Setting your prices is one of the most difficult aspects of running a freelance business. Unlike determining pricing for a restaurant or clothing store, you can’t use industry standards. It’s also generally pretty challenging to figure out what your peers are charging for similar products and services.
However, knowing the psychology of pricing will help creative freelancers come out ahead. Check out four crucial strategies.
Psychology of Pricing
1. Establish Value First
Using price to differentiate yourself from other freelancers is a dangerous strategy. There will always be someone willing to work for less than you, which means you may get caught up in a price-slashing war or end up selling yourself short with subpar rates.
Rather than focusing on the relative cost of your services, focus on their relative value. Let’s say you offer branding consultations to millennial professionals. Your customers often end up getting hired mere weeks after you help them create a personal branding strategy, meaning that your product has a massive ROI. When advertising yourself, you should highlight this value. Tell potential clients about your results first—then bring up how much they’ll pay. They’ll decide signing up for a consultation is worth it before they know the actual price tag.
2. Don’t Compare Yourself
Along similar lines, avoid drawing comparisons to your competition. Stanford professor of marketing Itamar Simonson, who has conducted research into the effects of price comparisons on consumers, says this approach usually backfires.
Imagine you’re speaking to a content marketer who wants you to design their blog visuals. Here’s a snippet from your hypothetical conversation:
Content marketer: “Ideally, I’d like four infographics and two Slideshares per month. Roughly how much would that cost?”
You: “That would be $2,000. If you look at other designers, they typically charge around $2,500 for the same packages, so my rate is a little below-market.”
Although you might think you’re making yourself seem like the more appealing option, Simonson’s studies show your client might start seeing you as a risk. Why are your rates lower than normal? Is the quality of your work inferior? Are you less reliable?
“Consumers may decide not to buy at all or to minimize what they perceive as a heightened risk instead of following the advice that the marketer had in mind,” Simonson concludes.
The takeaway: Don’t tell customers how your prices measure up. If they’re curious, they can do their own research.
3. Focus On Time Saved
Would you rather have more hours in your day or more money in your bank account? Research suggests most people would prefer the former.
Stanford psychologist Jennifer Aaker and Ph.D candidate Cassie Mogilner ran a study comparing the effect of two marketing campaigns: one that referenced time and one that referenced both time and money. The first marketing campaign attracted twice as many customers as the second.
In a second study, college students were asked whether they’d spent a lot of “time” or “money” on their iPods. Those who answered the former question reported more favorable attitudes toward their iPod than those answered the latter.
“Ultimately, time is a more scarce resource — once it’s gone, it’s gone — and therefore more meaningful to us,” Mogilner explains. “How we spend our time says so much more about who we are than does how we spend our money.”
Apply these insights by describing the time-saving benefits of your offerings rather than the financial ones. Compare these two value propositions to get an idea:
Money-saving value proposition: “If the average blog post generates 20 leads, and approximately one-fifth of those turn into customers, you’ll make roughly $1,000 per blog post.”
Time-saving value proposition: “Figuring out a topic, doing keyword research, making an outline, writing a draft, editing your work, finding images, uploading the finished product to your COS… Before you know it, your whole day has been eaten up by writing a single post. Get those hours back and outsource the entire process to me.”
4. Anchor Your Price
People don’t innately know what something is worth—so they look for context. If you were buying a house, for example, you might walk into the first one on the block and check out the listing price. Then you’d find a comparable home in the neighborhood and see how much that one is selling for. The second price tells you whether the first price is too high, too low, or reasonable.
This concept has been validated by research. When real estate experts are given fake listing prices, they assess the house as being more valuable. If they’re told it’s $119,000, the realtors will judge its value to be approximately $111,000. But when they’re told the listing price is $149,000, they estimate its value to be $127,000.
You can use this effect to your advantage by offering two choices: your true product (that is, what you want your customer to buy), and an upgraded product that’s priced disproportionately high.
To give you an idea, you might tell your client, “I offer a full homepage redesign with three months of on-call support for $10,000. Or you can purchase the redesign without the support for $7,000.”
Seven grand might have seemed pricey to your client if you’d only given them that option. Yet with this approach, they actually feel like they’re saving three thousand dollars.
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