From 2003-2006 I owned and operated a tutoring service (sole proprietorship). At the time I was very young, and this was my first attempt at owning and operating my own business. I grew up learning about business from working in and being involved with my father's business when he owned a small chain of auto parts retail stores.

At the time, the average charge per hour for a tutor to come to your home and tutor you or your child per hour 1-1 was about $35-$40. Being that I was young, underconfident, just beginning and wanting to "beat the competition" I starting by charging $25 per hour. I was proud to say that I was one of the cheapest around AND I come to your house! I was really impressed with myself and how I was operating my business. I averaged about 20 students per week. For an early twenty something with no boss, I thought I was doing quite well for myself.

Then comes the proverbial "I can't afford $25 per hour, but I really don't want to lose you as a tutor" conversation. Again, because I was young, underconfident and striving to please everyone, I would agree to only charge these hardship cases $20 per hour instead of $25. Sure, I knew that I really would have liked to charge $25, but out of fear of losing a customer I figured that $20 was better than nothing and a vacant slot in my schedule.

To make a long story short: Over time I began to see the bigger picture. I priced myself too low and I reduced my prices because I didn't yet value myself and my abilities as a tutor. I am a great tutor who gets great results and that's why my schedule was packed to the gills. I had a waiting list because so many people referred their friends. I should have been charging AT LEAST the industry standard and likely even more because of my above average abilities as a tutor.

But just like many many small businesses I was taken in by the fear of losing customers. It is amazing how widespread this fear is! I would have rather devalued my offering then confidently wait for the next full paying customer to come around and fill that vacant slot.

So I learned to not be paralyzed by the fear. Don't let the fear run your business. Be confident in your offering. Be passionate about what you do. Mix the confidence and the passion with your proven results and your business WILL take off. You don't have to lower your prices or sacrifice your spirit to do it!

Another thing I learned is that "financial hardship" is a very complicated beast. Standing face to face with a parent telling me a sob story in their own living room, I couldn't do anything but melt on the spot. But every time I walked away from their house to get in my car I'd be grumbling to myself about how "they obviously don't value their child's education. They care more about sports and entertainment over education. What bad parents..." and so on. Granted I didn't know the details of their financial situations, but what I was always most mad about was that a savings of $5 PER WEEK, $20 PER MONTH, was not going to bankrupt anyone! Sure in the long run this comes out to much more when it all adds up, BUT for that extra money they would have been receiving great benefit and worth. I soon realized that by telling them that I would reduce my charge by $5 I was letting them walk on me and I was enabling them to put other things ahead of their child's education. Even if we are talking about a middle class family that is nowhere near "rich," freeing up only $5 per week is like not buying coffee from Starbucks for a couple days or not making the impulse buy at the checkout or buying generic brand apple juice instead of brand name or renting movies instead of going to the theatre. I wasn't helping them I was enabling them.

So I learned to be confident in myself and my offering and not allow my customers to pay me less than I am worth. Stick to your guns and the GOOD customers will be happy to pay you what you are worth because they value your offering and wouldn't think of paying you less. I had some clients who consistently paid me more than my hourly rate, unasked, because they truly valued the benefits that their child was receiving. Good customers are out there, but you have to have the patience, and the availability, to receive them. If you have filled your vacant slots with the bad customers "in the meantime" you will not be available when the good ones come along!

PS So that you all are not confused: I do not own The Profit Process. I am employed by it. I passionately believe in its offering.

Leah,

An interesting post and a great life-lesson learned story. There is a strange psychological truth to what you say. People tend to value services they pay for and do not value services rendered at a reduced rate or even free.

That being said, as you suggest in your story, you need to know what the marketplace currently bears for the delivery of average services - but if you have the ability to provide above average service (marginal value) as compared to your competitors, than you should absolutely charge a rate that reflects your value. I would not have been surprised if you upped your rates, lost a third of your clients, but earned more money and saved countless hours of time and loads of pride by providing services only for those who truly value you.

Setting prices appropriately should also be considered a critical marketing tool. I worked with one client who provided a 5-star service, but marketed the service as a Motel-6 opportunity. He was surprised to find that he wasn't attracting his target customers, and those he did target did everything they could to hammer him on price. By simply changing his pricing model, he started to receive inquiries from good potential leads, and stopped wasting time trying to convince people that never planned on paying the fees to accept his offer.

For those reading this consultant to consultant exchange - there are a number of tools that can be used to make a determination as to what rate IS appropriate for your product or service. Simply surveying your existing client base to gauge their reactions is one way. Read your competition's ads and marketing to see how they position themselves. Raise your price with your best customer and see if the relationship holds. Etc.

Prices change for all kinds of reasons. I think I'm still paying "temporary" fuel surcharges with some service providers... for example...

Hi travelgreg,

Thanks for your reply!

Over the years as a business owner and from the knowledge I have gained working for The Profit Process, I have come to realize that being in business has a lot to do with confidence, self-worth, value and psychology. It's unorthodox and strange to think that these "touchy feely" type themes would be present in such a hard-line, money-making industry as the business world is thought to be. I think the really successful business owners have realized this truth and have steadily increased their profitability because they have tapped into the psychology of it all. And those who may have short-lived riches or lives full of stress have increased their bottom line by pushing it and forcing it.

I've learned that a product or service should sell itself. You should have customers knocking on your door rather than cold calling and interrupting dinner. The customers who value your offering will seek you out, and they will tell their friends. When I tutored I didn't spend a single cent on advertising and I had more customers than I could handle. Of course, we already went over the fact that I should have raised my prices and weeded out those who didn't value me, but I think I could still afford to be selective, get referrals and still not advertise. See my post about In N Out.

Many businesses treat all of their customers the same as if all customers are the same, but that's simply not true. Customers who don't value you almost always beat you up on price, whereas as those who recognize the value and benefits they receive will never haggle over price. They don't care about price because they are willing to pay whatever it takes to get the benefit. They are "A" customers. Just like you said, if I had raised my prices, weeded out all the C and D customers I would be left with only A and B customers. I would have less customers, but I might even make more because A and B customers pay full price. And the peace of mind that comes with working with A and B customers rather than C and D is priceless because they have positive attitudes and personalities, generally.

It sounds like your client with the 5-star service was attracting D customers who were more concerned about price than value and benefit. When he raised his prices he immediately starting going after the A customers who were willing to pay what he was worth. The fear of losing customers and the fear of not "making it" plagues business owners. When you let it rule your business, it fails.