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NatHERS Blog

How to avoid charging by the hour

by Michael Young on Thursday, February 15, 2018 with 0 comments

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One of the biggest pricing failures I come across every day is where assessors charge by the hour or the day. This is a recipe for disaster, as the only way the client can compare you to someone else, which they will do, is to look at who charges the cheaper rate. Given that the rate is the point of focus for the client, you as the assessor don’t get to demonstrate what you do, the value you provide or how your offering is superior to that provided by another assessor.

Why is charging by the hour a bad thing

This situation drives the temptation to offer a discount or decrease your hourly rate, which other assessors also do, resulting in a race to the bottom on price. As the rates go down, short cuts often get taken and the net result is poor work, assessors going broke and in the end, everyone loses. The other issue with pricing by the hour is that it often doesn’t take into account all the costs of performing the service and doesn’t necessary reflect the time and effort you have put in to develop the skills and knowledge to do the job.

So how should I price what I do?

A far better way to price is to identify the service you provide and develop a fee for each specific service. What are the different products and services you offer, and what is the fee for each service. Think of it like creating a menu for a restaurant. This approach to pricing is not new and it has been used by many different businesses for many years. When you go into a restaurant, you don’t see an hourly rate for the preparation of a meal. When go get your hair cut, you don’t get charged an hourly rate by the barber or hairdresser.

How not to work out your fees

“What should I charge” is the 64 million dollar question I get asked by assessors all the time, however there are some right ways and some not so right ways to work it out. Most people in business, not just thermal performance assessors, tend to look around at what others are charging and then come up with a figure that is about the average. But often this figure doesn’t take into account all the costs and assessors can find themselves going backwards as their expenses may be more than they charge, or even worse, the don’t pay themselves and are effectively working for free.  Another mistake I see is that some businesses work out their costs and then they add a margin to work out their sell price. This is the approach that has been commonly used in retail and other sectors where you are buying goods from a wholesaler and then selling them to end consumers. Whilst a cost plus margin might seem to make sense, it may put your price beyond what is acceptable to the market or to particular customers. Also, if you can’t demonstrate the value in what you do, even delivering your service for free may be a hard sell.

What do people pay more money for?

Buyers pay more money for a product or service if it takes a problem away. People also pay more for immediate delivery or convenience. If can order something online and it’s a few dollars more than the same thing in the store, often you will pay the extra, and for the cost of shipping, as its quicker and easier than going to the shopping centre. People rationalise in this way all the time and convince themselves that they are getting a good deal.  But buying is also an emotional process and buyers are not just purely rational in their buying decisions. People also pay more for status or to make them feel wanted and accepted. Think about the price of a Porsche sports car. Why are they priced substantially more than a Toyota or a Honda? The cost to manufacture the cars are all about the same. Sure there might be a little more R&D or slightly better materials used, but that doesn’t explain why the entry level Porsche is $130K and the top of the line Toyota is less than half the price. People buy a Porsche for the status and to send a particular message.  Some people buy a Porsche in response to some personal insecurity. Others just want to show that they have a bit of money. What do you do that provides an immediate or more convenient solution? Could you add this as a pricing option?

How do I work out my price?

The process to work out your pricing is pretty straight forward, but it isn’t quick or simple. There are four key steps:

Step1: Make a list

Start by jotting down on a piece of paper each different thing you do. Do you do BASIX assessments, NatHERS Assessments, Section J assessments, home sustainability assessments, and so on? List each one down .

Step 2: Develop your offering

The next step is to identify what you do as part of each service. For NatHERS assessments, for example, you might: engage with a client initially and provide them with a checklist of what you need, review the material they send you and follow up any issues, do the initial rating and then identify what changes might be needed to get the building to pass. If needed may need to liaise with the designer or architect and have to ask them to update the drawings.  Then after discussing the outcome and the changes required, you write the report and provide the certificate. 

There are probably also a number of things that you currently don’t do, but probably should do to better be able to solve your target markets problem (see last weeks post).

Step 3: Develop your packages

Following from the step above, you should end up with a bundle of services that you perform that provides a complete and remarkable service. This is something that will make your customers say wow and make them very happy to refer other people to you.

A good exercise to do here is to think about your service like an airline does. Let me explain. Qantas, Virgin and any other number of airlines fly from Melbourne to Los Angeles every day. Yet you can buy a ticket in economy, premium economy, business or first class, each with a very different level of services and comfort and also with a very different price. Everyone takes off and lands at the same time yet some people pay $14,000 for a first class ticket and others pay $1,800 for an economy ticket.

If your current offering is an economy class solution, think about what else you would need to do to make it a business class offering. What else would you need to do to make it a first class offering?

Step 4: Determine the price

This is the hard part, however, there are a few tricks to keep in mind. Firstly, don’t just work out one price, work out three, just like McDonalds and Starbucks do.

Many organisations offer three or more similar products each with different features, inclusions and prices. At McDonalds, they offer small, medium and large meals each at a different price point. This is a deliberate strategy, as it makes us as buyers look at which is the best value based on what we get for our money when we compare the three options offered. McDonalds does sell many small meals, they are not there really to be sold. Instead the medium meals are what people go for, as they are only 30 cents more than the small one. Often people won’t go for large, because they may not be that hungry, or it may be considered to be a bit too expensive.

I recently provided advice to an organisation on how to price their membership packages. They came up with three at $5K, $19K and $49K price points. They were hoping that most organisations would go for the higher $49K package. I suggested they introduce a $247K package. They almost fell off their chair. I suggested that Someone might buy it, but compared to $247K, $49K looks pretty good.

The price you should go with is the price that is the most a customer will pay. This is directly related to the value the customer perceives you provide. Your aim should be to provide 10x what you charge in value. On other words, your product or service should deliver a ten times return on investment for the client. If you deliver this, then the price you charge will be somewhat irrelevant, as the client will be happy to pay given how much value you deliver.

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