Value-Based Pricing: The Basics

Why Use a Value-Based Pricing Model?

When it comes to pricing your services as an independent entrepreneur, it can be hard to know where to draw the line between profit and practicality. If you aim too low, you risk selling yourself short and missing out on growing your business.

If you shoot too high, you might lose clients, right?

Well, not necessarily.

If you transition into using a value-based pricing system, you could find yourself seeing the results and profits you—and your clients—have been looking for.

What is Value-Based Pricing?

Value-based pricing is a shift in thinking that can be applied to just about any area of business. The basic concept is that you should be charging for your services based on the value they render your client, rather than on hours or cost.

Cost-plus pricing is what you’re probably most familiar with, in which you first calculate your costs before adding a certain percentage to create a profit. Cost-plus pricing often lends itself to an adversarial dynamic between yourself and your clients.

Adjusting Your Thinking

The first step to shifting into value-based pricing is changing your mindset about yourself and your work.

It’s easy to get caught up in undervaluing what you do.

Often, these are habits ingrained in you from your first jobs onward. You’re taught to pay your dues, to take what you can get, and to say thank you.

While some of these principles can hold true, once you’ve established yourself as a hardworking person in your field who delivers results, it’s time to move on from treating yourself like an entry-level employee.

Time Isn't Money

One of the tougher mindsets to move away from is equating time with money.

If you are charging an hourly rate, you are incentivized to drag the process out for more compensation. But the longer you are in your field, the faster and more efficient you probably are at your job, right?

Should you be punished for your greater level of experience?

Of course not.

And your customers likely want to reap the benefits of your skills as soon as possible, which adds to the value of your service rather than detracting from it.

Charging by the hour also limits your profits. You only have so many hours in a day, and it’s easy to run yourself down by working too much when you assign a dollar amount to all twenty-four of them.

Your clients are paying for you, not your time.

Even if something takes just a few hours for you, it is because you have spent years learning your trade and maintaining knowledge of your field so that you can deliver the greatest value to your client.

The Consultation

A big shift that value-based pricing demands is a change in the conversations you have with clients.

When talking about a potential project, you may have a pitch down to a T.

But value-based pricing isn’t about having a practiced pitch. It’s about having a thoughtful conversation.

 

Really Listen

Start out by asking thorough questions.

What problems does your client have that they hope to address through hiring you?

Sometimes the first answer isn’t the best one. Keep asking until you feel you’ve unpacked all you need to know about the client and their business goals.

Sometimes the client will be able to nail down their goals in a numerical way, like revenue or savings. Others will want something less tangible, like exposure.

Either way, your services and expertise can help them reach this goal, and understanding what their endgame is will allow you to accurately judge the value of your services.

In his book Breaking the Time Barrier, Mike McDerment suggests asking a client, “What does success look like to you?” This approach can sometimes help clients quantify a seemingly-unquantifiable concept, such as aesthetic value.

By the end of this conversation, you should both know what the client’s Point A and Point B are.

There may be some differences in how you both perceive these points, but you’ll have to close the gap between your perspectives to establish clarity.

Clarity ensures that you will deliver the greatest value to your client and will be able to charge accordingly.

Value Before Price

In a traditional, more adversarial pitch, you might lead with price off the bat. But that doesn’t work for value-based pricing for a number of reasons.

Talking price right away defeats the principles of value-based pricing because there is no value associated with those numbers yet. Until you know what outcomes the client is looking for, you can’t give them a fair quote.

Think of it in terms of putting the client's needs first.

You want to lead with what you can give them—results—instead of what they can give you—price. If your client wants to talk price right out of the gate, let them know that you need to establish what they are looking for first.

If you talk budget upfront, the numbers discussed will probably be just as disconnected from your value as cost-plus pricing.

Your clients don’t yet know exactly what value you offer.

Only after your discussion and presentation will they see how much they’re willing to pay for the value you can bring to their business.

A Healthy Relationship

Your initial consulting conversation is the beginning of a relationship.

This relationship—like any relationship—is founded on trust and attention. This means that when your client’s goals aren’t compatible with your skills or services, you tell them.

This kind of honesty will earn you referrals.

While this particular client may not need your services, they may know someone who does.

After going through the process of figuring out their needs with you, they know that you have an attention to detail and a level of personal care that everyone is looking for when commissioning services.

The Presentation and the Pricing

Once your client can see the value you’re ready to bring to the relationship, they’re often ready to take the next step right away. They understand that the sooner your partnership begins, the sooner they are going to start to see results.

Plans and Prices

What happens after you know what the client wants?

It's a good idea to craft a proposal. The client has problems and you have solutions.

Tell them what their needs are and exactly how your particular set of skills and experiences help you meet their needs.

This isn’t just about a pitch. This is about putting what you learn during your conversations with your client into practice, and turning it into strategies that bring results.

Something that may suit your area of business is offering a “menu” during your presentation. Each plan of attack or solution you offer can have a set price, with a range to accommodate the different amounts your client may want to invest.

These prices will still reflect the value of what you are offering. The client will be able to clearly see the opportunity costs of choosing less-valuable solutions for the sake of budget, and are more likely to go with a plan that will deliver high-impact results.

Don’t be afraid to suggest solutions your client may not have been looking for. There can sometimes be a gap between what your client wants and what they actually need in order to achieve their goals.

When it comes to value-based pricing, remember that your clients aren’t necessarily looking for the cheapest solution.

They’re looking for the best solution.

Cheaper rates can sometimes come across as compensating for shoddy work. If you know your worth, be comfortable with charging accordingly.

The Results

Using a value-based pricing approach will create positive results for your business, and I’m not just talking about your budget.

By understanding what your clients want and need, you’ll see areas of your own skills you may want to expand and improve upon.

If you begin to face stiff competition in your field, turn to adding value to your service rather than lowering your prices.

As you do, you will learn about your ideal client. Throughout this process, you will find out exactly which kinds of clients have the needs and scale that match your skills and value.

By offering value-based pricing and consulting, you can weed out clients that want to corner you into providing services for free or at a discount.

Conclusion

It’s important to note that value-based pricing can be applied to just about any industry.

For some clients in particular fields, it might make sense to use a combination of hourly rates and value-based pricing, especially as you transition from a cost-plus pricing model.

For others, the value-based prices and plans will work perfectly.

The greatest lesson to take from this primer is understanding and owning your value.

You have worked hard to develop your skills and you can deliver outcomes that clients will pay for. After you realize your unique professional value, you can offer yourself to your clients as a partner and investment rather than an adversary.

After all, you both want the same thing: results.