This article is based on a pricing workshop presented by Dimitra Stafilia as part of the SHAPING OUR COMMON FUTURE event held on 31/10/2014, at TECHNOPOLIS, MUNICIPALITY OF ATHENS
Pricing is a controversial and complex subject, and one that all linguists need to think about very seriously. Some advocate a universal structure of prevailing rates across countries since this is truly a globalised market and a translator in Greece can offer services in India, Japan or the US. Others advocate local prices for local markets, reflecting cheaper costs of living or weaker economies. Personally, I promote the differentiated pricing, which means different prices for the same service in different situations, e.g. depending on client segments, markets (local, national, international), urgency. Because pricing is such a “fearful” subject, a lot of us tend to determine our rates by polling, i.e. to make inquiries into the going rates, and to seek to achieve rates within or at the high end of the range, not considering the environment in which we offer our services.
Actually, if you use the polling average, you risk loosing business or loosing income. So polling may be a tool for market research, and benchmarking, but not a good enough tool for setting YOUR rates.
Furthermore, according to the 2012 Common Sense Advisory report on pricing trends, there is a decrease in pricing as a result of global supply, advances in technology, economic issues, and more aggressive buyers. In the last couple of years we have also been talking of demonetization and commoditization of translation that keep pushing prices further down. Even at an institutional level, both EU and national, we see a disregard of skills and experience by promoting a widening of the supply base, quicker formation of translators, faster production, even price dumping.
Freelance translators are in effect independent business owners, therefore they need to approach their job from a commercial standpoint. At the end of the day, it is NOT about the price someone tells us to charge, but rather what we want to earn and how we plan to get there. Furthermore, each one of us is responsible not to diminish the service value or give a false impression of skills and requirements for rendering the service.
NATURE AND CHARACTERISTICS OF A SERVICE
Before we can even start thinking how to price our services, we need to understand what a service is and what its components are, because only then may we understand the impact of pricing.
A marketing definition of “service” is the following:
A service is any activity or benefit that one party can offer to another which is essentially intangible and does not result in the ownership of anything. It’s production may or may not be tied to a physical product.
The very definition of service sets the first pricing challenge. How to make the service tangible, so that a client may understand, measure and compare it. This is where the concept of price unit enters. We are all aware of our industry’s price units: per word, per character, per page, per line, per 16 pages, per hour. But even this is problematic sometimes. E.g. when you offer a copywriting service and you charge on an hourly-basis, the client may not understand why you need e.g. 3 hours to write 500 words. This is because the “effort” we put in a job is difficult to measure and sometimes you need to have the necessary job experience to properly estimate it. And there have been some arguments about moving away from the per word model towards the per hour model, because the per word model does not really capture the effort put in the work.
This uncertainty stems from the following five main characteristics of services: intangibility, inseparability, variability, perishability and lack of ownership.
Lets have a look at each characteristic.
Service intangibility means a service is not physical and therefore cannot be perceived by the senses. A buyer cannot see the result before purchase. Because service offerings lack tangible characteristics that the buyer can evaluate before purchase, uncertainly is increased. To reduce uncertainly, buyers look for signs of service quality. They draw conclusions about quality from the place, people, equipment, communication materials, and PRICE that they can see. Therefore, to market a service, you need to add tangible cues to intangible offers, and price is one of those cues.
Services are first sold, then produced and consumed. Service inseparability means that services cannot be separated from their providers. If a person provides the service, then the person is a part of the service. Because the customer is also present as the service is being produced, provider-client interaction is a special feature that affects the service outcome. A second feature is that other customers are also present or involved (e.g other clients, recipients of the service other than the paying client). Their behaviour as well can determine the satisfaction that the service delivers to the individual customer. Because of the simultaneity of service production and consumption, service providers face particular difficulty when demand rises. What is the role of price here? A high price is used to ration a limited supply of the provider’s service.
