A glance at the comments on the previous post shows what a complex topic this is; it easily merits a follow-up. For this article, I’m going to focus on the conundrum facing the individual who is trying to set a price for mediumship/life-coaching/therapy/etc. The economics are much more interesting than selling physical commodities, or even regular services like lawn-mowing or waiting tables.
Warning! I’m not an economist; I’m just a thoughtful guy who’s interested in economics, and has read and thought a lot about this problem. If you want to try out my advice here, I suggest doing it first in a small inconspicuous area where a permanent stain won’t show…
Selling Your Time?
Suppose you’re a life-coach/therapist/medium/reiki master, and you charge $50/hour. From your point of view, you’re selling your time. That’s a “scarce” resource, in the economic sense of not being unlimited and free. You have to choose how you’re going to spend your limited time, and you have to get a good return on it. You have to ask yourself, “Should I spend my time on being a life-coach/therapist/medium? Or should I spend my time writing? Or should I spend my time bagging groceries?”…
And of course, money is only one part of that equation; there are returns from the work that can’t be measured in dollars — the satisfaction of helping others, exercising your craft, and contributing to your own growth. Nevertheless, if you’re trying to put food on the table, money is an essential part of the question. You have to balance the kind of lifestyle you want to support and the satisfaction you get from your work and all sorts of other things. And at the end of all your balancing, you have a number: “If I charge any less than $50 for my work, it just isn’t worth my time.”
The Invisible Drag of the Market
But from the point of view of your customers — and this is a fascinating thing — everything is different. You think you’re selling your time, but they don’t care one bit about your time! If they could get the same information from a book, or a television show, or injected directly into their chakras, that would be great. What is of value to them is the information. From their point of view, paying for your time, effort, training, groceries, etc. is a transaction cost, an unavoidable cost of making the trade.
So if you’re a life-coach/therapist/medium, you’re competing against others who are charging a lower transaction cost (unless you differentiate yourself in some other way — via your style, the quality of your service, etc. — and that’s an important caveat I’ll return to). Which means you’re trying to make a living competing against others who aren’t trying to make a living — who are doing it as a hobby, for example. Or competing against others who are willing to settle for a lower standard of living. In other words, their minimum charge is lower than yours, for whatever reason. Maybe they charge $40, or $25, or $5. And since what they’re charging has nothing to do with the quality of the information product (again, assuming you haven’t differentiated yourself), that produces an economic drag on the price you can charge.
Let’s face it. Even if you’re just doing basic Tarot readings, the value of what you provide is HUGE — it’s potentially life-changing, life-transforming in a way that a boatload of bananas or golden apples or iPhones or yachts never can be. A single reading frequently should cost a year’s salary, if we’re talking about pure value to the customer! Relative to the value of your product, the amount you charge is actually very nearly zero. That’s true even if you charge $500 an hour. And this is because of all the hobbyists and non-professionals out there who are providing excellent readings for lower transaction costs.
You see, doctors and lawyers have got it figured out. They have accreditation systems — internationally recognized medical and law schools and exams — to separate the professionals from the hobbyists. By differentiating their products — certified information, not just information — they can charge a completely different pay scale.
This, then, is how you can justify a higher price: differentiating your information product. You can either provide a strikingly higher quality (like those incredible booklet-sized readings Slade does), or enhance your personal reputation (like the TV psychics), or work in a specialized framework. Doing these things puts you in a different class from the hobbyists, and the economic drag disappears.
But of course, doing any of these things is incredibly difficult (at least as hard as passing a bar exam!). Which means that the vast majority of life-coaches/therapists/mediums do not make anything near what they are really worth.
Beating the Market
Everything I’ve said so far is just economic reality; and it’s pretty bleak. However, I think it’s possible that with the donation model I outlined in the previous post — that is, giving away everything for a donation of the customer’s choice — all of this could be turned on its head, and you might even make more money. Here’s the theory.
Let’s look at the economics purely from the customer’s point of view. How much money do they have available for life-coaching/therapy/mediums? It’s a balance of their financial situation, their personal desperation or difficulties, their confidence in the information product, etc. They have an amount they’re willing/able to pay: call it $X (per hour, per download, whatever).
Under the standard fixed-price model, you have set a price of, say, $50. If the customer’s $X is greater than or equal to $50, you have a sale. If their $X is less than $50, there is no sale. And the value of the sale is always $50. Pretty simple.
Under the donation model, however, there is no price $50. Your price is zero. So there is ALWAYS a sale, regardless of the size of $X. $X is always greater than or equal to zero!
And sometimes $X is smaller than $50. But sometimes it’s larger.
Now, most economists would assume that since your price is zero, the customer’s $X will be reduced to zero, also, and people will just take your stuff for free. And if we were selling bananas, maybe that would be true. But in my experience so far, that is totally not the case! Sometimes $X is rather small, it’s true; but sometimes it’s unexpectedly large. And in no cases has anyone taken my services for free.
NOW How Much Would You Pay?
Think of it this way. Imagine you have a potential customer base of 100 people. How much will each customer be willing to pay for your product? Well, we don’t know; it could be all over the place. Let’s give it an even distribution: customer One is willing to pay $1; customer Two is willing to pay $2; customer Three is willing to pay $3; all the way up to the last person who is willing to pay $100.
Under the standard fixed-price model, how much money do you make? It depends what you set your price at. If you set your price at $50, then everyone who’s willing to pay less than $50 will give you nothing at all; and everyone who’s willing to pay $50 or more will give you $50. In other words, you make $50 * 51 people, which is $2550. If you set it lower or higher, you don’t make as much money — setting it at $25, for example, will net you $1900, and $75 will net you $1950.
Under the donation model, how much do you make? In this case, you make 100 sales; and the total is $100 + $99 + $98 + $97… By the time you reach the $73 person, you’ve made $2580 already! The grand total of the 100 sales is $5050.
In other words, you’ve made twice as much money, and no one has paid more than they’re comfortable with, and you’ve turned no one away, and you’ve reached twice as many individuals.
Now, perhaps people will pay less than they’re actually willing to pay if you make it known you’re willing to accept less than that. In other words, maybe Mr. Burns up at the factory would grudgingly pay as much as $100 under a fixed price model, but since you’re just taking donations, he pays less than that. Fine — even if he only pays $50 — even if everyone pays just 50% of what they would have — you’re still making $2025 — 80% as much as you would with the fixed-price model.
Market Forces? What Market Forces?
A final couple of points. This model applies to physical products and services as well as pure information (like downloads). Everything I’ve said above is really about revenue (the amount of money coming in), not profit (revenue minus your own expenses/time); but if I’m right, the revenue should be about the same or more than you would get under the fixed-price model. That is, even though you will lose money on some sales, that should be more than offset by the people who donate far more than your cost.
Also note: since you’re not setting an hourly rate in this model, your hourly rate is not dragged down by lower-priced competition or lower transaction costs or anything else. The only variable in the equation is $X — what the consumer is willing to pay. So you can theoretically do quite well even if you haven’t managed to differentiate your product based on quality, reputation, or whatever.
It’s My Playground
Maybe this is all codswallop. I’ve never heard of any studies being done on this kind of thing. But since I have a Day Job, I have the luxury of being able to play around with it and see what happens; and I have the enormous satisfaction of not having to turn anyone away. I’ll let you know how it goes…