Pricing Yourself Fairly

It’s curious how much time I spend talking about the value of people’s time, or more importantly, their expertise. As a financial planner, I engage every client in a conversation at some point and often at many points, about how much they’re paid as an employee or charge as a business owner. Almost inevitably, everyone is underpaid and undercharging in some way, shape, or form. Not always the moment that we ask the question, but whether over the course of their career or their business stage, we often find that a raise or two has fallen short or that the business set prices too low at the outset, causing years of catch-up to be played.

Now, ask the question: Why would I encourage clients to think a lot about the value of their time and expertise? After all, job hopping can have negative impacts on your career. Telling business owners —some of whom I’m a customer or client of— to raise their prices means that they’ll not only charge more, but risk losing customers who cannot afford or no longer wish to pay a premium. But there’s a flaw in the logic of over-emphasizing this particular risk, so let’s discuss a perfect case study.

Groupon

Does everyone remember Groupon? Does anyone still use it? No shade if you do, but I personally remember a period of time between 2010 and 2012 where Groupons were a big deal. New restaurant? Grab a Groupon for $30 to get $100 worth of food. Want a couple’s massage? Get a 2-for-1 deal on Groupon. Yet, the funny observation over the many years of Groupon’s existence is that Groupon’s customers are remarkably stingy. While the offering of coupons and deals created ample opportunities to meet new customers and clients for many businesses, they often found that as soon as they stopped offering the promotion, those very same customers would be off to the next restaurant or salon up the street, still offering a promotional deal.

So, what do we learn from this particular example? Simple: There is always someone willing to take advantage of the arbitrage you offer them.

Note that I’m not saying they’re taking advantage or putting any sort of negative spin on the idea that someone might be willing to pay less for your services or skills. I’m simply pointing out that, provided the circumstance that one party is offering the other party a deal, the party being offered the deal has no real incentive to overpay or otherwise increase the premium they’re offering for the services in question. So, how does this show up in the case of something like a job hunt?

Asking For a Raise

Whether literally asking for a raise from your boss or otherwise taking interviews to see if you can get better compensation, asking for a raise has a remarkable number of contradictory elements to it. The research on human decision-making suggests that the best thing an aspiring employee or job seeker can do is set the price first. In other words, tell your boss or the potential employer what you want to be paid. This establishes an “Anchor” as discovered by Tversky and Kahneman, in which the specific datapoint in question forms the center of all subsequent thought and discussion. Thus, if you say you want to be paid $80,000 a year and the other party says they want to pay you $70,000 a year, they’re now put in a position to explain or justify why you shouldn’t be paid $80,000. Conversely, if they say the job offers $70,000 and you tell them you want to be paid $80,000, you now have to justify why you’re worth $10,000 more.

But what happens when you introduce a bit more uncertainty into the equation? For example, let’s say your current position pays $80,000. You know your company can’t afford to pay you $100,000, so you start looking for jobs that match your skills, and in your interview, tell the company you’re applying to that you’d like to be paid $100,000. They say they think they can do that, and you get an offer for $100,000 a few days later. Delightful! Perhaps a bit less delightful when you come to find out that almost everyone in your company is being paid $120,000 or more to do your job!

So what’s the solution when you want to be paid more or even just the market rate for your work? Well, that involves understanding the market rate. A lot of people use the anchor of their own earnings to define their earning potential in future negotiations, and unfortunately, so do many employers. It’s not uncommon to see token raises offered to attract talent to companies that don’t use a standardized compensation system to assign salaries or hourly rates uniformly across their teams. While this can win talent in the short term, it can also present an opportunity to overlook the issues with retention that underpaying can cause. But if the solution is to understand the market rate, how do both employees and employers do that?

From the employer side, it helps to review industry-specific benchmarking studies on compensation. For example, among financial planners, the Charles Schwab RIA Benchmarking Study, InvestmentNews Study, and CFP Board all provide a range of resources on understanding what financial planners should be paid. In turn, other industries have their own role-specific studies. In many cases, these studies can be rather pricey to obtain, but it’s considered a typical best practice for researchers to share the results of a study with the participants. So, share your company’s compensation data, get free benchmarking in return.

