Why Value based pricing (by example)

Why Value based pricing (by example)

This article is for entrepreneurs, contractors or consultant who sell their creative work or services.

Pricing strategies make up a lot of the thought process that goes into building a business, especially that, if done properly, It can push your business forward and satisfy your clients.

We’ll briefly talk value based pricing and compare It to hourly pricing.

Hourly pricing

def: For each hour It takes you to do the work you charge X. If you work for 10 hours to do the job the client is going to pay you 10X.

ex: Let's say you are graphic designer, working with clients who pays you by the hour, starting at 10$/hour. If you deliver your work to the client in 10 hours, you will be paid 100$. And the faster you are the less money you make. You will be punished for being productive.

Raising your hourly rate wont help you scale your business. No matter how valuable your work is ( profitable for your client ), you will still be paid the same amount for the same work you do.

You will realize that the only way to make more money is to charge for more hours than what It takes to do the work ( being intentionally lazy ), and that 's unethical.

Eventually, clients are going to start asking questions, "shouldn't this be done in two hours instead of ten ?" "I know someone who can do It faster and cheaper." They will start micromanaging you to get the most out of you with less money, and that 's also unethical.

Pros

  • simple to understand and explain to clients
  • very adapted to repetitive work

Cons

  • It can corrupt your relationship with your clients.
  • It doesn't encourage productivity and efficiency
  • hard to scale with


Value Based pricing

def: Value based pricing is a whole different story. You price your services as a percentage of the value perceived by the client. If he values the results to be 10M$ in one year, then It s fair to get 10% of that value if you can guarantee It.

ex: You might charge a small bookstore 100$ for a Logo, but what if your client is Pepsi. Then the logo has so much more value to them, It s going to appear in advertisements and they will probably stick with It for years, your logo can earn them a one more million dollar a year. Wouldn't It be fair to get at least 1% of that million dollar ?

In value based pricing, you will be judged by the final business outcome. It doesn't matter how many hours you work. The price is fixed. The more efficient and productive you are, the more money you will make, and vice versa.

Pros

  • adapted to custom medium/long term projects
  • encourages productivity and scaling
  • creates long term relationships ( you share risk/benefit with the client )

Cons

  • a little bit tricky to explain
  • hard to estimate the value of the projects
  • underestimating the project cost/timeline is your responsibility

This article was inspired by Chris Doe, Jonathan Stark and Alan Weiss. I recommend you check check out their content for more details on the art of consulting.