Welcome to a Pricing Revolution

It’s time to take back control of pricing.

For too long the accountants have ruled the world of price, with their cost-plus methods and their calculators.

But price is one of the most important aspects of your relationship with your customers. You – the marketing department or the business owner – are the ones who understand your customer’s psychology. You are the ones who can make it compelling for someone to pick up your product and buy it.

You ought to be setting the price, because you know the impact that the right – or wrong – price can make. So you need to take back control. Pricing Revolution is here to give you the tools to do that.

Posted in Uncategorized | Leave a comment

Amazon and the psychology of price

How Amazon uses the psychology of price:
http://recode.net/2015/01/13/how-amazon-tricks-you-into-thinking-it-always-has-the-lowest-prices/

I suspect the really clever part here – which the article glosses over – is how to know just which products will most influence customers’ assumptions about price. It’s easy enough to see which ones they click on most, but the ones with the most clicks don’t necessarily have the biggest role in forming price perception.

Supermarkets do the same trick with milk, as it’s a highly visible commodity which is easy to compare across competitors. Much harder to work out if Sainsbury’s multigrain bread is better or worse value than Tesco’s five-seed wholemeal loaf.

Posted in Uncategorized | Leave a comment

Reviewing by the prices

I always take a professional interest in the pricing of restaurants. I don’t expect restaurant reviewers to share my fascination. So I was very happy to see this review of Kappo Masa in the New York Times spend most of its attention on the (apparently absurd) prices on the menu.

Posted in Uncategorized | Leave a comment

How much should I charge for my cakes?

This article at the CakeBoss website asks – and partly answers – the question in the title: how much should I charge for my cakes? I like this topic, because it’s much more tangible than the work we more commonly do on the pricing of services or software applications. And who doesn’t like a bit of cake?

As in the last case study, this one takes a broadly cost-based approach to pricing: adding up the cost of ingredients, labour, overheads and delivery. And as in that case, this provides only the baseline minimum price that should be charged.

Actually, let’s go into this “baseline” idea in a little more detail. The true baseline is the cost of ingredients. If you need to spend £4 on ingredients for a cake, there is no point selling it for £3 – you might as well not have bothered.

Labour costs may or may not be in the baseline, depending on how regular your work is and what alternatives you have – essentially, your opportunity cost. If you (or your employee) has 40 hours available to work this week and only 30 hours of planned in, that 10 hours might go to waste if you don’t use it on something. If it’s your own time, you probably have something else you could do – even if there is nothing to catch up on at work, you could watch a film or have a bath. How much is it worth to you to give up that pleasure?

If you’re not looking at a specific job but setting your general pricing policy, however, you should usually assume that you will consistently use all or most of your staff time. If it turns out that you don’t, you would probably reduce staff numbers until they match demand (or if it’s your own time, you might take a part-time job to supplement your cake earnings). You won’t sell all of the time available – you probably will not operate at 100% efficiency, or you might even want to keep a small reserve of staff resource available just in case of emergency jobs – but it’s unlikely you will set aside more than 10-20% of the total cake-making time you are paying for. Let’s say it is 20%. Then the labour cost is the number of hours spent making a cake (including design, speaking to the customer, and so on as well as actually baking), divided by (100%-20% = 80%), plus direct employment costs such as national insurance and pensions.

Delivery costs usually are a direct variable cost which you will either pay out to a courier, or will handle yourself based on the same time and materials calculation as for the cake itself. Fairly straightforward.

Overheads are the really interesting part of this. You have to pay your overheads anyway, no matter how many cakes you sell. If you sell one cake a year, to make a profit you would have to include your entire annual overheads in the cost of the cake. This is unlikely to be affordable unless your customer is Elton John. Alternatively if you sell ten million cakes a year, the overheads per cake will be tiny. Most likely you are somewhere in between.

So you should just divide the annual overheads by the number of cakes you sell, right? Wrong. Here’s why.

Some customers have lots of money. These people are probably willing to pay more for a cake than average. Some people have not much money at all and are able to pay less. Let’s see how we can best serve both groups of people. Imagine your home town has three families: the Camerons, who will buy a cake every week for up to £52, the Cleggs, who will spend £28 and the Milibands who will only spend £20. Each family will buy 50 cakes a year if they can afford them.

