As a small business owner, one of the biggest challenges is figuring out pricing. You want to be fair to the customer, competitive with the industry, and yet of course profitable to make it worth your while.
This was a balance I struggled with and in some ways, never truly mastered.
Where pricing was concerned, I would price according to a desired hourly rate I felt my time was worth, divided by the amount of time a given project would take to complete. Most service businesses and freelancers, I think, follow this simple formula. I tended to low-ball the value of my time so I could win more contracts. This, too, is a familiar action to most freelancers and start-up business owners.
Of course, the result was plenty of work; I never had trouble attracting new clients. However, this sacrificed profitability; I was stuck operating on narrow margins. If a client was late to pay her bill or if she was delinquent altogether, that caused cash flow problems.
Even facing this losing formula, I had a difficult time raising my rates; I felt at the time that nobody’s time was worth, say, $100/hour. Worse still, I could not bring myself to invoice clients for small design tasks which took me only a few minutes to complete. I know my clients appreciated the generosity, but goodwill only goes so far when it comes to paying the mortgage.
Fortunately, someone much smarter (and much more successful) than I am hit me between the eyes with a dose of common sense business advice, prescribed in story form.
A mentor-friend of mine–I’ll call him “Robin” (since that’s his name)–shared a parable with me to illustrate the justification for appropriate pricing:
The story of the old mechanic and his hammer
The owner of a finicky automobile was having trouble diagnosing the source of his engine’s ailment. The car just refused to start. He spent hours attempting to repair it himself, replacing parts to no avail.
Finally (probably due to his wife’s insistence), the man asked a respected, old mechanic to provide assistance.
The old mechanic spent a couple minutes studying the car’s engine. He produced a standard ball peen hammer from his toolbox, leaned under the hood and gave the starter a single, precise strike.
To the car owner’s amazement, this time when he turned the key in the ignition, the engine fired right up.
“That’ll be $100.” the old mechanic said.
“One hundred dollars?” The car owner gasped, “All you did was hit it with a hammer!”
“Correct. That’s $5 for my time, and $95 for knowing where to aim.”
That is a short, simple story (as memorable parables usually are!), but I have always appreciated the lesson it provides.
How can you apply the moral of this parable to your professional life? As always, we would love to hear your feedback!