After years in recession, the U.S. economy continues to just plod along, leaving thousands of business owners in a quandary as to how to continue running their business profitability. They face a delicate balancing act: Should they implement higher prices (or fees in the case of a PR firm), in order to become more (or stay) profitable? Or should they stand behind their clientele and keep prices/fees as low as possible?
It is a difficult choice to make. If you are in this situation you understand how just one wrong move could eventually make you regret your decision. Here are some tips for making the right decision.
Develop a strategy
When developing a pricing strategy, consider a number of distinct situational factors, such as:
1. Cost. Factor in your fixed costs such as rent, utilities and salaries (include variable costs such as freelance and engagement costs not reimbursable by your client).
2. Economics. Research what the market will bear relative to supply and demand, price elasticity and other conditions, such as economic expansion or recession.
3. Customers. Your clients are your customers! I use this term rather than “client.” Know what your customers expect when it comes to capabilities and features. For example, they will likely value quality service and price. These features will vary depending on the type of business. You can ask two questions to find out this information: Why are you considering a change in with your PR firm at this time and what will you need to see six months from now to know you made the right decision to engage us?
4. Uniqueness. Do you fully understand how your product or service addresses your customer expectations and values? If you don’t you are likely not meeting their needs, which in turn means it might be easy for them to align with another agency. The above two questions should help you understand your customers expectations. You can also ask, if price was not an issue, what services would you like us to help you with?
5. Competitors: Research your competition by understanding their product lines and services. Also look at their strengths and weaknesses, and pricing strategies. This can help you better understand how your firm stacks up with the competition. Chances are you already know this information about the competition. Look at their website! You will learn a good deal about your competitor.
An intangible factor in the decision-making process is customer perception. As an example, a customer may perceive an underpriced priced service as lower quality or desperation, even if this is not the case.
While pricing strategies depend on your situation, you essentially have two choices: raise or drop prices. Although dropping prices in a lackluster economy may make sense in order to keep customers, more often it is best to maintain current pricing or even price you fees a bit higher than those of your competition, as this conveys higher quality and allows negotiating room without jeopardizing profitability.
Relying on lower fees to differentiate your service is risky, however. This strategy may escalate to a price war where, eventually, the bigger guns will be the only ones left firing. Larger PR firms with greater resources and operating efficiencies can quickly take out a smaller agency.
Gaining market share
There are many price-raising strategies you can employ for market share and increase profitability. One is to charge a premium. This approach works when supported by a service’s unique completive advantage. Sprucing up your presentation and website can also create a perception of higher worth. My good friend, Al Croft, publisher of Management Strategies, advocates a higher rate for “strategic services” that provide high value. As an example, assume you have a customer that needs strategic PR consulting services. The time it takes to advise the customer is two hours but the value to the customer is $100,000. What should the fee be?
Consider matching your competition. If you raise prices to match a competitor, customers may perceive your service as equal - even if the competitor’s offering is superior.
Understand the cycle
A business owner or executive that has been around for a long time understands the ups and downs of commerce. The key is not to panic during the downtimes. Use this time instead to make existing customers your best friends by providing impeccable service.
A Final Thought
Alan Weiss, a consultant to consultants feels that fees should never be based on time units of any sort. If your value to a customer is simply a matter of hours, days or weeks you provide, then you are no better than a commodity. Customers will understandably and rationally evaluate you as a commodity. The legitimate question will be “Can’t you do it for less time?” Your fees should be based upon fulfilling value, not performing tasks. Time unit billing will always be less than your true value.