The IT Marketing Crash Course

Written by Raj Khera
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Chapter 5: Pricing Strategy

"Price is what you pay. Value is what you get." — Warren Buffett

Of all the four P's in marketing, pricing may be the most oversimplified and, therefore, most misunderstood. (The other P's of marketing are product, promotion, and place.) Pricing a product or service isn't just about covering your costs while staying competitive within your market — while hopefully turning a profit. The price you set can have a tremendous impact on whether customers decide to buy your products and services at all.

Your pricing strategy should aim for one major goal: to make it easy for people to digest exactly what it is they are buying from you. Early on, I learned that if you price IT services at an hourly rate, it's hard for clients to know what they are getting. These clients may know what they want, but they may not understand how many hours it will take, what their end product will necessarily be, or what the total cost of these services are.

Pricing By Value, Not By Time

A computer expert is asked to visit a company to diagnose a problem and fix a computer. He looks at the computer for a few minutes, and quickly realizes what the problem is. So, he pushes a button on the machine, and the problem is fixed.

The computer expert gives the client an invoice for $500. But, the client is perplexed and wants to know why the invoice is so high, considering that the computer expert only worked for a very short amount of time. He gives the invoice back to the computer expert to fix it.

So, the computer expert outlines the work on the invoice in the following way:

Pushing the button = $5.00
Knowing which button to push = $495.00

Itemizing your bill this way might cause you to lose some clients. It does not explain the value of what they are getting, only the price. Clients who buy only on price are not your best customers. They will continue to shop around for something cheaper.

Does this scenario sound familiar? Are your clients perplexed when the bill comes because, while they understand the value of the services you provide, they can't grasp the way you've assigned a price to this value?

This problem inevitably results from the mindset that quality work requires a prerequisite amount of time to complete. Your pricing strategy should be to charge for the value of what you are delivering to someone, not necessarily how much time it's going to take.

Packaging Your Service as a Product

One way IT service companies can clarify the value they offer clients is to package their services as a product and then create a menu of options to make it easier for a prospect to understand what they are getting.

This approach benefits clients and companies alike. It gives your business the opportunity to create a proposal, outlining the scope of the work you will perform and the estimated cost, and then to post it on your website for prospects to see.

Let's say you provide Hosted Exchange services. Your menu would list all the benefits — not just features — that clients will get from your services, along with pricing. Aim to structure the menu so that people can look at your services as a bundled package, and even select the services they need a la carte. Your pricing sheet would include each feature and benefit that is included with each bundle. If it makes sense for your business, include the a la carte pricing to show the savings if the customer buys the bundled package. Packages enable people to get a clearer picture of what they are buying from you.

Consider the way wireless communication companies price their services. They offer their services packaged in all sorts of ways. Customers can purchase cell phone service based on how much data they use, or they can buy an unlimited data plan. Cable companies offer tiers of service that include Internet, television and phone service.

Similarly, IT companies can price services on their website in different packages — from a bundled pre-priced package to a la carte services — so people can clearly see their choices and select what works best for them.

The Assessment Product

A smart way to package your services is to create an assessment product. To entice prospects to try your services, you can create an audit product for a specified price. When a client purchases your audit product, you will assess their company and provide a complete evaluation, giving them an unbiased view on whatever it is that you do (disaster recovery audit, SEO audit, etc.). Then, you can offer them a checklist of what they should do to improve in your area of expertise.

You may want to offer this assessment product as a freebie if it doesn't take much time and will get you more work. If you can quickly go in and show the client where the bottlenecks are, your assessment product may lead to a substantial amount of additional, paid work.

Another way to entice prospects with a bundled package is to offer an introductory product that can lead to future, more in-depth work. For example, let's say that a web design firm wants to offer a "Quick-Start Package," which consists of a basic, five-page website including 10 stock images, an About Us page, and the structure to enable the client to build out a solid, starter website.

Once a client is willing to purchase this starter package from you, she may be more open to hiring you for more high-level work down the road, such as developing web applications or creating software products. But to win these future purchases, which require a longer time commitment and can't easily be packaged, you'll need to showcase your expertise. So, stick to the more basic services you can offer clients as a loss leader incentive and then aim to win bigger projects from them as you build trust.

It's up to you whether or not you use this assessment product as a loss leader, in other words, as something you give away for free to get more business later. You may want to charge a small fee if the assessment will take more of your time than you're willing to give away for free. Whatever you decide, be sure to test it to make sure it is ultimately generating more business. After all, all effective pricing strategies should lead to one place — increased revenue for your company.