It costs you £10 in ingredients and labour to make a cake. Your overheads are £2000 per year. So let’s see how we should include those overheads in the price.

Perhaps you’d like to sell all 150 cakes and divide the overheads equally between all the cakes? £2000/150 = £13.33. So you need to charge £10 + £13.33 = £23.33 for a cake. But at this price the Milibands can’t afford to buy, so you will only sell 100 to the Cleggs and the Camerons.

This in turn means you need to recalculate and divide the overheads by 100 instead. £2000/100 = £20. So your new price is £10 + £20 = £30. But now the Cleggs can’t afford it either. So you end up selling just to the Camerons.

Because you’re only selling 50 cakes now, you have to recalculate again. £2000/50 = £40, so your new price is £10 + £40 = £50. This is just enough for the Camerons to afford, so you will still sell 50 cakes. But there is not much room for profit, and those cakes are quite expensive now.

Let’s start again. Imagine that you make your cake with three different colours of icing. The Camerons like blue cakes, so you make a blue cake for them. The Cleggs like yellow and the Milibands like their cake in deepest red.

Now you have a new pricing policy. Blue cakes are sold at £37. Yellow cakes are £25. Red cakes are £18. How does this work out?

Each family can afford the cake you’ve made especially for them. The blue ones contribute £22 towards overhead (plus £5 to profits), the yellow ones £12 overhead + £3 profit and the red ones £6 overhead + £2 profit. Each sells 50, so your overheads are covered by 50 x £22 = £1100, 50 x £12 = £600 and 50 x £6 = £300 – a total of £2000 – and you make £500 profit too. Not are you better off, but so are all three families: the Camerons get the same cakes but cheaper than before, and the Cleggs and Milibands can now afford to eat cake too.

This approach, called price discrimination, allows you to tailor your product for different markets and apportion the overheads accordingly. If you get the prices right, you are better off and so are all your customers. There is a catch to this, however. What if someone decides to buy a cake that wasn’t designed for them?
Young David the Miliband brother may think he deserves a blue cake. Well, that makes no difference because Ed won’t let him spend the money on it. They can’t afford it.

But how about if the Camerons feel like slumming it and decide to buy a red cake? It will save them £19, after all. Even though they can afford £37, why should they spend it if they can instead keep the money to spend on tickets to the polo?

For this reason, you need to make the blue cakes more attractive than the red ones so that people who can afford blue will still buy it. You might do this by reserving the best flavours or the top quality flour for the blue cakes; or by making the red ones smaller, or applying the icing less neatly. You might make the red ones available only early in the morning, so that people who want cheap cakes have to get up early to buy them. You could even wrap the red cakes in garish VALUE CAKES packaging so that the Camerons would be embarrassed to serve them when the Ashcrofts come visiting in their yacht.

Paradoxically, some of these approaches require you to deliberately lower the quality, or perceived quality, of the red cakes. It seems odd that reducing quality would increase profits and make your overall customer base willing to pay more – but it can.

In reality your customer groups will not be a mutually exclusive set of rich, average and poor customers. The same customer will sometimes be willing to spend more money and sometimes less. A rich customer might buy the expensive product most of the time but will still trade down occasionally, while a poor one might generally buy cheap but will splash out now and then. The same person who may make do with a low-end cake for their birthday may spend more when it’s their wedding. You need to find the right mix of products which encourages people to spend more money when they have it, but still captures a price-sensitive market too.

You may want to use different brands for the different price levels – as the supermarkets do with their Value or Basic ranges, their standard mid-price products and their Finest or Taste The Difference premium products. This way they capture three different customer segments in the same store and earn maximum revenue from each, while clearly signalling to each customer group the quality tradeoff they are making for their money.

There are many other pricing techniques you can use in your cake business: loyalty cards, free offers, short-term discounts, customised recipes or designs for companies (which are much less price sensitive than consumers for this type of purchase), taster portions and more. Some of these are covered in other posts and they are all explored in my book, which you can order here. Price discrimination, though, is probably the most powerful tool you can use to increase profit and revenue in this kind of market.

Posted in Uncategorized | Leave a comment

How much should I charge for my freelance services?

