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Don't charge what you're worth, charge what the market can bear

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    Francois Badenhorst

    Francois Badenhorst Deputy Editor Staff Member

    Posts: 91 Likes: 18
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    As the great American economist Thomas Sowell reminds us in Basic Economics: “There is perhaps no more basic or more obvious principle of economics than the fact that people tend to buy more at a lower price and less at a higher price.”

    ‘Tend to’ is the key part of this aphorism. There is perhaps no more central question for a business owner than discovering the point where a higher price does not lead to decreased sales; a magical, profitable realm where a good becomes, as they say in economics, ‘inelastic’. That is, their demand is relatively unaffected by a price increase, as opposed to elastic goods.

    To explain the difference between elastic and inelastic, Jill Avery, a professor at Harvard Business School, uses the example of an elastic commodity like beef. If the price of beef dramatically increased, demand would dip because chicken and pork are cheap, tasty alternatives.

    Beefy lessons aside, understanding elasticity, and more specifically your product or service’s elasticity is vital before you commence any sort of price increase.

    “Charge what you’re worth” is a familiar nostrum in self-help business books and online. The UKBF member Prokofiev writes: “A lot of the business books I have read lately state that you should charge what a company believes it is worth.”

    Prokofiev - whose profile picture is the great Soviet composer Sergei Profokiev - runs a digital agency. His hope is to increase profits. As such, he wants to charge more. But if he charges more based on what he believes, he writes, will it necessarily lead to the best result?

    “Surely if I just charged as much as the market could bear, or rather, as much as we could personally justify based on our qualities surely this would be better for the company?”. Luckily for him, he isn’t subject to the same kind of price controls as his namesake’s Soviet homeland was.

    “I think we are good at what we do, however, I think we could potentially charge more than I personally value our worth as I measure it differently to that of our clients, and this could potentially increase the perceived value for our clients.”

    An idea like ‘charge what you're worth’, while its intentions are pure, invites problems when it becomes entangled with prosaic, unscientific issues like self-esteem. A better option is to see what your clients believe you to be worth; your own unique ceiling price.

    The best way to find out is brinkmanship. “Keep putting your prices up until the resistance to the increase is too high and/or is no longer beneficial,” counsels Alluphere. “The price you have to stop at, is what you are worth.” 

    He adds: “You should also concentrate on increasing what you are worth.” Elasticity is, well, elastic after all. Marketing and innovation can change the way you’re good is perceived and consumed. The clothing brand Supreme, for instance, recently charged £30 for a designer brick. It’s a  peak example of an elastic good made inelastic.

    To return to Harvard’s Avery: “A marketer’s goal is to move his or her products from relatively elastic to relatively inelastic. We do that by creating something that is differentiated and meaningful to customers.”
     

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  2. Paul Tykhedice

    Paul Tykhedice UKBF Newcomer Free Member

    Posts: 6 Likes: 1
    Perceived value is an integral part of that goal.
     
    Posted: Sep 6, 2017 By: Paul Tykhedice Member since: Aug 27, 2017
    #2
  3. webgeek

    webgeek UKBF Big Shot Full Member - Verified Business

    Posts: 3,862 Likes: 1,418
    Can't we just buy consultants for what they're worth and sell them for what they think they're worth, then pocket the difference?

    In a previous life, as a marketing agency owner, I always took the line of an honest days work at an honest days wage, which meant we were nearly half the price of most consultants in and around London.
     
    Posted: Sep 6, 2017 By: webgeek Member since: May 19, 2009
    #3
    Scribe Copywriting likes this.
  4. Scribe Copywriting

    Scribe Copywriting UKBF Newcomer Free Member

    Posts: 3 Likes: 0
    Totally agree with doing things this way. It's not just about the billings - it's about the difference you make to your customer's lives, too, and that means shooting for a price that is fair to both sides of the deal. The best businesses don't just charge the highest price; they serve 3 parties equally (owner, employee and customer).
     
    Posted: Sep 14, 2017 By: Scribe Copywriting Member since: Aug 30, 2017
    #4