There is so much talk in the professional services industries about how to price your services. We’ve posted about it many times right here on our blog already.
Then people get confused about pricing vs. billing.
Pricing is what you charge for your services. Billing is what you do later on, after you’ve agreed on pricing. It’s important to understand this distinction.
There are many different methods of pricing your services, and there are even more methods of billing. We can agree on an hourly rate, and if we do, I will bill you by the hour. There is not much difference there. Then we can agree on a fee for the entire project (pricing), and then a billing schedule.
How we bill has nothing to do with how we price our services. In fact the way we price our services is much more likely to drive how we bill. Hourly billing has long been the standard in many professional services fields. This of course means that we’re billing in arrears based on tracking time.
A while back I found I was getting tired of chasing clients for money. At the same time I was working on cleaning up the books for a lawyer. He was paid a retainer by his clients, and then as he billed for his services, he pulled the money out of the retainer account, and paid himself. Then he applied that to the billing. This seemed like a MUCH better business model to me, and I wondered if I could do this with my bookkeeping service.
It seemed unorthodox, but unorthodox is practically my middle name, so if anyone was going to do this, I could. I re-wrote my service agreement to include a provision for a $1,000 retainer to be paid on signing, which would then be applied to the billing.
What happened next shocked me.
Not only were people writing that retainer check. They were telling me they respected me for doing things that way.
The reason people respected this was that they could relate to why I was doing it. Nobody wants to be burned, and most of us have been at one time or another.
Pricing works the same way as charging a retainer, in a manner of speaking. If my services weren’t in demand, people would have laughed at the idea of paying a retainer. In one case I had a guy refuse to pay the retainer, but he agreed to write a check to me on-site. In those days I was still going on-site to see clients.
Now, a tangent: I once asked a mentor of mine why it was even worthwhile to be the President of the United States.
Financially speaking, they're not all that well-compensated when you consider the immense pressure they're under. Why do it? (Let's forget about the opportunity to guide the nation, the Air Force 1, and the private Bruce Springsteen concerts for a second.)
My mentor explained to me that the key is what you can do afterwards. A former president of the US can write their own ticket. Want them to speak somewhere? How’s $50,000 as a fee to show up? Don’t want to pay the fee, get someone else to speak.
Being the President creates demand. That is why it is worthwhile.
In your own business, you want to find ways to create demand so you can write your own ticket. That is how you price your services. When there is little or no demand, you’ll take what you can get. You’ll charge lower prices so you can attract the clients and get the money flowing in. As you build, grow, and develop a reputation, the demand for your services increases. This is when you can increase your rates.
Pricing has nothing to do with value.
It has to do with supply and demand. This is economics 101.
Now the question is, how do you create and increase demand for your services?