How to reduce your cognitive costs

When your clients buy from you, they incur two different kinds of costs: economic costs and cognitive costs.  The economic cost comes out of the client’s bank account.  But the cognitive cost is extracted from your client’s psyche.  Think of it as the psychological gap between the cost of something and its perceived value.  Sometimes that gap is small (or even non-existent), in which case the cognitive cost is minimal.  But when that perceived gap is large, the cognitive costs are huge.  In effect you’re making your client pay a heavy price, in more ways than one.*

Reducing cognitive costs

How do you reduce your cognitive costs?  Align the prices you charge with the perceived value of the services you deliver.  When you apply your “blended hourly rate” of say, $150, to resizing a banner ad, your client pays not only a high economic cost, but an even higher cognitive cost. 

Stephen Covey teaches the concept of an “emotional bank account.”  In relationships -- both personal business -- you’re constantly making either deposits or withdrawals from the emotional bank accounts of those whom you deal with.  When you consistently charge more than the perceived value of a service, you make an emotional withdrawal from your client’s account.  Do this long enough and you eventually bankrupt the account.

What do clients complain about?

To see this principle in action, think of the nature of most client complaints.  They tend to be about the small stuff (“Why did this copy change cost so much?”) not the big stuff.  Clients complain mostly when the cognitive costs are too high; when the perceived value doesn’t align with the economic cost.

Agencies that understand these dynamics are innovating with new and different pricing approaches that are very different from the “one size fits all” approach of the standard hourly rate.  For higher value services, not only can you charge a higher price, but you can charge based on an outcome instead of a deliverable.  Outcomes always command better prices than services.

On the other hand, a readily-available, easily-delivered standardized service (like producing a newspaper ad) can and should be priced as a deliverable.  Menu-based pricing for lower-value services is a smart strategy, because it presents clear pricing up front and avoids back and forth price negotiations for what are essentially “commoditized” services.  Essentially you’re holding down not only the economic cost but the cognitive cost of these transactions. 

Here’s a way to think about this approach to pricing:

When you’re selling:

Ideas, concepts, strategies, plans, solutions.

When you’re selling:

Deliverables, produced items, revisions, distribution

Apply a value-based approach,
such as:

  • Fixed priced based on perceived value.
  • Variable price based on outcomes.
  • Variable price based on usage.

Apply a unit-based approach,
such as:

  • Unit price for a specific deliverable
  • Pricing adjusted for volume

*Wired magazine editor Chris Anderson writes about this concept in his insightful book, “Free.”

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