As services involve people in production and consumption, there is considerable potential for variability. Service variability means that the quality of services depends on who provides them, as well as when, where and how they are provided. This is why there should be steps towards quality control. Variability offers a chance for “value” pricing. Clients who appreciate the quality factor and do not wish to see fluctuating results, are more likely to establish long-term relationships with translators and pay the rates asked without trying to drive prices down.
Service perishability means that the unused service capacity from one time period cannot be stored for future use. Consider this. A client has given you a project and you have booked 2 days of work rejecting other jobs. All of a sudden they cancel. What do you do? The service value existed only at that point and disappeared as soon as the project was cancelled.
Lack of ownership
Services are used or hired for a period of time, e.g. you are booked for a 3 hour proofreading, for a project, the service is not owned for ever. It is not physically possessed. This means that as a service provider you must make a special effort to reinforce your brand identity and affinity with the buyer of services, so that they keep coming back, i.e. to avoid one-off requests. By fluctuating your prices, you may draw the customer back or standout.
If we are aware of these characteristics, they we can determine our marketing mix, price being one component of this. Therefore, it is important to understand how to price, because it determines how we market our services, how we develop our business and of course how much we earn.
- Price is a marketing mix component
- Price makes a service tangible
- Price can be used to ration limited supply or drive requests away from unsociable hours or cut down on “urgent” last minute requests
- Price may reflect value perceptions
- Price creates recurrent clients or drives them away
WHAT TO CONSIDER WHEN PRICING?
When considering pricing, we need to keep some points in mind.
- a) Price is the only element in the marketing mix that produces revenues. All other elements represent costs. It is also one of the most flexible elements. At the same time, pricing and price competition is the number one problem. If we miss sight of how price interacts with other elements, our rates may be too cost-oriented and not value-oriented, we may forget to revise rates in order to reflect market changes, or our rates may not be varied enough for different market segments.
- b) Most of us tend to believe that costs is the one main factor for determining translation rates. However, accounting is not enough; there are other internal and external factors to consider.
Internal factors: marketing objectives, marketing-mix strategy, organization
When setting prices, the total marketing mix must be considered. If the service is positioned on nonprice factors, then decisions about quality and promotion will strongly affect price. If price is a crucial positioning factor, then price will strongly affect decisions made about the other marketing mix elements.
BEAR IN MIND THAT COSTS SET THE FLOOR FOR THE PRICE TO CHARGE. BELOW THAT, YOU BUY WORK. This means that you offer your service below cost or for no margin. As a rule, you should never do this. But if you do, e.g. because you have expectations from the client, you should be clear that you are not going to maintain this indefinitely.
External factors: nature of the market, demand, competition and other environmental elements (recession, inflation, interest rates)
WHEREAS COSTS SET THE LOWER LIMIT OF PRICES, THE MARKET AND DEMAND SET THE UPPER LIMIT.
- c) The relationship between price and demand and understanding what a client is willing to pay and why is of utmost importance. Buyer perceptions of price also affect the pricing decision. It is claimed that since the end client is only interested in costs, trying to base our pricing on value features, trying to explain and educate them is of no use, because a client is only interested in the bottom line. I do not share this opinion. Nonprice factors have become more important in buyer-choice behaviour in recent decades. For example, ISO certifications require certain skills and procedures that not all translators may meet. The legal implications and risk of costly lawsuits against medical companies, car manufacturers etc are more important than the cost of translation. And having the convenience of a dedicated translator when urgent B2B needs occur within a company is priceless when it minimizes the stress levels of all involved.
- d) The type of market affects pricing freedom. There are 4 types of markets: pure competition, monopolistic competition, oligopolistic competition, pure monopoly. We are not going to go into details, because we assume that we operate in a monopolistic competition market, i.e. a market that consists of many buyers and sellers who trade over a range of prices. This range of prices occurs because sellers can differentiate their offers to buyers. Buyers see differences in sellers services and will pay different prices for them. Because there are so many competitors, their marketing strategies have a lesser effect. However, also consider that at a local market level, you may operate in an oligopolistic competition market, i.e. the market consists of a few sellers who are highly sensitive to each others pricing and marketing strategies. This means that depending on how our competition moves, you might have to reduce your prices or risk loosing customers.