Today’s question prompted by Melanie Pinola at Lifehacker, answering the question of a reader who’s newly going freelance:

I’ve decided to strike out on my own as a freelancer. I already have some people interested in my work, but I’m not really sure how much to charge. Do I set my rate based on what other people are charging? Or how do I come up with the best price to charge?

Melanie gives a clear explanation of how to calculate your costs as a freelancer (take your desired salary, add overheads, divide by number of hours worked, add profit margin). But this misses all the interesting parts of the pricing conversation. Just a few of the questions not answered by a cost-based approach:

  • How much salary should you take? Melanie gives an example of $45,000. Well, I’d want to take as much salary as I can get. Let’s say $2 million. Unfortunately I don’t have the freedom to set whatever number I want, so the method falls down right at the start.
  • Similarly, how much profit do I want? Naturally I’d like a 700% markup, but this method won’t help me get one.
  • How many hours am I going to work? A new freelancer has no idea, and in any case the answer will depend on the price they set – so this is circular reasoning.

The factor missing from all these calculations is: what will the customer pay? Without knowing that – or having a way to ascertain or influence it – you can’t work out the right price.

You don’t know in advance exactly what a client is willing to pay. But you can get an idea of it by working out the value they will gain from your work. Will your brilliant advertising copy help them sell £2 million more of product? Will your business process optimisation save 30% of staff time, and what does that work out to?

Whatever figure you come to, use this as the benchmark for the price of your project. Let’s say it’s £100,000. The client will usually expect to keep most of this value for themselves, but you could take 20% or 30% of it – £20,000-£30,000 – as a reasonable starting point for a negotiation. This way the client will have little to gain from negotiating hard – even if they get you to cut your price in half, their profit from the project will only go up from £80,000 to £90,000 – only a 12.5% increase.

This structure also gives you a good argument for why they should use you rather than a cheaper competitor – if they are paying you 20% more than the competitor and you get a result that is at least 5% better, they are better off

You’ll notice that this has no relation to an hourly rate. That is exactly as it should be – the value the client gains is not directly related to the time you spend on the work.

The hourly rate does form part of your decision, though. First, because it provides a baseline below which you shouldn’t go. If the work generates £50,000 of benefit (so your price is going to be £10,000) and if it will take you 100 days to complete, this works out to a rate of just £100 a day. It is not worth doing this work and you should walk away from it; or else try to persuade the client to give you a higher share of the value.

Hourly pricing enters into the client’s mind when they consider if they’re getting a fair deal, and what they could hire a competitor for. So you should be ready to defend against these kind of questions. Explain why you’re charging for the project – you may not even know how many days the work will take, so does the client really want to enter into an unknown commitment with an unpredictable price? If the client is worried about day rates, offer them multiple choices – maybe using subcontractors with different skill levels, and putting in different amounts of work – to show that the choice they are making is actually about the value created and not just the time spent.

Offering a range of options also serves other psychological purposes – it gives the client a feeling of control, it lets them “own” the choice they’ve made, and it anchors them on a high value figure. Three choices is usually a good number to offer.

So a step-by-step answer to the question “How much should I charge for freelance services” is:

  1. Understand the scope of the project as a whole, and work out how much value the client will get from it.
  2. Create three project options priced at approximately 25%, 15% and 5% of this value figure.
  3. For each project option, create a different work plan – clearly the client should get a higher quality, more detailed, lower risk or more exclusive service at the higher level. You don’t need to tell them exactly how many days each plan will take, but chances are the 25% option will take longer.
  4. Make sure all the project options meet a basic benchmark for the cost of your time – you could use the Lifehacker article linked above as a guideline to calculate this. If you’re picking the right markets, many projects will come in at a multiple of this benchmark – even if you only need to make £50/hour, if the project’s worth £300/hour why charge less?
  5. Pitch these options to the client, showing why the higher options will generate more value, and use these as the basis to negotiate. Even if you have to move downwards from your initial figures, you should have the confidence to insist on a scope reduction in return for any price change.

If you use this approach you will make more money and have more spare time than basing your pricing purely on cost.

