July 25, 2019
Price determines cost, NOT the other way around
Sent by Jonathan Stark on July 27th, 2019
In his book Pricing On Purpose, author Ron Baker blew my mind with this (paraphrased) insight:
Value - not cost - determines price. Your costs will change depending on what price you set.
In other words:
- First, determine the value to the client
- Next, set a price that is less than the value
- Finally, set a cost that is less then the price
Once I started value pricing, I completely understood points 1 and 2. Value determines price, so you must have a rough idea of the value before you can set an acceptable price - i.e., you can’t charge more for something than it’s worth to a buyer.
But… it didn’t dawn on me until I read Baker’s work that once you set a price, then you SET a cost! The key word here is “set” - i.e., your cost is not some constant that must be exceeded by the price for you to make a profit from an engagement. You can simply set your cost to be less than the price!
:mind_blown:
This was a complete game changer for me. This was the insight that allowed me to finally stop thinking about scope in a sales interview.
But let’s back up for a sec and talk about how most folks like us price our services. Typically, it goes like this…
A prospective client sends an email that says something like, “Hey Alice! Our mutual friend Carol said I should get in touch. I need some work done and she says you’re great! When can we talk?
Yours,
—J