Your Prices Reflect Your Paycheck, Not Your Value

Most small business owners do not have a pricing problem. They have a confidence problem, says Codie Sanchez, an investor who buys small businesses.

The usual method is to look sideways. Owners check what competitors charge and match it. The trouble is that competitors are mostly guessing too, with little research behind their numbers. Fear does the rest. After a lifetime of dreading hearing no, owners build that fear into their price lists, and some even treat low prices as proof they are good people.

The alternative Sanchez describes is called value-based pricing, which means charging for the result you create. If your work saves a client money, brings in revenue, or buys back time, you take 10 to 30 percent of that value as your fee. Few owners do it.

The reason is a quirk she calls the wallet share phenomenon. In studies she cites, professional pricing experts were no better than ordinary people at picking the right price. In fact, they priced about 15 percent lower. The explanation was that people set prices within about 10 to 15 percent of what they themselves could afford. Your income quietly sets your price, without you noticing it.

That bias has a costly second layer. Employees on average have a pricing range about 30 percent lower than owners think they do, which drags down profits without owners realizing it. Sanchez says she found the same pattern in her own companies once she looked.

The takeaway she offers is to stop pricing from the market or from what feels comfortable, and to price on what the work is worth to the buyer.