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 are 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 by us 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.
Article by LeanCept