It’s great to say that you charge $3000/wk or even $10,000/wk but how on earth do you actually justify that to a client? What makes your customer think that paying for your services is worthwhile?
First we need to understand what price anchoring is. We’ll start by seeing what Wikipedia has to say.
Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.
A great example of that is purchasing a car. You walk in to purchase a car and see that the one you want is $10k. You manage to negotiate the price down to $8k and go home to think just a bit more about it.
Saving $2k is a great thing. That car is a real deal now.
So you go in to another dealership just because you should and you see the same car priced at $8k already. Hrm that original $8k you were able to negotiate doesn’t seem like that a great deal anymore does it?
Your price anchor has been set lower so all your thinking about the pricing of the car is now reset on that expectation.
Anchoring a bit closer to home
Okay now how about something a bit closer to home a by looking at WP Migrate DB Pro. This plugin migrates databases from one domain/server to another. It even deals with media files now.
On their pricing page they offer a handy formula based on a $50/hour rate which shows you that you pay for it with 4 hours of work. They’ve anchored the price against the time you’ll save.
My effective hourly rate is $150 so if I save 1 hour I’ve almost paid for the developer license. I know I save more than an hour a week with this plugin.
Anchoring your projects
Now how do you anchor the cost of your services?
Most businesses should know how much a lead or customer is worth to them (if they don’t then help them figure it out). Lets say that a membership site knows that they get 4 out of 10 leads and that each lead is worth $100 over a year. They already get 1000 leads a month to the site so that means that they get 400 conversions.
So that means that $40,000 a month is the value of the leads brought in.
If you’re a content marketer you could propose a content plan to triple the leads a month for $40,000 a month. That would still leave the client earning $80k extra from the leads that you added that month.
So when you present the costs to the clients you talk about what a lead is worth then how top plan to triple the leads in a month (and include how you’re uniquely positioned to do that) then your price to do it.
You set the price anchor for your services based on the expected extra revenue that the client will earn. That $40k you make per month is pretty small compared to the $120k the client will make based on the extra leads.
In 2013 I had a client that was using a $50k/year external tool that worked fine when they had 1000 users but was being totally crushed with 10k users. I built a new version of the tool totally on their server inside WordPress for $15k and I anchored the $20k based off the $50k tool and $35k/year savings they were going to see.
It’s great to know how to anchor your pricing but you better make sure you can deliver on the value you said you’d generate. You should always be conservative with your numbers.
You might think that 4x the leads is possible but you know that 3x is easy. Tell the client 3x and then when you see 4x the client is even happier since you set a realistic goal and surpassed it. They are making even more money than they expected.
This won’t work for you
If you’re building WordPress themes for local barber shops it’s possible that price anchoring will not be an effective way to price your services. Does that small business owner even know the lifetime value of a customer?
To really leverage price anchoring you need to work yourself out of the commodity services market. Commodities compete on pricing and often the lowest price is the one that wins out. It’s a race to the bottom that you don’t want to be in.
So you’re not just selling ‘building a WordPress theme’ you’re selling achieving measurable business goals for the client.
By the way my friend Chris Lema wrote and excellent book on pricing called The Price is Right. He talks a bunch about anchoring in it and you should read it. I even wrote a review of it.
4 responses to “Project Price Anchoring”
You’re really causing me to re-think how I run my business, I am “racing to the bottom” with hourly pricing – your post yesterday about effective hourly rate going down due to increase in coding speed (something I’ve really noticed over the past year) really hit home as well. I’ve got to put my thinking cap on and figure out how to shift to a business model that’s more sustainable, I’ve been mainly building sites for the barber shop in your example. Thanks for knocking some sense into me!
I was there for quite a while as well and only changed when someone had a good talk with me about how I was running my business.
If you have questions feel free to bug me on Twitter or hit up my AMA form.
Thanks Curtis, much appreciated!
Great post, Curtis. The “this won’t work for you” section hits closest to home – In order to utilize value-based pricing I need to aim for particular types of projects/clients. I’m in the process of moving away from that commodity-style website (a.k.a. Here’s your brochure site for $X) and trying to locate those clients who I can deliver a longer term value to. The transition isn’t clear cut, but I’m slowly getting there.
Keep the good content coming. 🙂