For more on this subject, order my book which tells you how to use hyperbolic discounting, decoys, free offers and many more techniques to get a higher price for your services while keeping your clients happy.

Posted in Uncategorized | Tagged , , , , , | 3 Comments

Cute price discrimination

A very nice price discrimination effect (which we usually call price differentiation because it sounds less threatening) is found by sinha at Pluggd In.

The WordWeb software, innovatively, offers a free version to consumers who take a return aeroplane flight less than twice a year. Those who take more flights (and are willing to admit it) have to pay for the commercial version.

It’s a nice way to achieve a few goals at once:

  • Helping the environment, though in a subtle way. An economist might rightly point out that it’s absurd to think anyone would avoid several flights per year to save the £14 cost of the software. But this is where standard economics misses some of the dynamics. The effect is not a simple incentive effect, with people trading off the costs and benefits of flying versus the cost of the software. Instead, the salience of this extra cost that you have to pay to fly may well help change your preferences over time. Preferences are not fixed, and this is exactly the kind of decision that helps to change them.Conversely, if you said that you took no flights and then discover that you are being rewarded for it with free software, that is also likely to reinforce your preference for less flying.

    (the company might be helping the environment more directly if it puts some of the revenue into carbon offsets).

  • Getting more money out of people who can afford it. Of course, you could easily lie about how many flights you take. But by doing so, you’re not just keeping back some money from a small software company; you are also being dishonest about your own “bad” behaviour. This is very likely to strengthen the price discrimination effect, and get more people to pay up than would otherwise do so. It is likely that those who are more able and willing to pay will feel less temptation to lie for the free software – not because they’re any morally superior, but because the £14 price of honesty makes less of a hole in their wallet than it does for, say, a student or a child.As pointed out by one of the commenters on the page, and mentioned by WordWeb on their page discussing this scheme, people who can afford to fly are more likely to be able to afford the software than those who can’t.

    (There are a few other price discrimination and upselling mechanisms on their pricing page – selling additional dictionaries, some of them bundled, and so on. The company has clearly given some thought to its pricing strategy.)

  • Signalling something about the brand and corporate culture. We now know the publishers of WordWeb are willing to make a statement about the environment. That might just influence our future decision between their product and a competitor.

I have no idea if this scheme generates much money for WordWeb, but it’s clever, and it would be possible to create a similar mechanism for many businesses which rely on self-selecting price discrimination.

Posted in Uncategorized | Leave a comment

Disproving Hotelling? A tale of two burger stalls

To the Thames Festival, where the Hotelling model of competition is at risk of being disproved.

The festival is a weekend event along the south bank of the Thames – populated with stalls selling crafts, food and drink and this year, for some reason, promoting South Korean tourism. There is a wide range of fresh food available along a 1.5-mile stretch of river, but when I came across a hamburger van, I was surprised to notice that the festival organisers had decided to locate a second hamburger vendor right next to it.

On the first day of the festival I noticed a discrepancy between the two companies’ approaches. First, from Perfect Burger:

20111004-112400.jpg

And now from Northfield Farm:

20111004-112604.jpg

The results were predictable. With nothing visible to distinguish their product as better than the competition, Perfect Burger was selling almost nothing. I can’t say whether one burger was better than the other, but when one of them costs four pounds, why pay five?

During the remainder of that day, Perfect Burger tried to respond with some last-minute brand differentiation and bundling tactics:

20111004-112859.jpg

20111004-112924.jpg

But apparently that was not enough, because the next day their menu looked like this:

20111004-114746.jpg

I spoke to the operators who said sales were so dreadful on the first day that they had been forced to cut the price. Results were much better on day two, but they were understandably furious with the festival organisers for locating both vans directly beside each other.

There are a few tactical lessons from this, and a deeper point about the economics of competition. The tactical messages include:

  • If your product is sold alongside a competitor, and you don’t distinguish it on any clear basis, you will be forced to match their price.
  • To avoid this, make your product benefits tangible and clear in your branding. Northfield Farms conveys freshness and authenticity while Perfect Burger is an assertion of quality with little rationale behind it. Indeed, purely on the basis of brand I would expect Northfield to be able to sustain a price premium, but not the other way around.
  • Quality is irrelevant in some contexts. When I spoke to the Perfect Burger staff, they told me that their burgers are better. This may well be true, but they are selling in a festival to one-off customers – if nobody has heard of you, they will only buy on first impressions.
  • Write your prices in chalk on a blackboard! Economists talk about prices failing to adjust to market conditions because of “menu costs” – the physical costs of changing prices, relabelling etc. This is a very literal version of that. I suspect that if the prices had not been printed on a board, Perfect Burger might have felt more able to cut them during the first day instead of overnight.

