While this thread came from a discussion of pricing for Energy Star Version 3, it applies to any service you might offer. Pricing is one of the most difficult tasks you face as a business. I’ve written a related post on Firing a Client and we’ve also discussed how we set pricing for software services. Let’s start by assuming that a “good” price is one in which we have an equal exchange of money for value. What other questions should you try to answer?
- What will the market bear?
- Can you deliver the service for less without sacrificing quality?
- Are you building a business or working for wages?
- Could you scale up at the price you’ve set?
All of these questions (and there are a LOT more!) are considerations for pricing your services. I’d like to spend a few words discussing the last bullet, price versus scale. In an immature, developing service industry, there are typically a multitude of small companies, many of them sole proprietors. These companies are able to offer their services for a very low price as they have insignificant overhead; tend to have simple systems and far too often don’t understand the implications of pricing. A key factor in small business failure is attempting to fight a price war. I just wrote about this in my last post about racing to the bottom.
As an industry scales up, the assumption is that prices will drop. This is often true in product sectors. I’d like to propose a contrasting position; as an industry scales up, in order to meet market demand, prices must increase to handle increased complexity and overhead requirements. BIG CAVEAT: This presumes consistent quality of service. That is, it presumes and apples to apples comparison. If quality is eroded, then my theory doesn’t hold. I contend that the impact on the industry (any industry, but especially service industries) if quality is diminished will be negative. In my opinion, we are a trust agent industry. If and when we lose that, we all lose for a long time. Finally, as an industry achieves maturity, prices can come down again as economies of scale and other synergies come into play. There’s nothing wrong with that as long as the integrity of the industry is protected.
I think it’s critical for the long term health of our industry that we all work to support and demand a high level of accountability, enforcement of standards and ethical behavior. For better or worse at the moment, we must self-police. This is not a call for collusion. It is a call for demanding quality of ourselves and our peers. In fact, we can and should explore increasing oversight and raising standards. The Rating Registry is an example of something that will benefit us all. Yes, it’s additional effort, but the payback for the industry as a whole is worth it. (We’ve got a very nice system for handling your registry woes built into our Enterprise Resource Planning (ERP) System iRate® if you’re interested. See this blog post on our solution!)
We work in a price sensitive environment to be sure. Builders, homeowners and utilities are cost-conscious shoppers. However, we do ourselves and our businesses no favors by racing to the bottom. In the words of Mark Twain (possibly?), “History doesn’t repeat itself, but it does rhyme.” We’ve seen this before; markets nearly drive themselves to destruction with price wars. Quality suffers, companies go out of business, and industry integrity is damaged. It is my fervent hope that we are building an industry that will supply meaningful work that is fairly compensated–that our industry will be stable enough to grow, mature and deliver ever better service and information to our customers.
Many of us have worked long and hard to bring this industry to where it is today. And where is that? I think we’ve built a foundation of credibility for long-term, sustainable growth. It’s up to us not to screw it up.