In the ever-evolving landscape of creative and technical services, the question of pricing strategy is more pertinent than ever. For firms looking to optimize their profitability while aligning closely with client expectations, transitioning to a value pricing model might just be the key. We’ll dive into the essence of value pricing, contrasting it with the traditional time-based billing approach and guiding creative and technical service firms on how to implement this model effectively.
Understanding Value Pricing
At its core, value pricing is about setting prices based on the perceived or estimated value of the services to the customer, rather than solely on the cost or time involved in delivering those services. It’s a strategy that recognizes the varying impacts a service can have on different clients. For example, the value of a new website or a marketing campaign will not be the same for a small local bakery as it would for a multinational corporation. The essence of value pricing lies in this recognition and its exploitation to maximize your firm’s income.
The Traditional Model: Hours for Dollars
Traditionally, firms have relied on a billing model that equates hours worked to dollars earned. This method, while straightforward and easy to calculate, often overlooks the actual value delivered to the client. It treats all hours as equal, regardless of the strategic importance or the outcome of the work provided. Outcomes are everything in marketing and technical services. Think about it for a moment…. your team is judged on the outcomes of your projects and retainers by your clients, not the hours. So why shouldn’t your pricing reflect those outcomes?
Value vs. Volume: A Comparative Analysis
To illustrate the concept of value pricing, consider a website development project. For a small local business, a new website might generate an increase in sales and enhance local brand recognition. However, for a large multinational, the same website could play a pivotal role in global branding strategies, potentially affecting millions in revenue. Therefore, while the effort – the level of effort (LOE) – might be identical in both cases, the value delivered is drastically different.
Defining “Value” to the Customer
This is the tricky part my friends. “Value” is inherently subjective. We all might differ on our opinions of what the value of something is. The good news is that value can be quantified by understanding the customer’s business, goals, and the potential impact your services can provide. The key is to engage in detailed discussions with your clients to uncover their objectives, challenges, and expectations. They know what they are after and they know how they will be judged in their own organizations (their own outcomes). Once you can align your understanding to theirs, it gets a lot easier to align your pricing with the actual outcomes from the client’s point of view.
10 ways to determine “value” for your services
Value pricing, particularly for small creative and technical services firms, revolves around understanding the perceived worth of the services to the client rather than just the cost of delivering them. Here are some typical metrics these firms might consider when basing their value pricing:
- Client’s Revenue Increase: If your service directly contributes to an increase in the client’s revenue (e.g., a marketing campaign that boosts sales), this growth can be a key metric for value pricing.
- Cost Savings: When your service reduces costs for the client, those savings can inform your pricing. For instance, automation software that cuts down on manual labor hours offers measurable cost savings.
- Market Positioning: If your service enhances the client’s positioning or brand recognition in their market, the value of this improvement can be quantified and used in pricing.
- Competitive Advantage: Services that give the client a leg up over their competition, such as innovative web design or unique IT solutions, carry value that can be reflected in pricing.
- Risk Mitigation: Services that help the client avoid potential losses or mitigate risks, such as cybersecurity for IT firms, can be priced based on the value of the risk avoided.
- Operational Efficiency: If your service streamlines the client’s operations, the increased efficiency and its impact on productivity and cost can be valuable metrics.
- Access to Specialized Skills: The scarcity and demand for specialized skills or expertise you provide can dictate a higher value, especially if such skills are not readily available in-house for the client.
- Client’s End-User Satisfaction: The impact of your service on the client’s own customers, such as improved user experience from a redesigned website, can also inform your value pricing.
- Time-to-Market: If your service helps the client accelerate their time-to-market for a product or service, this quicker entry can have significant value.
- Long-Term Strategic Value: Some services may provide benefits that extend beyond immediate revenue or cost savings, like building a brand or establishing a digital footprint, which can be crucial metrics for value pricing.
When determining value pricing, it’s essential for firms to have deep conversations with their clients to understand what aspects of their service are most valued and how these impact the clients’ success. This understanding helps in setting a price that reflects the true worth of the service offered.
Calculating the Value Price
The methodology for determining a value price starts with an estimation of the LOE in person-hours for each deliverable. Okay, so the website project takes 100 hours. Done. Let’s say your base rate for your hours is $150 per hour. Your LOE total is set at $15,000. And this is where you start to estimate the value markup based on your service’s anticipated impact on the client’s business. For instance, the same service might be marked up to 1.25X for the small business ($22,500) because they will get at least $50k in sales benefit in the first 12 months. But if you know that the large corporation will see a revenue lift, market positioning and long-term strategic value in the millions, then is it fair to charge 8-10X?
The important part here is you decide the value since you know your customer or prospect. Sometimes, it’s going to be a guess and cross your fingers. Other times, you’ll be more confident because the data will back up your assumptions. The hardest part is just doing it. Having the courage to put what may feel like a ridiculous price tag in front of a client, risking the loss of a sale. It might be nerve racking the first few times you do it, but you may end up amazed at the reaction you get (in the form of a signed agreement) from the clients.
Implementing Value Pricing in Your Firm
Transitioning to a value pricing model requires a shift in your mindset, from seeing services as commodities to viewing them as key strategic investments for your clients. Here are steps to help you define your value pricing strategy:
- Conduct Value Discovery: Engage with your clients to deeply understand their business and how your services impact their success. there is a reason you are talking to them in the first place. What is it? Really dig in on these discovery calls to figure out how the client perceives their objectives.
- Quantify Outcomes: Using the ways the financial or strategic benefits your services will deliver to the client.
- Set Baseline LOE: Calculate the level of effort required for each deliverable to establish a baseline cost.
- Apply Value Markup: Adjust your pricing based on the estimated value to the client, using a value markup on the baseline LOE.
- Communicate Value: Ensure clients understand the rationale behind your pricing, emphasizing the outcomes and benefits.
The Bottom Line (Your Net Net)
Embracing a value pricing model offers a pathway to higher profitability and deeper client relationships. It shifts the focus from how much time a service takes to how much value it provides, enabling your firm to charge what you’re worth.
The shift to value pricing is not just about changing how you charge but about transforming how you view and communicate the value of your work. It’s a strategic move that aligns your firm’s interests with those of your clients, fostering partnerships that are based on mutual success and respect.
Don’t forget, Net Net let’s you quickly build estimates based on time or value for your projects and retainers. It also instantly converts those estimates into projects where the tasks and deliverables are ready to be managed by your team. Go sell more with Net Net!