The deeper point is about the Hotelling model. This model, based on a logical economic argument, suggests that two vendors in competition will want to make their products as similar as possible. The standard example is ice cream stands on a beach. According to Hotelling’s theory, two ice cream stands selling the same products will not, as you might expect, locate themselves in different parts of the beach. Instead, they will both set up right next to each other in the middle of the beach – because otherwise each one can steal customers from the other by moving slightly closer to the centre. Competition will force them to end up occuping the same space in the middle, even though it is not the best outcome for customers.

Hotelling admitted his model was a simplification – it ignores what happens if the vendors are selling different products, and in its basic form it only allows for two competitors. But this weekend’s example shows that even when those conditions are fulfilled, the model omits a key variable which is crucially important to real businesses.

That is: most successful businesses avoid competing on price. Businesses are not just fighting with each other; they are also in a game with their own customers. They each want to transfer as much money as possible from the customers into their own pockets – but competition prevents them from doing that.

Inevitably, if vendors are positioned directly beside each other, consumers will compare them on price. If they are separated, consumers will be much less likely to head over to the competitor to make a comparison – indeed most consumers will not even know there is an alternative. Thus, both vendors will be able to defend a premium price.

The traditional view of Hotelling is that the vendors compete for business from each other – at the expense of the customer, who has to walk further for their hamburger. The traditional view of competitive markets is that customers force down prices through competition – at the expense of vendors, who cannot maintain high profits. This example shows that it is possible for the situation to serve nobody’s interests. Customers have to walk halfway along the riverbank for a burger, while the vendors suffer price competition and lose their profit margin.

Putting the stands in a different position would save time for customers and repay the vendors in extra profits – everyone wins. Economists call this a free lunch. Only in economics can you get a free lunch for just £5.

In fact, there was one winner from all this. People who were not selling burgers apparently felt no pressure to cut prices at all…

20111004-115527.jpg

 

Posted in Uncategorized | Tagged , , , , , , | Leave a comment

How much should I charge for a book?

More specifically, this question – again from Twitter – was:

How much?

So, how much should Graham charge for Stealing Cthulhu?

Here is the picture he links to:

Stealing Cthulhu

Books are a good pricing puzzle because they combine two conflicting factors:

  1. The value they create is usually very high. A good fiction book will provide 10-50 hours of escapist entertainment, and the pleasure of the memories and discussions you can have afterwards. A good non-fiction book, depending on its subject matter, could generate business value of thousands or occasionally millions of pounds. So there should be opportunities to charge lots of money to reflect how much it’s worth to the customer. This particular book is perhaps somewhere in between those two scenarios.
  2. Books are seen as a commodity with very strong price anchors. Book buyers – perhaps wrongly – often see one book as a substitute for another. If you want to buy the latest James Ellroy book but it costs £50, you may seek out an alternative writer of deep-South thrillers instead. As much as I may try to persuade you that there’s nobody like James Ellroy, and the alternative is an inferior substitute, most consumers simply feel that it’s wrong to pay £50 for a novel, and they won’t do it.

 

The economic name for this is that books generate a very high consumer surplus – the difference between the price you pay and the value you get from a product.

If you are a publisher, or a self-published/independent author, your job is to figure out how to capture a higher share of the value they create. To do this, there are three strategies which you can follow together.

The first is to create more perceived value for the customer.

The second is to dislodge the buyer from their anchor by reframing the product.

The third is to segment your customers so you don’t lose the low end, while still capturing a higher price from the top end.

First, value. Most customers do not get full value out of a book. Do they pay it the attention they should? Do they actually try out all the things you recommend in the book? Do they savour the world you’ve created or cook the recipes you’ve invented?

