Tuesday, August 18, 2009

Charge What The Pain Is Worth

I recently stayed in the most expensive hotel room I've ever been in in my life. The problem is it was also probably the poorest hotel room I've ever seen. The floors were not comfortable, the bed was extremely uncomfortable, the noise from the corridor was outrageous, and I got one of the worst nights sleep I've had in years.

To add insult to injury I was awaken every four hours and stuck with needles, I had to listen to the snoring sound of my bedmate as they spent the night next to me recently in a hospital room. The room cost me over $500 a night, more than I would ever pay for a high-end establishment hotel, or timeshare. However while I was stuck in his hospital bed I began to realize an important idea that ties in very well with pricing service related business.

When I was wheeled into the emergency room with slurred speech and tremors and my arm there was little discussion about what the cost of the hospital service would be. The CAT scan was immediate and since there was no indication of a stroke an overnight hospital stay was recommended with monitoring. The next morning I was awakened and received a courtesy ambulance ride to an outpatient MRI facility, where I received both an MRI and an MRI brain scan, surprisingly showing that I have a brain!

Considering the frightening symptoms I was showing the last thing on my mind when they came to pick me up and take me across the street to the MRI facility was to say "excuse me, what is this going to cost me?" It was really irrelevant since it could be a matter of life or death.

All things considered it turned out to be a false alarm probably related to a new medicine that I was taking and now have withdrawn from and the symptoms have slowly disappeared. This reiterates a point that I often times discuss with business owners who in asking me as a consultant what they should charge for their services my reply is "I don't know, what do you need to charge?"

Many companies are afraid of charging what they really should because they have a great internal resistance to their organization to the thought of raising their prices. "If I raise my prices, I'll lose my business!" It is just this type of reasoning that runs service related businesses out of business every year. My hospital had calculated its cost of expenses, even over inflating it realizing that many of the patients would be unable to pay the full amount for services provided, and it's serious discounts are given to insurance companies. The very fact that I was presented with a $13,000 bill for a 24 hour stay in the hospital is mind-boggling, yet my insurance company settled for less than $3000 still a high amount for less than 24 hours at the hospital and for a five-minute ambulance ride and 30 minutes in a machine that clunked, thumped, and whirled.

What this demonstrates is if there is enough pain perceived by the customer then the expense to rectify the problem is irrelevant. The pain does not have to be physical but perceived as either inconvenience, damaging, or just plain annoying. When service companies have to price their work based on what the market demands they will lose profitability. If you are in a service business price your work based on what you need to recoup to meet your expenses, projected gross profit, and projected net profit. Calculating these numbers may be surprising to you yet why do work just for practice, charge like a hospital! Charge what you must to remain in business. Even if you lost 10% of your customers the offset in raising your rates would more than pay for those customers in the long run would make you more profitable.

I hope that you don't have to spend a night in one of the most expensive hotels around if it's a hospital. Price your services and goods correctly in the high-priced room that you stay in will be a luxury resort and certainly you won't be sharing a room with someone else unless you want to!

Jeremy Lowe

Callahan Roach Business Management


1 comment:

  1. Thanks Jeremy this is the shot in the arm I needed about pricing. When jobs get scarce the first thing you want to do is lower your prices to get those few jobs. When you think about it however, the wholesaler and all your other vendor haven't lowered thier prices. If anything prices are going up. So to lower my prices woukd make no sense.