Pricing & Work: Are You a Commodity?
The coffee bean — a commonly traded commodity, like many freelancers.
Anonymous Corp was a small company that used several freelancers for writing and graphic design. When they decided to cut costs, each freelancer was asked if they could offer better pricing. Joe immediately offered to cut his cost in half. Karen pointed out that they were getting significant value for they money they paid her. She offered to help the client transition to a less skilled freelancer if they no longer required her level of expertise.
What do you think happened?
Basic economic theory says that when price goes down, demand goes up. I see freelancers applying this logic all the time in order to get more work. What most small business owners don’t understand is that this is based on the idea of commodities—products or services that are pretty much interchangeable.
For example, gravel of a certain size is usually going to be a commodity. If you can buy a truckload of gravel for $50 from Company A and $60 from Company B, Company A will get more orders.
So if you are a graphic designer who normally charges $75 per hour, you can get more customers by dropping your rate to $50 per hour right? Not necessarily. If your service is a commodity that means it can be done by someone in India making $10 per day.
The trap that many freelancers fall into, is sending the signal that they are a commodity. This can start a downward pricing spiral as the client keeps looking for a better deal or for someone cheaper to replace you with.
It is important to understand that most clients have very little background to value your service. Yes, they can tell if they like a design. Yes, they can tell if a piece is written with bad grammar, but once you get past a certain level of competency, clients have no real way to value your service. Most clients aren’t trained in art or graphic design. Most aren’t trained as literary critics.
It turns out that one of the things clients rely on to determine your value is your price. If most people are honest with themselves, they will admit to practicing this type of behavior. Let’s say you see two unfamiliar types of coffee beans for sale. One type sells for $10 per packet and the other $5 per packet. If you have minimal coffee experience, you will probably conclude that the more expensive coffee is more valuable and tastes better. If you know a lot about coffee, you may do something similar with choosing toothbrushes, soap or car tires.
If you are willing to immediately drop your price, your client will assume you really aren’t worth what you originally quoted. If you need to change your pricing, make sure you make an even exchange in terms of the price versus the value provided. If the client wants to pay less, oblige by offering less.
For example, let’s say you are going to do the design for an eight page brochure and your quote is $2,000. If the client says they need a lower price, offer to do a four page brochure for $1,250. This allows you to work within the client’s budget, but sends a clear signal that your service is valuable.
So what happened at Anonymous Corp? They got rid of Joe entirely. They kept Karen on at her regular rate.
Your price and your price flexibility send a very clear message about the value of your service. Offering a huge discount without any type of concession from the client sends a clear message that you are desperate for work. The client can then assume that no one else wants to use your service either. In the case of Joe, Anonymous Corp suddenly decided that he wasn’t worth what they were spending.