Pump up the value: it’s time to make the switch to value based pricing
July 30, 2019
Your SMB can benefit from switching to value based pricing.
Imagine going into a sandwich shop and ordering your favorite combo, only to find that the restaurant charges by the minute. But what will my sandwich cost, you ask? That depends on how long will it take to make, answers the worker behind the counter. Sometimes we can make it in 5 minutes, but it might take up to 15 minutes, they explain. “But you’ll have our team’s full, undivided attention during those minutes!”
Unless they made the world’s best BLT, you probably wouldn’t keep eating in that sandwich shop. So why are you selling yourself with the same manner of pricing?
Time based pricing is an awkward and archaic method of pricing your professional services. Make the switch to value based pricing (also known as fixed fee), and reap the benefits of more happy customers.
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You’re not a taxi driver, so stop charging like one
Value based pricing turns the old pricing model on its head. Traditionally, firms determine pricing based on their costs plus a profit margin. Like a taxi, they charge per mile driven, regardless of road conditions, time of day, or number of passengers. Value based pricing determines the end value of your product to the customer, then charges accordingly. Like Uber’s surge pricing, value pricing takes into account what consumers are willing to pay for the service at that time. Why are you charging the same rates during rush hour as you are on a Sunday afternoon?
Many industries already price like this, because the benefits for consumers are numerous. Customers get more transparency, as the price and services included are fixed up front. There is less ‘sticker shock’, because your customers know in advance exactly how much they will need to pay you. If clients think you are too expensive, they can exit the contract before purchasing your services. Many customers are even willing to pay a premium for this certainty, increasing your profit margins.
Clients probably aren’t looking to buy your hours. Rather, they are hiring you for your specialized knowledge and expertise. After all, nobody wants to hear about a new mother’s labor pains – they just want to hold the baby! Similarly, your clients probably don’t care about your work process. They just want the end product, plain and simple. So why not give them a comprehensive price for it?
Adding value all around
Value based pricing is a win-win: it benefits the consumer and it benefits you. Value based pricing separates time from profit, encouraging efficiency. Hourly workers have no incentive to improve their processes, because they’ll make the same amount regardless. But when you begin to charge based on the perceived value of your services, you also begin to reward efficiency among your workforce.
An hourly worker at McDonalds probably isn’t worried about how many burgers they can make in an hour. They just want their hourly wage (then to get out of there). But if the worker was paid based on the output (number of burgers flipped), you can bet they would figure out a way to flip more burgers. Under an hourly system, workers aren’t incentivized to come up with new processes to streamline workflow. But when you stop rewarding hours spent and start rewarding real productivity, workers have an incentive to work smart, not hard.
As well as productivity, many large firms that have switched to value based pricing have also seen a rise in employee satisfaction. This makes sense when you consider the fact that you probably aren’t looking to hire bean counters, but experts. Treating your employees like the knowledge experts they are demonstrates trust, a key element of any high performing team. Employees enjoy increased flexibility, improved work-life balance, and most importantly, the death of the dreaded time sheet. Would you rather work for a boss that encouraged you to add value and make a difference in the lives of your customers, or to simply clock hours? If you prefer the latter, McDonalds is probably hiring.
Another unsung benefit of value based pricing are better profit margins. Under an hourly system, you could only charge for the amount of time it took you to complete a task. Value based pricing allows you to stagger your costs, and to charge more for highly demanded or niche services.
Let’s say your translation business offers a wide variety of languages. It probably takes the same amount of time to translate from English to Dutch as it does to translate from English to Flemish (a related dialect from southern Holland and northern Belgium). But, the value of Flemish documents is likely higher than those in more common languages like Dutch, especially if your client is navigating the (in)famous Dutch communication style. Value based pricing would allow you to charge a premium for your specialized knowledge of local dialects, idioms, and customs. Now, you can afford to reduce your price for more common languages like Dutch or German, adding even more value to customers.
If your services add thousands of dollars in increased revenue for your client, value based pricing allows you to grab a larger slice of the pie (even if it only took a few hours).
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Making the switch
Value based pricing requires a shift in your mindset. Instead of counting hours, you need to consider the value provided to the consumer. Beginning in a client-focused mindset can help you determine how you can best help clients in a holistic manner (possibly in ways they haven’t even thought of). After all, your clients are purchasing your expert knowledge and advice, so don’t be afraid to give it!
Similar to a cell phone plan or a software package, value pricing bundles services together, then charges customers a set amount. Take the services that are in the highest demand or are often purchased together, and start offering your clients a comprehensive price. They will likely appreciate your expert opinion on what precisely they need (and what they don’t).
Many professional service companies shy away from value based pricing because it’s difficult to know where to start. It’s true: pricing your products and services properly will require research and critical analysis. Instead of simply adding your profit margin on top of hourly costs, consider the positive benefits of your services for your clients. Research what your competitors charge, and solicit feedback from existing clients on the value added by your services.
Consider a tiered system of ‘good’, ‘better’, ‘best’. For example, if you have a marketing business, your ‘good’ tier might consist of a simple social media campaign. The ‘better’ tier would include extras like custom graphics, social care, and detailed analytics. The ‘best’ tier, or your premium service, would include more labor intensive products like content marketing, video tutorials, webinars, or other industry specific products.
You may need to experiment with different pricing levels to determine what exactly your customers are willing to pay. But entering into pricing with a client-centric mindset will allow you to focus on providing the most value possible (not just the most hours).
Time sheets are an archaic relic of a long gone era. You’re a knowledge worker, not a timekeeper. So start charging like one.
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