Stealing Cthulhu is about how to create roleplaying game scenarios based on HP Lovecraft stories, and includes a ruleset for such games. Graham wants to sell it at a convention, and will be selling it online after that. He has already ordered a limited edition which has been pre-sold to advance buyers, so he’ll want to take into account what they’ve already paid for.

Indeed, the advance orders already display quite a subtle pricing structure – it was presold on a site called Indiegogo, and the choices included a wide range of added-value options – from a regular copy of the book at $28, to an extra electronic copy that can be annotated at $50, to a limited edition at $65, right up to the $600 level where you can have the book dedicated to you.If Graham wants to preserve his advance for future books, he might keep in mind that those $28 buyers might expect newcomers, who did not make an advance commitment, to be charged more. For that matter, Graham may well want to charge them more, if he can get it (and I think he can). Some anecdotal evidence:

The readers who will get most value out of Stealing Cthulhu are game designers themselves, who will use its insights to help them create their own works later. These people are going to be making an investment of hundreds of pounds worth of time in their own games, and that time may be significantly more productive and satisfying if they absorb the lessons from Stealing Cthulhu. So this audience should be paying perhaps £200 or £500 for the book.

However, there is an audience of more casual readers and gamers – who may never get around to running a game based on the book, but might be Lovecraft fans or simply interested in the horror-fantasy genre – and who probably won’t be interested at that price. So how to differentiate between them? Why not offer a live online video seminar with Graham for the game designer and GM audience; either one-to-one consulting or a group seminar where people can get ideas not just from Graham but from each other. That would be worth a couple of hundred pounds. (one of the options for the pre-orders was a little like this – Graham would run a game for the buyer in person)

To ease the shock of shelling out a lump sum for that, it would be better to offer a Writers’ or Designers’ Programme over 3 to 5 months at £60/month, including a monthly seminar, a manual with writing advice and Lovecraftian source material, and a forum where writers can post their own work for critique by other informed reader/writers. Not only is this useful inspiration but for many people, it will provide exactly the structure they might need to get their work completed.

An intermediate version of this product could be a £20/month subscription which would include fresh material and – let’s say – a video or podcast recording of some of Graham’s own games.

This model has five advantages:

  • It takes advantage of hyperbolic discounting; people feel less pain from a commitment to future spending than from current spending.
  • It allows Graham to give the book away for “free” now – which is likely to attract a much larger immediate audience than any non-zero price – and collect the money later.
  • It creates a relationship with the reader, allowing him to provide them with more value later and sell them other things in the future.
  • It repositions the book away from just being a book to being an ongoing service – which people will naturally expect to pay more for.
  • It creates an anchor effect, making the book on its own appear to be better value than if it were sold with no comparison.

As for immediate sales, the bundling principle is a good one. There is other merchandise mentioned on the pre-order site (postcards, game scenarios etc) which can be included in a premium priced version. Bundling makes the value of the pack harder to compare with alternatives; and even if few people buy the bundle, it again makes the standalone book appear better value.

So my ultimate recommendation – for the convention, and probably also for online orders afterwards – is:

  • Subscription to a Cthulhu Game Designers’ club, £60/month – including a free copy of the limited edition, and a monthly live webinar
  • Subscription to a Cthulhu Gamers’ club, £25/month – which includes a free copy of the book
  • Bundle: the book, postcards, scenario, autographed note, and whatever other cheap stuff he can find at the convention to bundle in: $75 (the convention’s in the US)
  • Book alone: $38
  • Extra scenarios to add onto book: $18 each

That $38 for the book? That ties in a few little things: it’s about half of the $75; it’s $10 more than the online price; it positions the book as a higher quality offering in line with the $40 market; and it creates sufficient distance between the book and the individual scenarios to feel logical.

There’s one final consideration: competition. Books are a strange case, because there is no exact competition for a book – every one is unique. But readers will make comparisons with neighbouring options. Graham mentions that he will be selling the books on a stand belonging to a publisher called Pelgrane.

 

Pelgrane publishes lots of other books and game materials at a range of prices – mostly below the $40 level but a few up there. By pricing at the top end of the products that will be available on the stall, Graham will send two useful signals.

First, that the products are high quality. This will be useful not just at the convention itself, but in the future.

