This is the holy grail of pricing services – the one everyone’s talking about but which seems out of reach. In this article, we break down the how’s and why’s of a value-based price and show how you can take the first step.
How a Value-Based Price Works
There’s no shortage of articles on this blog explaining how value-based pricing works. So instead of repeating all of that, I’ll provide a short definition of a value-based price:
A value-based price is based on the value that your product or service creates for the buyer.
In other words, a value-based price corresponds to the value that buying the service or product generates for the customer or client.
- High value: high value-based price.
- Low value: low value-based price.
By solving or fixing problems that either painful (emotionally expensive) or costly (creating financial loss) value-based pricing lets you get a share of the improvements.
A value-based price has another benefit over cost-based or cost-plus-prices (your base cost plus a fixed margin) – they reward you for delivering more value. The more value you help create, the more you can earn.
Pricing the Client
Since a value-based price corresponds to value and larger companies have larger problems, large clients pay more than small ones. It’s fair, after all, someone with a large problem (that you solve) gets more value from you than someone with a small problem. This is why we refer to value-based pricing and a value-based price as “pricing the client.”
A Value-Based Price Is Not Contingent
Unlike performance pricing, there’s no “if” what a value-based price is concerned. You’re paid regardless. Though I do recommend delivering on the tantalizing vision of a better future you’ve dangled in front of the customer, or your work till dry up fast. We live and die by our reputation.
It Doesn’t Matter How Hard You Work
Any price that doesn’t promise a certain effort or number of hours as part of the deal is in effect a value-based price. The customer is buying the service on account of what they get, not based on what you do.
The Idea and Vision of Value is Built During Sales Conversations
To shift the buyer’s idea of they get to focus on highly valuable results, you can steer sales conversations to be about value. Such a conversation will be about results, effects, impacts, improvements, and changes rather than commoditized deliverables such as blog posts, social media campaigns, and websites.
Having a Recognizable Brand Is Like Rocket Fuel When Pricing on Value
Companies that have a recognizable brand are in a wholly different position to talk about value with clients compared to those that are unknown. If the client knows you and thinks well of you, then they will value your counsel and input. That’s why it’s so important to position yourself and be an authority in your niche.
A Value-Based Price Requires a Conceptual Agreement With an Economic Buyer
Before you can set a value-based price, the prospect needs to realize the potential of what you’re selling. The buyer himself or herself needs to say what the problem is costing them or what a solution would be worth – in terms of money.
Value-pricing expert Alan Weiss calls this a “conceptual agreement.” Without such an agreement, a value-based price will seem high or unrealistic to the buyer. In most cases, only certain people can make such cost estimations or sign contracts. We call these key individuals “economic buyers” – make sure you’re talking to the right person!
Even If You’re Modest, You’ll Still Earn More Than When Pricing Per Hour
It can be challenging to provide a value-based price early before you have all the information you need. The conversation about value doesn’t happen immediately and you want to establish rapport and trust so that any number is viewed in the right context. Though in case you have no choice, value-pricing expert Alan Weiss recommends:
“If you feel pressured to agree to some number, ask what a conservative improvement would be. Cut that number in half – it will ensure an unequivocal ROI ratio. Even better, ask for a range, take the low end and cut it in half.”
Chances are that even that number, however modest, is multiples of what you’d earn if you were billing hours.
Two Types of Value-Based Prices
There are, generally speaking, two kinds of value-based prices that are common in the freelancer and agency space.
The Fixed Value-Based Price
This is the most common form of value-based prices and the one I recommend to most agencies and freelancers. It’s the idea of selling a service as a package at a fixed price on account of the value it will generate for the client.
If you want to be a bit more advanced you can use options to let customers add more value. You can also present different packages or options in tiers to use psychological effects such as anchoring to sway their choice.
A value-based price allows you to be rather creative in how you present your services. Which is great, since you want to be hard to compare. The harder it is to compare you to your competitors, the more competitive you are.
The Point-Based Value-Based Price
Organizations that comprise more than just a handful of people and which wish to streamline work are starting to use value-based points. This is handy for agencies that provide productized services, such as marketing or content production, on a regular basis using retainers. It makes pricing easier while still avoiding the use of hours.
In a value-based points system, each client pays a pre-defined price per point. That price is set by the salesperson or a special pricing team. The price reflects the value that the client gets from the work the agency is doing. Services are listed on a menu and each item has a predefined price in points.
A client would normally negotiate a set of such services in advance to secure a lower price. When a writer at the agency is asked to write a blog post, they immediately know that it costs 7 points by looking up that client’s services menu.
This makes it easy to bill the client for the work. It also means that people on the team don’t need to be pricing experts to price based on value. The client can buy points in advance as a retainer or subscription, or pay monthly for services rendered.
Who Uses Value-Based Prices?
I sometimes get the impression that agencies and freelancers consider value-based prices to be an exception, not the norm. But that’s only true for our little corner of the world. Looking at any other good or service makes you realize that most prices are based on value:
- Would you ask the car salesman how many hours it took to paint the Toyota you’re about to buy?
- Will you ask the salesperson at the bathroom appliances store how much steel that was used to manufacture the washing machine you’re looking at?
- Did you ask at the paint store about the cost of the pigment used for the house paint you’re eyeing?
The idea to pay for materials or time is the exception. Agencies and freelancers are still using efforts/hours/time/materials only because determining value is seen as hard or even impossible.
Basically, every product you see at a supermarket has a value-based price. The price is as high as you’re willing to pay. Your willingness to pay is based on how you benefit from the product or service. In other words, the value it provides to you.
6 Reasons You’d Want to Use a Value-Based Price
Value-based prices and pricing have been covered extensively on this blog so this section is intentionally kept brief. I’ve linked to articles that go into depth in case you want to learn more about these benefits of using a value-based price.