For employees, similar resources can be helpful in understanding what your experience and talents are worth, but if the company you’re applying to is big enough, they are often giving the data away for free, whether they like it or not. Websites such as Glassdoor.com can contain literally hundreds of thousands of datapoints on bigger businesses, including everything from interview questions to benefits data and salary ranges across titles and geographies. In turn, even public databases such as the Bureau of Labor Statistics can give you an idea of where compensation and growth in a particular job field are and are heading based on geographic dispersion, density, and demand.

Giving Yourself a Raise

For business owners, particularly those in a professional service rather than in the business of selling goods (e.g., attorneys, accountants, consultants versus retail store owners), let me posit a very simple suggestion: You’re probably undercharging. Don’t take it personally, frankly, even we as financial planners are undercharging. For example, the average hourly rate charged by financial planners has been stuck at $250 an hour for the past decade, and even in states like Utah, regulators effectively fix the price even lower (despite dubious statutory authority to do so!) But where do I get off on saying you’re undercharging? Well, simple: You’re probably really busy.

Now, you might attribute that to being in business for a while, the great quality of your work, or otherwise, there simply being high demand for the type of work that you do. But that last item is really the crux of the matter: Any buyer will take advantage of your willingness to undercharge as much as any employer would be willing to take advantage of a potential hire’s willingness to work for less. It’s not malicious or ill-intended; heck, you probably set the price in the first place! The primary issue is that many business owners start a business in an environment of scarcity: Lots of time, lots of talent, and not a lot of people to help. But, as the business picks up steam and grows, and as revenue rises, a secondary concern arises. “What if I raise my prices and everyone suddenly leaves?” Well, let’s posit the extreme of that idea: What if you double your prices and lose half your clients? Good news, you have half the work and double the revenue.

That example is, of course, a bit facetious, but I’ve actually seen many entrepreneurs, ranging from accountants and attorneys to software engineers, genuinely execute on that strategy with great success. Therein highlights a basic maxim of commerce: Everyone is willing to pay for value greater than the cost. If the business deal is equal to or better than: “Give me a dollar and I’ll give you a dollar and a penny back,” then you’ll have buyers lining up out the door and plenty coming back for seconds. Because people don’t buy effort, and they don’t buy the skillsets behind them. They buy the results they produce, whether that be time saved, getting it right the first time, or simply avoiding costly mistakes. The value proposition of any business owner offering a service can vary wildly, and how one competes in the marketplace of their peers is an individualized and competitive question. But when you have a 100% close rate on new business, I guarantee you’re undercharging, because the value you can offer is so much more substantial than what you’re charging that the public will gladly buy.

In turn, if you find yourself charging a premium price in your marketplace, such that your close rate is low, but you find yourself working on the most difficult or complex cases in your field? Congratulations, you’ve really made it. Just be sure that if you’re charging a premium price that you’re delivering both premium results and a premium experience. Without one, the other won’t really matter in the eyes of your customer.

Pricing Yourself Fairly

There are exceptions to everything I’ve just said. Sometimes an employer can’t afford to pay you what you think you’re worth, only what the role is worth to them. Sometimes, an otherwise great customer simply doesn’t have the capital to give you before you do the work. That’s perfectly fine. There are other employers, and there are other great customers. You do not distinguish yourself in your professional field or provide yourself with the quality of life you justly deserve by impoverishing yourself for the benefit of others. Such is the professional domain of monks and saints, but most of us aren’t in the business of prayer; we are in the business of providing valuable results in return for that which is necessary to provide for us and ours.

So price yourself fairly. Lose half the potential bids you put out into the universe. Do less work but do better work. Take what you can get early on, but never stop being a ceaseless advocate for your own interests. It doesn’t mean you have to be a jerk or throw out elbows on your way up the ladder of life. It simply means that you are a valuable contributor to anything you set your mind to, and whether that be recognized by salary, benefits, flexibility, or a variety of other means, never find yourself dissatisfied with where you are because you feel unfairly rewarded for what you contribute.