Many are eager to switch to value-based pricing but have no idea where to begin. This is a 3-step guide on how to gradually implement value-based pricing in your agency or freelance business.
This isn’t our first article on value-based pricing, nor our last. We’ve previously published a comprehensive guide to value-based pricing. If you want to get more details about the how of value-based pricing, and not its implementation, I recommend you read it first (as well as our huge FAQ). That article has many concrete tips and ideas on how to gain insight into client needs. But I think it falls short on explaining how to implement value-based pricing in an existing business. That’s why I decided to write this.
Gradually Implementing Value-Based Pricing in an Agency or Freelance Business
The best way to make a big change is in small steps. A well-known truth in agile software development is how small changes can, if happening over and over (iteratively), make huge a difference. Just like the way a river wears down a ridge over the millennia forming a canyon, small changes to how you operate your business will have an impact. Needless to say, it happens much faster than endless water molecules and sand grinding against rock. This is thanks to effects that are compounding and reinforcing each other.
Step 1: Don’t Fix What Ain’t Broken, Start Using Value-Based Pricing on a Small Scale
First of all, you are where you are for a reason. Much of what you do is clearly right so there’s no need to throw out the baby with the bathwater, so to speak. Stick with what you do for now and bring change to well-chosen part of your business.
Introduce Value-Based Pricing to One Warm Lead
I recommend trying value-based pricing with one new potential buyer who has, on their own accord, chosen to approach you. Buyers who take the initiative have realized what you can do for them and are acting on that conviction. They are very warm leads will likely trust your judgment and be happy to do whatever you propose.
When pricing based on value, it’s important to understand the buyer’s sense of value. In other words, how much they’re willing to pay. The easiest way to understand how much a buyer is willing to pay is through conversations. These conversations take place during the “diagnostic” stage of the sales process. To reinforce the client’s sense of value, it’s important to act consultative and ask questions, rather than making statements.
Reducing Information Asymmetry Through Conversations
These conversations simplify value-based pricing by reducing what economists refer to as “asymmetrical information:”
“Customers will try to conceal from you how much they value your services and what they are willing to pay for them. This is especially true of professional buyers, such as procurement. Economists refer to asymmetrical information as information concerning a transaction that is unequally shared between the parties to the transaction.” – Ron Baker in Implementing Value-Pricing
While many buyers will not tell you outright how much they value your services, there are other ways to glean this information. Arriving at a number requires a bit of detective work. Here are some questions you can ask that help reduce asymmetrical information:
- What do you expect from us?
- What is your business model? How do you make a profit?
- How will the services we provide add value to your customers?
- Which of our offerings is of the highest value to you?
- Who is the next best alternative (competitor) to us/me?
- What characteristics do they have that we do not, and vice versa?
- What keeps you awake at night?
- How do you see us helping you address these challenges and opportunities?
- If price were not an issue, what role would you want us to play in your business?
- What will the success of this project look like?
- What is your budget for this type of service?
I recommend picking up Implementing Value-Pricing for the full list of questions and lots of other great ideas regarding value-based pricing.
Steps to On-Board Clients in a Value-Based Manner
By now you should have a pretty good idea of the kind of value you’re providing this buyer. Now you need to act the part and reinforce the sense of value through your actions:
Expediency and Helpfulness
Redouble your efforts when it comes to expediency, professionalism, and helpfulness throughout the buyer’s experience (the buying journey).
Frame Your Offering
As soon as you have qualified them and ensure they’re a good fit, budget, and vision-wise, work to establish a sense of value. This shapes the mental frame that the client will use to compare your offering and price. It’s important that you position yourself here so the client makes the right comparisons. The wrong position will result in the client viewing your offering as unrealistic.
Identify the Pain Points
Strive to understand the pain points you address with your offering. This will give you clues as to what value you’re providing.
Use Tiers and Options
Price your services in tiers with options based on what you’ve learned about the buyer’s needs.
Deliver a Fantastic Proposal
Deliver a stunning proposal that reinforces the sense of value and follow up.
With some luck, the client is a good fit for value-based pricing and you succeed in convincing them about the potential value of what you can accomplish together.
By applying what you’ve learned, you can use your version of this method for all new clients you bring in. All new business you generate will use value-based pricing.
Congratulations, you’ve (probably) doubled your future profits!
Cost-Plus Pricing
Pricing this way involves calculating the cost of providing a service or good and adding a premium, usually 10-20%.
An example: Jane is a freelancer who wants to make $6,000 per month before taxes. She calculates other costs in her business and her average number of billable hours per month. She estimates the total cost of her salary and other expenses to be $7,200. She works on average 120 billable hours per month. Her spreadsheet tells her she needs to charge $60 per hour to cover her salary and other costs. She sets her hourly rate to $72 to add some margin.
Note: This is a very simple example which ignores several important factors for the sake of clarity.
Step 2: Review Your Client Portfolio and Decide Who Is Worth Keeping
Once the value-based on-boarding flow is in place and you feel confident presenting your services this way, it’s time to have a look at the existing client list. This part of the process is frequently the most challenging and often calls for some hard decisions.
Sometimes It Feels Like Losing a Battle But Winning a War
You acquired your existing clients back when you were doing cost-plus pricing. They’re used to the way you’ve been working with you and many of them probably like it. Your decision to switch to value-based pricing could mean some serious, but necessary, boat-rocking. Chances are some clients will not still be with you when it’s all over.
But that’s a good thing.
