A Guide to Value-Based Pricing
The uptake of value-based pricing is now progressing nicely and the adoption rate in some verticals is very positive, but there is still a lot of room to make up in some such as technology and most of all procurement, where they are obsessed with costs.
What is Value-Based Pricing? #
Value-based priced is the standardised term for pricing expertise. It’s alternate name is price discrimination. A good way to explain what price discrimination it’s the way we commonly use to get medicine into 3rd-world countries.
It’s pricing the customer. And maximising the price is your goal, but the maximum is what a client is willing pay. This is trading unequal items, which make ‘fair’ a subjective word, which all of economics is.
Value-based pricing is also common in hotels, commercial airliners and in some ecommerce platforms.
Introducing The Value Triad #
The value triad is made up of these 3 rules: money made, money saved or emotional contribution. This is how I add up all my value and then take my cut. As a designer in my past life showing my value was tricky. But once I tied it to one of these 3 rules, I was in cruise control with my value-based pricing education. Here’s some expert examples of using The Value Triad:
- A management consultant can save money to recruit better hires
- A tax accountant finds loopholes to save money on taxes
- A lawyer can save a brand on a highly publicised case to maintain profits
- A marketer can make a great campaign and tie compensation to usage which is tied to profit
Why Should I Care About Value-Based Pricing? #
For the most part, Value-Based Pricing firms outperform those that use hourly-billing (not pricing), by almost double. Value-based pricing isn’t merely a financial win for your firm. Hourly-billing firms have a huge list of problems, sure it’s easier, but easier comes at the cost by:
- Hourly billing limits your income potential
- Hourly billing is tied to stress and suicide in expert firms
- Hourly billing diminishes quality of life
- Hourly billing ruins thinking
- Hourly billing is a selfish pursuit
- Hourly billing is an incorrect economic theory of value
- Hourly billing doesn’t reward the best in your business
- Hourly billing ruins your brand
- Hourly billing is never tracked effectively, leaving with unethical and indecent staff
Myths and Misconceptions About Value-Based Pricing #
Is Value-Based Pricing Just a Fixed Price? #
People think Value-Based Pricing is simply a fixed-fee price. But value-based pricing is the array or pricing methods you can possible use.
Blair Enns states that ‘saying NO to your ideal target customer is intellectually lazy’. And to answer the question to the ‘how?’ is by value-based pricing.
Using sliding scales of value you provide you can offer up a price that gives the client, the ability to pay at a later price, gives you flexibility in payments, and maximise income for your firm.
Is Value-Based Pricing Unethical? #
Giving a different price to different people is good business. You get on a plane and the person next to you has a completely different price. They might be first class, business class or economy, but even within those tiers they have different prices based on when you book or where you book. You never ask the person next to you what you paid, you got the price you’d pay and went on your way.
Is Value-Based Pricing Language I Should I Use In Meetings? #
I don’t use value-based pricing language in meetings. I use ‘Modern Pricing’ or ‘Strategic Pricing’ personally. That feels a little more me. The word ‘value’ more often than not sounds cheap. So probably a personal approach to what you use would be my advice.
How to Use Value-Based Pricing Effectively (The Price Stack) #
You learned about The Value Triad back at the start of the article. I want you to use this in your initial value conversations with clients. The value conversations are the meaty parts of value pricing, but it’s an article for another day.
Once you realise what scope of value you’re providing you can then start thinking about your solutions. That might sound counter intuitive if you’re an hourly-biller, but that’s how.
Now we go away to craft out pricing options, and we open up Word doc and use 3 or 4 columns to map out our prices.
Introducing The Price Stack #
When crafting the proposal, I reach to my Price Stack, I credit Tim Williams for introducing me to The Price Stack in this article. The Price Stack is my range of pricing tools I can use. It may be a lot or a few. Up to you.
Some examples I’ve used: Fixed-price, revenue-sharing, usage, licensing, royalties, performance-pay, tips.
Why Give Options? #
Options is the most underrated part of all of pricing.
This is for my friend Stephen Younger, he’s an expert in branding, but he’s obsessed with his 1-solution method. But what Stephen gives up in his method is a client never selecting a highest price option. So he will never know how much he’s leaving on the table.
Confidence #
To set a big price you must be confident in your expertise. Confidence in your expertise comes from positioning in the market. If you’re not willing to throw out a big price in a meeting I’d start with using a prop in meetings, maybe holding your phone, or a pen in a diary? But if these aren’t helping, perhaps give it to a pricing council.
You might not be a super confident person, so a pricing council might be needed. This is especially true for creatives and I help in that area.
Rounding Up, Staying Positive is Key #
You might struggle early in the process, as the value conversation is quite hard to master, but soon enough you’ll learn how the price stack, options and confidence give you the ability to calmly say $100,000,000.00.
- Next: Death to Timesheets