Using a Loss Leader to Get More Consulting Business

Retail companies use a "loss leader" all of the time to get more business. You've probably seen sales for $1 or even $0.01 products that are clearly priced below their cost. Retailers use this strategy to get you in the store in the hopes that you will buy much more than the loss leader product. Usually those loss leaders are scattered throughout the store so that you see many other products that you might want to buy along the way. It usually works. Websites place loss leaders near related high-margin products to encourage more sales (and typically charge for shipping to discourage people who only want the loss leader at the heavily discounted price).

You can also use a loss leader for a consulting business, but in a different way. Since your "product" is consulting services, offering yourself for a $1 rate would sound ridiculous to a client and would devalue what you bring to the table. Never discount yourself like that! Instead, you can offer to do a small project for free. This would be something that takes you an hour or two, or a little more if you are comfortable with that.

Offering an initial consultation like this does two things:

  1. Gives the client a taste of the value you will bring to their organization.
  2. Gives you an opportunity to see what working with this client is really like.

Free High-Value Consulting Session

I had a client who was almost ready to engage, but was slow in pulling the trigger. During our conversations, I asked several questions that uncovered a laundry list of ways I could help. They seemed excited, but they were hesitating to get started. As I probed to find out why, I figured out they were looking at the price, not the value. So, I picked one of their most pressing topics as my loss leader and offered a free one-hour in-depth consulting session about it.

During our conversation, I didn't keep track of time and we did run over an hour. I also did not sell my services during this free consultation because I wanted them to experience what it would be like to actually work with me. I only focused on their problem and asked probing questions that got deeper into the real issues (see Chapter 7 for a list of MSP sales questions). I was able to offer several on-point solutions that provided a direct benefit very quickly. They were able to see that I had their best interest at heart.

When they compared the value they received to the price of my rates, it was clear that they were getting a good deal. They made back more than they invested. After that dialog, they were ready to ask more questions about other issues they were facing. When you provide rock solid consulting services, people see the value.

You can also offer a free half- or one-day training seminar at a customer's site to educate them on a particular topic. If a prospect is looking to implement a workflow solution, a morning seminar on the pain points, the options and the expected results is a great way to show off your expertise.

Responding to Pushback

To ward off attempts to gain more of my consulting insight for free, I asked if they would like to tackle some of their other issues as well under a more formal agreement between our companies. That helped them understand that I wasn't prepared to give more away for free. You can use responses like these if a prospect keeps trying to get your advice for free:

I appreciate your question and it is definitely something I can help with. Shall we go ahead with our formal agreement so that we can get started right away?
This question warrants a deeper discussion and I want to make sure that the time that both of us invest in solving these issues is spent efficiently. There's no 5 or 10 minute solution to this topic so rather than start a dialog that we can't finish, how about we move forward with an engagement letter? This way, I can make sure you're on my calendar and that I can give the topic the full attention it deserves.
I hope the value you gained from our prior consultation illustrated how we can help go deep into solving problems. So rather than start a conversation that only touches the surface, let's proceed with moving forward in a more formal way. Shall I send you our engagement letter?

If you encounter a company that isn't ready to engage you even after your initial consultation and after trying the responses above, watch for signs that they do not have the budget to hire you. The worst situation you can be in is engaging a consulting client that can't pay you.

When Not to Use a Loss Leader

Not all consulting services lend themselves to a loss leader consultation in which you can provide in-depth advice. Often, consulting requires deeper, long-term commitments. In these cases, your initial consultations need to focus on problem discovery so your proposal addresses the client's key questions and not something that you think they want.

For those times when you need to nudge a prospect to close a deal, give them a taste — just a morsel — of what you can do for free. Don't discount your services because then your value will be the discount, not your knowledge.

Checklist: Your Next Steps

  • Consider the services that you offer. Is the value you provide to your clients easy to see? Do you need to adjust your pricing strategy to help potential clients understand what you can do for their business?
  • Could you package your services as a product, such as a bundle of services to be purchased as a single product? Create a pricing sheet outlining the features and benefits of each item included in the bundle.
  • Do you offer a service that businesses would like to outsource? Create a pitch to prospects that offers your services as an enhancement to what they already have in-house. Consider the expertise you could provide that they may be lacking.
  • Could you offer an assessment product as a free or low-cost package to let prospects try out your services? What would you include in the assessment that would provide the prospect with value without consuming too much of your time and resources?
  • Would offering the assessment product as a loss leader pave the way for future, high-end projects with your prospects?
  • Have you considered offering a free, high-value consulting session? What would you offer? How long would it last? How would you respond to push back?