Reality-Based Pricing
Prices based on feelings will not generate the profits needed to stay in business.
Many of you who know me know that I love books. More accurately stated, I’m a book “listener” because most of my reading list is in audio format. I don’t claim some lofty perch for reading the history and great literature I get to enjoy. I simply grew weary of the talk-radio format that seems to contain 55 minutes of commercials every hour.
Listening to great authors with complete thoughts instead of sound bytes is refreshing and stimulating. Often one author leads me to another, which is how I found Ayn Rand and her masterful work “Atlas Shrugged,” a novel which includes a picture of American life as a result of feelings-based pricing of services and commodities.
I don’t personally buy in to all of Rand’s philosophy but in the capitalism arena, she nails it down pretty tightly. Her fundamental statement of ethics is that each of us should seek our own self-interests. A phrase like that will stir up several predictable responses. If you are greedy of character, you’ll interpret that phrase as justification for your love of money. Sooner or later you’ll find out that greed does not serve your best interest, but I’m not writing to you, so you’re on your own.
If you embrace the principle that capitalism simply describes commerce between willing buyers and willing sellers, then you probably understand what Rand is talking about and I expect you’ll appreciate this month’s column. But if you are among the thousands of contractors who think it’s your duty to provide the lowest price for your clientele, and especially if you think that charging high prices is immoral, then this column is for you. Don’t answer the phone until you’ve had time to read it and ponder what it means to your future.
Let’s look at another example. I’ve recently been certified as an emergency medical technician (EMT-B). When we see the lights and hear the sirens, we know that help is on the way, right? So what do you think the instructors hammer into our skulls from the very first day of training? Do they applaud us for putting our lives on the line for the sake of others?
Far from it. The first priority of an EMT, firefighter or any other responder is to ensure the personal safety of themselves and their associates. The common denominator of these two examples is that if rescuers become impaired or debilitated, they will not only lose their ability to help others, they also become part of the problem.
Does this make sense so far? Now for a touch of philosophy. For most of us, from the time we were little folks we’ve been trained and taught not to stick out. Most of us want to be liked by the “group.” Even the ones who do stick out tend to flock together in their own groups, so even the rebels aren’t thinking outside of any boxes, they’re just getting into another box. Even if it’s subconscious, that desire to fit in, to be liked, colors our world view and, subsequently, our decisions.
In the contracting world, especially in the service world, one of the quickest forms of feedback we get from our customers is acceptance or rejection of our prices. If acceptance and fitting in is important to our psyche, then it’s difficult to face that rejection. As a result, we exit the world of reality-based pricing and enter the world of feelings-based pricing.
Another form of feedback we get is from our professional peers. The hens at the will-call counter are quick to ostracize contractors who charge “highway-robbery” prices as if they know exactly who charges what. The consensus of the brood is that anyone who charges significantly more than they do is obviously a shyster.
If you’ve been conditioned to fit in with the flock, then the fact that you’re not making a profit must mean you’re not doing something else properly, since you know that you’re charging the right price, according to the clucking hens. Once again, feelings-based pricing takes precedence over reality.
Each of these questions (and there are more where these came from) is based upon important aspects of running a real business. Each of these questions represents expenses that a legitimate business should be expected to shoulder. If you consider these items when pricing your services, your price will be significantly higher than the “going rate” of the flock of hens at the supply house.
That’s reality. If you want to keep your feelings intact (temporarily at least) by keeping your price artificially low, then you are forced to pick some of those line items to delete from your portfolio.
Do you want to know why our professions have a hard time attracting talent? See above. Do you want to know why our professions suffer image problems? See above. Do you want to know why so many contractors have a lower net worth than a homeless guy? See above.
In the real world, a properly priced contractor would show his supply house buddies how to break out of the hen house. He would show them how reality-priced contractors end up paying the final supply bills for the feelings-based contractors. He would show them how he’s training the professionals of the future rather than whining about the lousy work ethics of today.
Beyond that, the reality-based contractor would show the feelings-based contractor how his selfless low prices are actually very selfish and will end up harming himself, his customers and his profession. By choosing feelings over reality, the spineless contractor may not have to face rejection today, but in the future, his customers will end up having to find another contractor.
When dealing with potential price-book clients, the most common feelings-based statement I hear is, “If I raise my rates, I won’t get any work.” I’ll usually answer with something along the lines of, “I hear it all the time but the success stories I have are the contractors who understood that cost is cost and they have to make a profit based upon cost.”
Perhaps what I should really say is just three words: Get a job. You see, if you’re setting your prices based upon feelings, then you become just like the airline passenger with the mask. You might successfully get the mask on the child but in doing so, you starve for oxygen and it’s not likely that the child can help you. In other words, you are now part of the problem.
If you can’t get work at the right price, then quit being part of the problem and get a real job. The inevitable will come because reality is real.
Photo credit: (C)iStockphoto.com/Gene Chutka
Many of you who know me know that I love books. More accurately stated, I’m a book “listener” because most of my reading list is in audio format. I don’t claim some lofty perch for reading the history and great literature I get to enjoy. I simply grew weary of the talk-radio format that seems to contain 55 minutes of commercials every hour.
