So I’m hanging out one day with some friends, and the topic comes up about that one time I sent in a bid of $1500 for a small job with the government, where the very next bid above mine was for $56,000 (not a typo).

While trying to explain my reason for charging what I did, one of my friends became pretty animated and was adamant that the reason I offered was just plain stupid, and showed a lack of understanding of how business works.

OUCH!

So what was this oh-so-stupid philosophy he was talking about?

I said to him that the job had only required some editing and formatting, and at the time it didn’t seem to me that it would require more than 3-4 hours of concentrated effort. As well, the final product was to be placed in a repository of sorts, where the public could go use the information for research.

To my mind, seeing that there was no money to be made from the project by the government, I simply charged for the task. Nothing more.

To him, it was inconceivable that I could’ve charged many multiples of what I did, to an entity that had the money to pay me, and didn’t.

This led to an exchange between him and me that went on and on for some time, eventually leading to the following question.

“So Jason, if you did work for a big business which made a lot of money from what you did, you’d charge that business more for the same work than for a small business which made less money from the same time and effort?”

“Yes I would.” I said.

“Well that’s just dishonest.” he said. “You’re just charging more because one entity has more money than the other.”

“Actually, not at all!” I said. And I went ahead to clarify a few things right then and there, and will do the same now.

There’s a difference between…

• Charging a client one price and another a different price for the same service, when it’s IMPOSSIBLE to prove why and how the same service is of differing value to them both
  VERSUS
• Charging different pricing for similar services rendered for different clients, where you can OBJECTIVELY prove the difference made to each of their bottom lines by what you do

Let’s look at two scenarios that will illustrate what’s going on in the two bullets above. We’ll call them Scenario 1 and Scenario 2.

Scenario 1

Two clients ask you to mow their 100 sq ft lawns. On one hand, there’s Client A, whom you believe to be a lot better off. While on the other is Client B, whom you deem to be worth a LOT less.

Because of your assumptions, you charge Client A $400, while you charge Client B, $100.

So what’s the problem here?

Well, for one thing, it would be impossible for you to prove that the satisfaction Client A receives from seeing his lawn cut is any greater than the satisfaction Client B gets from same.

Added to that, there’s also a fairly reasonable counter argument the says the client who has better means will experience lesser satisfaction. And it’s based on the idea that people with very meagre means derive more enjoyment and satisfaction from small things, than those who can afford every and anything they want.

Ultimately, the real problem with attempting to determine your pricing in this manner is that it kind of requires you to “play God”. And by that I mean you’d constantly be engaged in an unending dance that has you “measuring” the net worth of all of the people or entities you provide services to in order to determine what you should charge them.

And while this method may feel like an attempt in determining value, it is an attempt that’s flawed because its premise isn’t rooted in the value of the work you do.

Rather, it has its philosophical base tied to the idea that there should be some link between the fair assessment of what a product or service is worth, and the financial standing of the person who’s going to pay for it.

For your business, and anyone who does business this way, the results of this kind of thinking are as follows . . .

1. Clients being charged either too much or too little because of your inability to truly assess what someone is actually worth
2. A reputation for having inconsistent pricing
3. And a general feeling on the part of your customers that your goal is to pick their pockets.

On the other hand, for those of us who DO perform work for which there’s a direct link between what we do and the financial fortunes of the people we do it for, some measure of variable pricing MUST be a feature of how we charge.

On the other hand, for those of us who do perform work for which there’s a direct link between what we do and the financial fortunes of the people we do it for, some measure of variable pricing MUST be a feature of how we charge.

Why you ask?

It all comes down to one simple word that we’ve used at least three times in this very article…VALUE.

If I give you more value, you give me more money. And lest you become too put-off by this, let me present to you Scenario 2, which effectively ended the debate between my very high-strung friend and I on that day.

Scenario 2

Let’s say a guy walks up to you one day and tells you the winning numbers of the lottery. And let’s say you take his suggestion and find yourself a couple days later with a windfall of $50,000.

How much of your windfall would you be willing to share with him as a token of appreciation the next time you see him?

Truthfully, the amount doesn’t matter, though the assumption here is you would give him something. To be sure, this example falls flat for those who would give him nothing. (If the latter describes you, the chasm between us cannot be crossed and you probably should abort reading now).

To continue with the example, let’s say he walks up to you the very next week and gives you a new set of winning numbers, but this time your windfall is $1,000,000. How much would you give him then?

Again, the actual amount is still immaterial, as long as you’d reward him with more than you would in the first scenario.

And if you WOULD pay him more, it begs the following three questions…

Why did you know instinctively to give him more money the second time around than the first?

What inherent sense of fairness told you that it wouldn’t be just or right to give him the same amount of money on the second occasion, even though it took him no more time nor effort to share the second secret than it did the first?

And lastly, why would the pay structure for a professional, who’s specifically hired to make you money, not resemble that of the pay structure for the strange man with those valuable secrets to share?

Of course, these are all purely rhetorical at this juncture, as you’ve clearly either gotten the point or fervently still disagree.

If you happen to agree with me, great. However, if you find yourself in the latter category, respond below by telling me why you think this method is flawed while also suggesting something better that can work in all situations.