Second, that the subject matter of the book is special: it’s not just another sourcebook or ruleset, but a guide to storytelling – not just a utilitarian work but an artistic one. Thus it’s positioned in a new category, one level up from the books beside it.

A final note. Although I often recommend it, premium pricing isn’t always the right strategy. If you want to create and dominate a market segment, lower or at least mid-market pricing may well be the right approach (though you should usually offer premium options too). But in a niche market like this, setting a price that both demonstrates and captures high value is usually the optimal play.

Posted in Uncategorized | Tagged , , , , , | 2 Comments

How much should I charge for a tattoo design?

From @mycherrytattoo on twitter, comes the following question:

The full question is here, and reads:

I’ve bееn аѕkеd tο design a tattoo fοr a friend οf one οf mу teachers, аѕ I аm nοt actualy tattooing thіѕ person, i’d lіkе tο come up wіth a price solely fοr mу design. Whаt’s thе average pricing fοr a tattoo DESIGN (nοt thе actual tattoo). And whаt ѕhουld i consider whеn setting thе price. Alѕο, whаt аrе thе bіggеѕt factors іn thе design price?

So what is the secret to successful pricing of a tattoo design?

It’s an interesting question! I have never had to look at tattoo pricing before, though it could no doubt be compared to other kinds of design. Or it could be compared to other kinds of surgical intervention. Which would result in a better price for the designer?

Here are the factors that come to mind:

  • How long will it take? Of course, I would never recommend pricing just based on how long something takes – but this should provide a minimum floor to the price. It will give an indication of the lowest price your competition can afford to charge – especially if they do this for a living, as they will be unlikely to allow themselves to take a loss by charging too little per hour. A professional designer will have a floor price of no less than $50/hour – and many will aim for $100 or $150/hour. Effectively, this should govern whether it is even worth your while doing the work. If you are being paid less than you can earn from other clients or other work that you might do, you should turn down the work. I would imagine it might take around an hour to draw a good tattoo design – but if it’s in colour, or a large design, or has a lot of detail, it could be longer. And if you need to consult with the client, try out ideas on them, and go back and forth with a few changes, the time will add up to a few hours quite quickly.
  • What is it worth to the customer? This is a big deal for them. You are creating a piece of art which they will carry around and display for the rest of their life. It’s really important that it be beautiful, that it expresses their identity, and that the details be just right. Imagine all the situations where they’ll show it off to friends or lovers – and how much difference it will make if you can make it really stunning.
  • Is there any competition? If your potential customer is looking elsewhere, you will need to be mindful of the prices they will be offered by others. But also make sure they are aware of the difference in quality or aesthetic between you and the competitors. Are the competitors offering a unique design or just reusing one that is already walking around on many other bodies? Think of the difference in price between a Picasso original and a Picasso print. On the other hand, if there is no competition (you may be doing this for a friend who would not ask anyone else for a comparative price) then you don’t need to worry about what anyone else might charge (though see the last point in this list for a deeper issue).
  • How much are they spending alongside this purchase? Their main “complementary spending” in this case is for the tattoo itself. Tattoo prices vary widely but an online search shows a range from $50 to $200 per hour – and the process could take from 15 minutes to eight hours or more depending on size. Let’s imagine it’s a midsize tattoo taking an hour and a half, at $100/hour. Then they will be spending $150 – and the price of the design will inevitably be compared to this.
  • Perhaps most importantly: what does the customer expect? If the customer is expecting to pay $30, you are unlikely to persuade them to pay $3000. Likewise, if they think it will cost $3000, you will not only miss an opportunity but may actually put them off if you suggest charging just $30. The answer is that the customer probably doesn’t have a clear idea of what to expect – even if there is a figure in their mind, they probably have little confidence in it, and they will want to have something to compare with, to reassure themselves that they have made a choice that works for them. The best way to achieve this is to give them a range of prices with a rationale for the different price points. The customer can then pick their preferred price point and feel that they’ve been treated fairly because the choice was theirs.

Putting all these factors together, here is my recommendation.

Create a small list (6-8 items) of different size and colour options. Establish a baseline to reflect the fact that your creativity and time are going to be spent thinking about this client’s personality and wants. Point out that this decision is going to affect them for years into the future. And make sure that you put enough effort into the job to reflect and respect the weight of this responsibility.