1. You Want to Earn More and Work Less
When charging for value instead of time, what matters isn’t how much you work but how effective you are at what you do. Value-based prices incentivize you to be better at what you do. Hourly billing isn’t in the client’s interest at all since unprofessional and dishonest agencies and freelancers can simply work slower to boost their earnings. Do you want to be associated with companies or individuals who operate like that?
2. You Want to Solve Real and Painful Problems
When adopting value-based pricing, it suddenly matters what kind of work you do. Since your price is based on the value created, you can no longer profit from work that doesn’t benefit the client. To earn more money, you need to find clients with more expensive and complex problems. Or find a niche for which you can be effective at solving the same problem for many.
3. You Want to Align Your Interests With the Client
A value-based price requires skin in the game and transparency: the client being open about benefits or gains and you being transparent about what’s in the client’s best interest. You can no longer build 50 pointless landing pages (which you know won’t help the client one bit) just because the buyer doesn’t know better. If that work doesn’t pay off, you’re partly to blame. That’s just a plain decent way to work, don’t you think?
4. You Want to Be Valued For Your Unique Competence, Skills and Perspective and the Potential You Bring
As an agency or freelancer that uses value-based prices, you’re no longer “yet another.” You’re apples and the competition is oranges – incomparable. Clients know this and they will value your counsel so much more highly because of it. You will be brought in for your expertise, not because you put the lowest bid on Upwork.
5. You Want to Be Able to Work According to Agile Principles
As I explained in the article about effort-based pricing, agile principles are rather meaningless if all billing is done by the hour. Agile development requires the client to make decisions based on business value, not time spent. As long as you bill for hours, time will be the deciding factor for what work to prioritize, not the value it brings.
6. You Want to Offer a Great Workplace That Attracts the Best Talent
People who join the workforce today want to work remotely and not necessarily always spend 40 hours every week on the job. They know as well as you that they have ups and downs – good days and bad days. Hours as such don’t really count. It’s what they accomplish at work that matters.
Sorry if I offend but to link someone’s productivity in our industry to the number of hours sitting is just plain dumb. Especially when it comes to someone who’s as committed and involved as an employee. Companies that stop tracking employee work hours as a basis of salary have access to the best talent.
6 Reasons Agencies and Freelancers Avoid a Value-Based Price
1. They Don’t Know What Value They Provide
Without you having a grasp of the value you provide, value-based prices aren’t an option. If you truly don’t know, then I recommend you do a little bit of research. These articles should give you some practical ideas:
- Want to Use Value-Based Pricing? Do These 3 Things – on the basic ideas of value-based pricing and how you break down your offer in terms of benefits and advantaged and determine their value to your clients.
- Use This Model to Crush Your Customers’ Worst Problems – on how to interview your clients and learn about what led them to hire or contact you in the first place.
2. They Cannot Explain or Communicate the Value to a Client
Without proper communication or sales skills, you’ll fail to convince the client that you are in fact providing value. I suggest checking out our guide to value-based selling. A value-based price requires that you build a vision of what the world will be like with your help. That’s the vision that you’re selling. That’s the value.
In many cases, clients won’t even contact you due to poor marketing or just a terrible website. Lucky for you, we got an article on that too. Learn how to redesign your website so it starts generating more leads and helps position you.
3. Their Potential Clients Are Price-Sensitive and Cannot Look Further Than the Price Tag
If your clients are cheap-skates and simply unable to view what you do as value-generating, then you’re barking up the wrong tree. Not all buyers get the concept of a value-based price. If your clients are “price buyers” or “window shoppers” then I recommend going back to the drawing board and finding a niche that is willing to invest for results.
You will want to focus on a subset of buyers with whom you have a unique (or perhaps even unfair) advantage. Among these people, there should be ones you know already and who can help open doors for you.
4. Switching From Hourly to Value-Based Prices Seems Hard and Risky
Perhaps you’re already deeply invested in hourly billing and have processes and tools set up for it. Or even worse, fear that clients will leave if you change to value-based prices. In that case, switching to value-based prices can seem scary if not outright dangerous. If the change is not communicated correctly, clients might feel your new value-based prices are simply a euphemism for a price hike. But there are ways to overcome that, as this article explains.
5. Their Employees Really Do Not Value More Control Over Their Time
Perhaps your team is a statistical improbability and prefers to be chained to their desks and being required to check-in at 8 in the morning sharp. If so, congratulations. Twenty-first century Taylorism is perfect for you. But people retire and you will need to hire new people to replace them or to grow your business. When that day comes, just don’t expect to find any hungry traditionalists hanging around looking for work.
6. They’re Happy Billing For Time
Perhaps you like billing for time. You consider it simple, fair, and straightforward. Well, technically you are wrong about almost all those things, but habits can be hard to break. I recommend at least reviewing your pricing strategy in a year’s time and see if you’ve changed your mind.
Conclusion: Value-Based Prices Are Fantastic for Services But Require That You Know Your Clients
Value-based prices are powerful and can potentially transform your business. But they don’t work unless you do the legwork needed. To be effective at using value-based prices you must:
- Know your position and how to differentiate yourself;
- have marketing activities in place and build a brand;
- know your market and customers in and out – pains and gains;
- be able to guide a sales conversation towards vision and value; and
- be perceived as a premium option and always think and act client-first.
It’s no small feat for sure. But totally worth it. Getting this right will build client loyalty and a brand that will ensure the survival of your business for the long term.
What Are Your Experiences of Using a Value-Based Price?
What worked well? What didn’t? What would you have done differently? Please post a comment and share your thoughts. I read all comments.
Coming Up Next: Retainers and Subscriptions
If you’re looking for a way to generate sustainable and recurring revenue, retainers should definitely be part of your strategy.