Not all clients are easily convinced of the benefits of working this way. Either because they find it hard to accept the idea or because you do not communicate well with them. As a general rule, it’s smart to work with people who we gel with. Switching to value-based pricing could be a much-needed spring cleaning for your business.
This assumes you have enough clients to handle a potential shortfall. In some cases, it’s wise to wait a bit before you roll out value-based pricing to all existing clients. Make sure you are certain your business can survive the results of many clients deciding to stop working with you.
Make “Lovability” a Requirement for Client Retention
To prepare for that outcome, I recommend taking inventory of all your clients. Wise agencies grade their clients on a regular basis. The traditional way of doing this is by classifying clients into A, B, and C tiers. The factors that go into such a classification are usually annual revenue for the client, prompt payment history and profitability. I think there’s a better way.
Instead, I recommend considering softer factors. Specifically, how do you and your team feel working with this client? Do you love it, enjoy or tolerate it? Or do you even hate it?
As Ron Baker states in his book, “bad customers drive out good ones.”
It’s when we do what we love that we achieve wonders. Working value-based is all about making fantastic work together and sharing in the results.
If you’re a one-person operation, ranking clients on “lovability” is easy. If you’re more than one, create an anonymous Google Form and send out to your team. Tabulate the results and compile a client list with a lovability column. Combine this information with other factors such as the client’s importance to your firm, their size/budget, growth potential and your estimation of their willingness to pay for value to create a master client list.
You can probably, even now, determine which clients will stick with you and which won’t. To reduce the impact on your revenue, phase out clients over time. By introducing the change in such a staggered manner, switching to value-based pricing won’t be a shock.
Bring the Change in Small Steps, One Client and Project at a Time
For the clients you judge being receptive to value-based pricing, approach them as they order new work and introduce your new tier-, options- and value-based pricing. Explain that hourly billing is no more and that all work will have a fixed price instead.
Consider the impact on your clients when you decide what information to share. Every client may not have to be aware of this change immediately. But different companies operate with different principles. Your company might prefer absolute transparency in everything you do. If so, share the information with everyone at the same time. Just make sure you predict most questions your actions give rise to. In addition, reach out to each client to ensure they understand what it means for them. Not doing that can have some rather adverse consequences. Something recent events reminded me of.
Some weeks ago, a consultancy I’ve worked with informed me about a price change. They didn’t reach out to me in person, instead, they sent a digital contract with a letter attached. They expected me to just accept the change and sign, even though it meant a 600% increase in fees. The letter was brief and raised more questions than it offered answers. I wrote back to them and complained, disappointed by how this negatively affected me. But I was also annoyed by the manner in which they’d informed me of the change. The owner called me back the next day with an apology and an explanation.
Make sure you don’t have to do a mea culpa as a result of your price change.
Respond to Client Concerns in a Calm and Constructive Manner
Use the spreadsheet classification you made earlier to try to predict which of your clients that will object. For each of these clients, plan your action: keep them on under existing terms, work to convince them or try to phase them out. In these conversations, strive to be calm and strategic. Try to respond, rather than react to what they’re saying.
Emotions can run high when it comes to pricing. We often associate price to our sense of worth. As a consequence, we tend to take price personally. Such a reaction is not constructive and often misguided. A client that’s hesitant to pay you more doesn’t necessarily undervalue you, but rather cannot see the cost of problem you are solving. That is a problem of communication which you can help address and solve.
“He who has learned to disagree without being disagreeable has discovered the most valuable secret of negotiation.” – Quote in Never Split the Difference by Chris Voss
Being cool and composed in the face of criticism builds trust. If your client and you cannot find a solution and decide part ways, they will remember you for your professionalism. Chances are they will speak well of you even though you disagreed.
The Risks of Retaining “Troublesome” Clients
It might seem strategically smart to keep on a client no one likes due to the revenue generated. But be aware that all such clients create a debt in the form of low morale in the team.
Another factor to consider is that the work they order may be plentiful but it’s probably not extremely valuable. Clearing out work you hate to do will make space for the kind of highly valuable work that you love doing. That will raise revenue and morale.
Step 3: Review Your Pricing Policy and Model on a Regular Basis
You’ve probably raised your prices before by adjusting your “standard hourly rate.” With value-based pricing, there are no “standard rates.” Instead, you price the client.
As your clients grow and change, their needs will too. Your capabilities and brand value will also grow, making clients willing to pay more. You need to take this into account when you set prices.
While your value-based pricing isn’t based on a standard rate, nothing stops you from developing a pricing model you use within your business. It can weigh-in many factors. It’s only natural that client profitability and revenue influence your pricing. If you like being mathematical about it, you can create a standard spreadsheet for your company and then adapt it to each client by changing the weight of each factor.
Make it a habit to review and update this model by appointing someone responsible for it. If you’re an agency, I recommend taking Ron Baker’s advice and creating a value-pricing council. This group updates pricing models and sets prices for clients. By taking pricing out of the hands of account managers and salespeople, you avoid unnecessary discounting and can maintain a consistent way of pricing your services.
Conclusion
Taking the leap to value-based pricing isn’t as hard as you might think but it does require determination and a plan. You need to be firm in your conviction of the merits of value-based pricing and not back down when clients are pressuring you.
The best way to ensure a successful transition is to be prepared. Work to improve your understanding of your clients’ willingness to pay and the problems you solve for them. List all the questions they will likely have and write down answers. Respond to their concerns with empathy.
Take the lead. Convince your client there’s a clear path forward and that it will benefit you and them.
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