A good range of prices might look like this:

  • Large or wraparound design (6×12 inches or more), full colour and with two personal consultations and initial draft designs: $1400
  • Large or wraparound, black and white, two consultations and drafts: $950
  • Medium (around 4×6 inches), full colour, two consultations: $650
  • Medium, black and white: $400
  • Small (up to 2×3 inches), full colour, one consultation: $250
  • Small, black and white: $150
  • Micro (up to 1×1 inch) colour, one consultation: $95
  • Micro, black-and-white: $55

For reuse of an existing design which you already have, offer a 50% discount.

This list gives your client the ability to select a price that works for them with a commensurate amount of work for you. Whatever their expectations are, they’ll be able to find something that fits.

If you are a tattoo designer, please let me know what you think – or try this list and tell me how it works. And if you’re the original poster of this question, I’d love to hear what you ended up doing.

Posted in Uncategorized | Tagged , , , , | 25 Comments

Making $400/hour look cheap

Ever wanted to have Gary Becker advise you on the costs and benefits of committing embezzlement? Or Steve Levitt recommend whether you should walk or drive home after a bottle of wine? Now you can.

A new business, Expert Insight, lets you hire world-famous intellectuals by the hour to advise you on whatever you want (Slate writeup here). Nice idea and interesting to browse the rates that everyone thinks they’re worth (Becker is $5000, Levitt doesn’t publish his but hints that it’s higher).

Cute story but it has two (perhaps intentional?) side-effects.

The first is that I now think Jeffrey Miron is incredibly good value at $400/hour. Without seeing Becker’s price first, I’d have said that was unrealistically expensive.

The second, unexpected, effect is to reveal how cost-effective the New College of the Humanities is! You get (maybe) 100 one-hour lectures a year from people who, on Expert Insight, would cost several thousand dollars an hour. Instead of paying $300,000 for that hundred hours of insight, you pay just £18,000 a year! And with a degree qualification thrown in at the end! What a bargain.

Now you may notice that there’s a difference between these services. Hiring Niall Ferguson, AC Grayling and Richard Dawkins on Expert Insight entitles you to ask whatever questions you want. In NCH, you need to take the lectures you’re given. Does that make NCH less valuable?

Not necessarily. If Gary Becker and Richard Dawkins are so much more expert than you, wouldn’t they be better than you at figuring out the right questions to ask? Maybe an NCH lecture is more valuable than a personal hour of you quizzing the professor.

In conclusion: Expert Insight is too expensive (except for Jeffrey Miron) – or NCH is too cheap – or Expert Insight has been set up by AC Grayling to show how cheap NCH is.

Posted in Uncategorized | Tagged , , , , | Leave a comment

The price of a smile

This research from Bangor University (via Lucy Tobin at the Guardian) has worked out how much a smile is worth.

Turns out it’s a third of a penny.

So if you want to increase your profits, retailers, simply tell your staff to stop wasting time smiling and get an extra transaction through the tills once a day.

But is that really all a smile is worth? I wrote somewhere recently that an economist doesn’t know the price of a baby’s laugh. Although I had this research in mind, I had not read it quite carefully enough. All it measures is the additional willingness-to-pay of a consumer already in a predefined transaction context.

What I mean by that is that, once a consumer has decided what they want; and remembered their past memories of how to satisfy that desire; then selected which shop to go into; and gone into it; at that point, the smile makes only a third of a penny impact on them.

Where the smile really matters is at all of the previous stages. How do I decide what I want today? Which experiences am I more likely to remember? Based on those memories, which shop might I enter?

At any of these points, a smile might matter. And even though the consumer doesn’t pay directly for any of them, they all have a value. These are the decisions from which profit arises; because once they have been made, price sensitivity has already disappeared.

So I’d suggest that a smile, like a good advertisement or a strong brand, actually accounts for a big part of the value of your product. A smile could be worth hundreds of pounds when you’re selling a car, or tens of thousands when you’re applying for a job.

So if Lucy Tobin’s giving away three for a penny, I’ll buy as many as I can get.

Posted in Uncategorized | Leave a comment