So what is all this value-based pricing about then? If you sell professional services, or your expertise, then the only way of measuring what you should charge your customers is the amount of your time it takes to deliver what they have asked for, isn’t it?
Well, not necessarily.
Many products and services that we buy are priced according to the value that they provide, or add, to us. If it’s our wedding anniversary we may choose to visit an expensive restaurant, and pay a significant amount of money for a meal. If we’re just ready to eat something because it’s dinnertime, we are less likely to spend a fortune.
To all intents and purposes, the anniversary meal and the utilitarian meal cost the restaurants a similar sum to produce in terms of ingredients, yet they are able to justify widely differing pricing models because of the value they add to those ingredients.
In other words, you as the customer are willing to pay what you feel the meal is worth to you, and you will choose your provider accordingly – the up-market restaurant, or the local pizza place.
From the business owner’s perspective …
Look at the same situation as a business owner, facing a similar decision-making process. They need a problem to be solved, and that solution is worth a certain amount of money to them – they may have quantified that, or they may not. Typically, they will approach a number of potential providers for pricing.
The first one comes along, and quotes you £50 an hour, for whatever period of time the work takes. That’s open-ended, and you can’t really get a decent estimate of the time taken, because the scope of the job is not yet clear enough. The provider says that it may take a day or so, but can’t be sure.
The second one turns up, and takes a look at the problem, and then quotes you a £500 fixed fee to deliver the solution. This is likely to be a more attractive offer than the open-ended one, because you know where you are with it. There ought to be no nasty surprises.
From the provider’s perspective …
So how do you work out how to set your value-based pricing?
Marketing experts will tell you that you need to consider your prospect’s alternatives, and weigh up the pros and cons of those alternatives, and then calculate a price that takes into account the fact that you may have a greater, or lesser, expertise in a particular area, and so on.
These value-based pricing models are fine if you are in a position to ask your prospect who else they have spoken to, and what they thought about the proposal that was made to them. In my experience, that’s not normally the type of conversation that takes place when you are pitching for work and, frankly, asking too many questions like those makes it sound as if you are fishing for information so you can undercut competitors.
Working out the price …
I prefer to look at it from the client’s angle, and consider what the job is worth to them. This may actually result in you walking away, of course!
I often come across software problems. Let’s assume that a client has a timesheet system in place that logs the activities of staff, and it needs to be updated or replaced. I know that they can buy systems off the shelf that will do a lot of what they want for (say) £250. There will be a bit of support and an implementation cost on top of that.
To rebuild it completely might take three days, for example. If I charged £40 an hour, then that would be £960, which is clearly a significant amount over and above the off-the-shelf cost.
So this is where you need to think it through … if it is going to cost the client £500 to buy an off-the-shelf system and get it implemented, but it’s not going to do everything that the old system did, there will need to be some compromises. Your value-based pricing calculation needs to consider what those compromises are going to be, and what is it worth to the client if you can overcome them?
You may decide to split the difference, and quote them £750, or you may stick to your higher price as you know it will be a lot of work. Alternatively, you can be honest with the client and tell them that it would not be worth their while to pay for another bespoke development, because the benefits it will deliver are not significantly greater than the cheaper off-the-shelf option.
It’s always a balance, but in the end there is no magic formula to value-based pricing – it’s a gut feel, and a bit of considered logic. Above all, though, it’s about talking to a prospect, and weighing up what’s best for them, as opposed to wading in with a view to getting as high a fee as possible. Call me old-fashioned, but I think that is a bit of a USP!