The Psychology of Pricing
I ran across this interesting article in the November 2003 edition of Design:Business newsletter. Though written for design professionals, there were some really good insights into the pricing of all professional services. Just some snippets:
Although there is no question about the overall importance of pricing to the success of a design business, overemphasizing it is a common mistake. Many designers assume that pricing is a very important factor in success, which it is not. Surveys of buyers of professional services consistently show that cost is never even among the top reasons clients give for choosing a supplier. Typically, the surveys show that cost ranks around tenth in importance. It is always lower than quality, service, dependability, flexibility, convenience, etc. Creative Business knows of no similar surveys specific to the buyers of design services, but our experience among better clients with good projects is that cost ranks fifth in order of importance. Ahead of it are “chemistry,” or how much the client likes the individual(s) he or she will be working with; degree of relevant experience; portfolio quality and creativity; and service. Also relevant is that the more creatively challenging the job and more sophisticated the client, the less importance cost takes on. And vice versa. Additionally, our experience is that skill in pricing ranks fourth in importance among the reasons some studios and freelances are more successful than others. Again, not number one. Higher in importance are the desire and motivation to succeed, the everyday working procedures that have been established, and marketing programs and efforts.
Understanding the psychology of design pricing is important because most clients accept that quality, results, and price go hand in hand. The higher the quality, the better the results, the more something is thought to cost. This belief is especially relevant to the design market because clients place orders without seeing what they’ll be getting. They make purchasing decisions on the anticipation of quality and results based on little more than samples of similar projects and their confidence in a firm or individual. Similarly, once the work is produced it will usually be subjectively evaluated before any market feedback is received. Here, too, client satisfaction depends mostly on perceptions of how well they believe their needs have been met. Aggressive (low) pricing in such situations sends the wrong signal. It can lead clients to expect a reduction in quality and results. It can also lead to a destructive pricing cycle: the more price-competitive a design firm is seen to be, the less their work will be valued; and the less their work is valued, the more competitive they will need to be in the future.