Never forget that pricing strategies (e.g. price cuts) are quickly emulated by competitors. Furthermore, intense price competition erodes margins and does not create a sustainable differential advantage over the long term.
- e) Finally, pricing must be buyer oriented: understand how much value consumers place on the benefits they receive from the service and setting a price that fits the value. These benefits can be actual or perceived.
- The price charged will be somewhere between one that is too low to produce a profit and one that is too high to produce any demand.
- Service costs set a floor to the price; consumer perceptions of the product’s value set the ceiling.
- Consider competitor’s prices and other external and internal factors to find the best price between these two extremes.
- Consider the purpose of pricing, e.g. to maximize profitability; to defend an existing market from new entrants, to increase market share within a market or to enter a new market.
GENERAL PRICING APPROACHES
First of all, lets clarify what this actually entails. We are not going to talk about volume discounts, CAT-tools pricing structures, rush jobs and updates etc. We are going to view pricing from a marketing point of view, because finding and understanding the right strategy is an important element in running a successful business.
There are various pricing strategies relevant to specific industries. We are going to examine 3 main approaches that include 3 sets of factors: costs, consumer perception, and competitors’ prices as a general point of reference.
- cost-based approach (cost-plus pricing, break-even analysis and target profit pricing)
- buyer-based approach (perceived-value pricing)
- competition-based approach
1) Cost-based pricing
The simplest pricing model is cost-plus pricing. This means that you add a standard mark-up to the cost of service (standard cost+profit). We are going to talk about costs next. Margins are what create value for the business, and are set based on the profit you need to make, as well as you sales objectives and what you believe clients will pay. So once you’ve costed everything you can play with margins to get your price! (you never want to have your margin be <0). And if you fell below that, you are not being paid to do the job, but you buy it. There can be a wide range in profit margins, but in Greece, the accounting margin used for translation services by the tax authorities is around 47.5%, so this is a good indication. So this is a good first reference.
But this does not make always sense, as it is depended on unit sales (in our case words). Less unit sales would mean higher unit cost. Mark-up pricing only works if that price actually brings in the expected level of sales. Still it remains popular for a number of reasons. First, sellers are more certain about costs than about demand. However, by tying the price to cost, sellers simplify pricing – they do not have to make frequent adjustments as demand changes. Second, when your industry tends to use this pricing method, prices tend to be similar and price competition is thus minimized. Third, many people feel that cost-plus pricing is fairer to both buyers and sellers. Sellers earn a fair return on their investment, but do not take advantage of buyers when buyer’s demand becomes great.
2) Value-based pricing
This means that you are basing your prices on the service’s perceived value. Value-based pricing uses buyer’s perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that you cannot first design your marketing and then set the price. Price is considered along with the other marketing mix variables before setting the marketing programme.
Cost-based pricing is product driven. How you market your service then convinces buyers that the product’s value at that price justifies its purchase. It the price turns to be too high, this might mean lower mark-ups or lower sales, which is disappointing.
Value-based pricing reverses this process. You set the target price based on customer perceptions of the service value. The perceived value will depend on the alternatives open to the customer. In order to employ value-based pricing you have to know your customer’s business, his business costs, and his perceived alternatives. The targeted value and price then drive decisions about what costs can be incurred. As a result, pricing begins with analyzing consumer needs and value perceptions and a price is set to match consumers’ perceived value. However measuring perceived value can be difficult.
3) Competition-based pricing
Consumers will base their judgments of the products value on the prices that competitors charge for similar products. One form of competition-based pricing is the going-rate pricing.
In going-rate pricing, you base your pricing on competitor’s prices, with less attention paid to its own costs or to demand. You may charge the same, more, or less. This is very popular. Providers feel that the going price represents the collective wisdom of the industry concerning the choice that will yield a fair return. They also feel that holding to the going price will prevent harmful price wars.
