a takeoff on TV’s popular Shark Tank. We give attendees 30 seconds to stand in front of everyone and pitch what they do. Then a panel critiques their pitch in front of everyone.

Some women nail it—and earn loud applause. Others stumble—but glean valuable advice from the judges on how to pump up their presentation. If you have doubts about how effective your pitch is, test it in front of people you can trust to be candid—then pay attention to their feedback.

The hard truth is you may never feel comfortable pitching yourself and asking for the sale. You can read every sales book, take endless sales courses, get extensive sales coaching, practice on end, yet it may never come easily, no matter how much you try. In that case, learn to live with the discomfort; otherwise no sales means no business. If you want this business to take off, you’ll speak up and ask for it.

Tory Johnson is CEO and founder of Spark & Hustle, a weekly contributor on ABC's Good Morning America and a contributing editor of SUCCESS magazine.