To Price, Forget About Your Costs

To charge what they should consultants are better off looking at perceived risk.

This week I reread the excellent "Pricing Creativity", by Blair Enns. Although it's mostly oriented to creative service firms and agencies, every consultant would benefit from it. It's been my go-to gift for many friends and acquaintances that struggle with pricing.

The final chapter of the book is called "The Last Obstacle is You". In it, Enns examines some common ideas and beliefs that prevent experts from charging what they should (and earning what we might).

One of these is what he calls the "difficulty letting go of the labor theory of value".

It's easy to understand the subjective theory of value: it states that all value is personal and subjective. But when we're under pressure, stressed, or not in our best conditions, we fall back to the labor theory - that the value of something is determined by the cost to make it.

We do that because we biologically hate uncertainty and ambiguity. We look for objective rules or laws to guide our actions and explain the world. As Enns puts it, "Many people consider value, beauty, fairness, color, sound, and time to be absolutes - real things external from us and universally true - and yet none of them are. They are all our own mental constructs."

The idea that your services should cost X or that the price of your time can't be more than Y is nonsense. But that doesn't mean your clients will accept any number you shoot them.

One important idea that is deeply connected with price, especially for consultants, is that of risk. I wrote about it before: All profit comes from risk. The bigger the risk you reduce (or manage) to your clients, the more they will pay for your work.

Here's a great passage from the book where Enns touches on this topic:

"To succeed as a pricer you need to watch for your own tendency to default to the labor theory of value. My wife, the hardest working person I know, will occasionally remark about someone, "She is very successful. She must work very hard." Like a programmed droid, I reply, "No, she must take a lot of risk." After the initial stage of success (the validation or proof-of-concept stage, which does require a lot of hard work), your success will depend more on your creativity (ability to see opportunity) and risk (willingness to leap for it) - which together equal what I call innovation - than it will on hard work (labor). To price based on effort is to shackle yourself to a life of hard labor and devalue the expertise you have amassed."

You can find his book here (not an affiliate link).

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