- Cost-based approach: costs+markup
- Buyer-based approach: perceived price value
- Competition-based approach: what other charge
- Also consider: As a provider you do not set a single price but rather a pricing mix that covers different services. Consider: domestic vs international pricing, customer-segmented pricing, service-form pricing, location-pricing.
LETS FIND THAT FLOOR
“To price your services, you must first know your true hourly rate cost to deliver your services”
In general, we can categorise costs to fixed and variable costs.
Fixed costs (overhead) are costs that are independent of output, e.g. rent, equipment.
Variable costs vary directly with the level of production, e.g. utilities.
Total costs are the sum of the fixed and variable costs for any given level of production.
CALCULATING YOUR TRUE COST HOURLY RATE
- Start with: annual wages
- Add taxes (income taxes 23%; solidarity tax 2%, freelancer flat tax 650€; etc.), pension & social insurance
- Add: cost of benefits
- Health care; life insurance; gym/wellness; etc.
- Add: technology costs
- Software licenses; computers; IT support; mobile phone
- Add: business costs (apportioned amount)
- Rent; admin costs (accountant), utilities, consumables (paper; coffee; toner; etc.)
- Add: other costs
- Training; conferences/events; maternity; personal expenses (groceries, entertainment, school fees etc)
- Divide total costs by total productive (billable) working days
- Total potential billable days = total potential days of work LESS (holidays; sick days; vacation; learning time; wasted time)
Lets try to fill in a costs sheet to see what happens. You can download the one used in the workshop here. However, there are many spreadsheets like that available online. It can help you figure out your hourly rate for starters.
If we calculate that our hourly cost is 25 euros and our translation speed is 3000 words in 8 hours, this is what we need to charge per word:
So our unit price to cover total costs is 0.06. If I add the legal markup, this becomes: 0,097218
To determine how much to charge for a specific job, the translator determines the number of units in the job and multiplies it by his/her per-unit rate. The industry has also worked out some empirical production rules to work out the average occupancy and productivity of a translator. E.g. proofreading may range from 1000 to 2000 words per hour depending on the service, a translator’s daily productivity is estimated to 2000 – 3000 words per day. This is a tangible, reference point that everyone has come to expect, that does not only facilitate cost estimates, but also timings, and is also used to also define minimum tasks, rush tasks etc.
THE ENGINEERING TRIANGLE
Direct clients and translation agencies will use any sort of excuse to make you lower your prices. Have you heard any of these before?
1) Your other colleagues offer lower rates
2) You charge higher than the average
3) We are looking for a longterm cooperation, could you lower your rates
4) This is just a low paid test, more work will come
5) Our client’s budget is fixed
When you find yourself in this situation, run away as quickly as possible, or try to insist on your original price. Perhaps this is the point where you bring out your big marketing guns and ammo that prove why you are worth what you are asking for. For example, “I am an expert in XYZ and I can provide a well researched and meaningful text.”
Unfortunately, the reality is that more and more translators agree too willingly to the lower rates just to get the work.
The Engineering Triangle is a good tool when you are put under pressure to cut prices. It is applicable across many disciplines and industries for project management, which is in effect what we do when translating. In that triangle you can only choose two. E.g. You can do the work fast but not cheap, you can do the work fast but not as good, you can do the work cheap but not as good. You must be prepared to fall back on this and reiterate to the client if they begin to ask for all three of these elements. However, also bear in mind that translation software development companies are trying to persuade paying customers that the Engineering Triangle does not apply to translation. That e.g. you can do the work fast and cheap, or cheap and good, or even cheap, fast and good because of content reuse, QA checks, machine translation etc.
PRICING – QUICK RECAP
- You must earn enough to reinvest in yourself
- Don’t be afraid to lose business on price
- Make clients happy to pay your invoices
*This article is based on Kotler, P., Armostrong G., Saunders J., Wong, V. The Principles of Marketing: The European Edition, Prentice Hall Europe. This article does not deal with the psychology of pricing.
Dimitra Stafilia is PEEMPIP’s President since 2012 and FIT Europe’s Treasurer since 2014.