Listening to great authors with complete thoughts instead of sound bytes is refreshing and stimulating. Often one author leads me to another, which is how I found Ayn Rand and her masterful work “Atlas Shrugged,” a novel which includes a picture of American life as a result of feelings-based pricing of services and commodities.
I don’t personally buy in to all of Rand’s philosophy but in the capitalism arena, she nails it down pretty tightly. Her fundamental statement of ethics is that each of us should seek our own self-interests. A phrase like that will stir up several predictable responses. If you are greedy of character, you’ll interpret that phrase as justification for your love of money. Sooner or later you’ll find out that greed does not serve your best interest, but I’m not writing to you, so you’re on your own.
If you embrace the principle that capitalism simply describes commerce between willing buyers and willing sellers, then you probably understand what Rand is talking about and I expect you’ll appreciate this month’s column. But if you are among the thousands of contractors who think it’s your duty to provide the lowest price for your clientele, and especially if you think that charging high prices is immoral, then this column is for you. Don’t answer the phone until you’ve had time to read it and ponder what it means to your future.
Self-Interest Serves Others
If you’ve ever flown commercially, you’ve seen the preflight training presentation where the attendant explains emergency procedures. If you’re traveling with a child and the oxygen masks drop down, what is the first thing you’re to do? An altruistic response would be to help the child with his or her mask first, then worry about yourself. The selfish response would be to don your own mask before helping the child. Does the flight attendant instruct you to be altruistic or selfish?Let’s look at another example. I’ve recently been certified as an emergency medical technician (EMT-B). When we see the lights and hear the sirens, we know that help is on the way, right? So what do you think the instructors hammer into our skulls from the very first day of training? Do they applaud us for putting our lives on the line for the sake of others?
Far from it. The first priority of an EMT, firefighter or any other responder is to ensure the personal safety of themselves and their associates. The common denominator of these two examples is that if rescuers become impaired or debilitated, they will not only lose their ability to help others, they also become part of the problem.
Does this make sense so far? Now for a touch of philosophy. For most of us, from the time we were little folks we’ve been trained and taught not to stick out. Most of us want to be liked by the “group.” Even the ones who do stick out tend to flock together in their own groups, so even the rebels aren’t thinking outside of any boxes, they’re just getting into another box. Even if it’s subconscious, that desire to fit in, to be liked, colors our world view and, subsequently, our decisions.
In the contracting world, especially in the service world, one of the quickest forms of feedback we get from our customers is acceptance or rejection of our prices. If acceptance and fitting in is important to our psyche, then it’s difficult to face that rejection. As a result, we exit the world of reality-based pricing and enter the world of feelings-based pricing.
Another form of feedback we get is from our professional peers. The hens at the will-call counter are quick to ostracize contractors who charge “highway-robbery” prices as if they know exactly who charges what. The consensus of the brood is that anyone who charges significantly more than they do is obviously a shyster.
If you’ve been conditioned to fit in with the flock, then the fact that you’re not making a profit must mean you’re not doing something else properly, since you know that you’re charging the right price, according to the clucking hens. Once again, feelings-based pricing takes precedence over reality.
Feeling vs. Reality
Which is a more powerful force in the pricing of contracting services, feelings or reality? Here’s how I would answer this question: Am I making the kind of income I want? Do I get to take time off? Am I training future plumbers/technicians for our profession? Can I stand behind my workmanship if something goes wrong? Do I have a waiting list of qualified job applicants? Do my employees make a decent living? Do I contribute to my community? Does my company have a culture of safety? Do I take discounts for paying invoices early? Do I have a positive net worth?Each of these questions (and there are more where these came from) is based upon important aspects of running a real business. Each of these questions represents expenses that a legitimate business should be expected to shoulder. If you consider these items when pricing your services, your price will be significantly higher than the “going rate” of the flock of hens at the supply house.
That’s reality. If you want to keep your feelings intact (temporarily at least) by keeping your price artificially low, then you are forced to pick some of those line items to delete from your portfolio.
Do you want to know why our professions have a hard time attracting talent? See above. Do you want to know why our professions suffer image problems? See above. Do you want to know why so many contractors have a lower net worth than a homeless guy? See above.
In the real world, a properly priced contractor would show his supply house buddies how to break out of the hen house. He would show them how reality-priced contractors end up paying the final supply bills for the feelings-based contractors. He would show them how he’s training the professionals of the future rather than whining about the lousy work ethics of today.
Beyond that, the reality-based contractor would show the feelings-based contractor how his selfless low prices are actually very selfish and will end up harming himself, his customers and his profession. By choosing feelings over reality, the spineless contractor may not have to face rejection today, but in the future, his customers will end up having to find another contractor.
When dealing with potential price-book clients, the most common feelings-based statement I hear is, “If I raise my rates, I won’t get any work.” I’ll usually answer with something along the lines of, “I hear it all the time but the success stories I have are the contractors who understood that cost is cost and they have to make a profit based upon cost.”
Perhaps what I should really say is just three words: Get a job. You see, if you’re setting your prices based upon feelings, then you become just like the airline passenger with the mask. You might successfully get the mask on the child but in doing so, you starve for oxygen and it’s not likely that the child can help you. In other words, you are now part of the problem.
If you can’t get work at the right price, then quit being part of the problem and get a real job. The inevitable will come because reality is real.
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