What is Value Based Pricing?
Basing your pricing on the value you provide can dramatically change your business and your relationship with your clients, so just what is value based pricing?
We talked about it on Episode 10 of the Extremely Valid Points podcast. Check it out if you’d like to hear a fun and in-depth conversation about value based pricing strategies.
First of all, it’s not for everyone. And it’s a different way of thinking for most people. So before we get into it, let’s define three basic pricing strategies for comparison …
3 Basic Pricing Strategies
1 – Cost Plus Pricing — charging what it costs plus a little extra for profit. This is probably most common, especially for physical goods with fixed production costs.
2 – Competitor Based Pricing — charging a price slightly below what your competitor charges. This is what Dollar Tree — and its competitors, the 99¢ Only Store and 98 Cent Store — does.
3 – Value Based Pricing — charging a fee based on how much value you are bringing to the client. This is especially good for consultants as well as professional and creative service providers.
Under the value based pricing model, you are getting paid for your contribution to the outcome that your client gets. Instead of basing the fee on the deliverable, you base the fee on the value provided.
For example, if a new website generates $1,000,000 in revenue to a business, the value of that website is $1,000,000.
Of course, a client wouldn’t expect to pay $1,000,000 for a website even though that’s its value to them. But they might happily pay 10% — $100,000 — for this asset that is now making them a million dollars.
One caveat here … value must be based on a dollar amount. So if what you’re selling doesn’t produce a dollar amount for your customer, value based pricing is not right for you.
A Win-Win and Better Value
The value based pricing model provides a win-win for both the company and the client. The company is now more fully invested in the outcome that the client wants, giving the company more incentive to do their very best work without limitations that may be imposed on them if they were charging by the hour or even by the deliverable.
In our website example, if we were charging $10,000 for the deliverable, we may put limitations on number of revisions, number of hours spent on doing the work, number of resources we devote to the project, etc.
But with the value-based $100,000 fee, we would have more ability to go fully in-depth to produce our very best work and get the very best results.
3 Things You Must Do if You’re Implementing Value Based Pricing
1 – You must be 100% clear on your brand positioning. You must know who you serve, what you do for them, and how you’re different from others providing similar services to yours.
2 – You must be willing to turn away business that is outside of what you specialize in.
3 – You must be able to prove you’re worth your fees. You have to have case studies, testimonials, and other people vouching for you. It can’t just be you saying it. You have to have gotten similar results for others to prove it.
This is not a pricing strategy that gets put into place overnight. And there are a lot of things to consider to get it right.
But it can be a game changer when it is done right.
Listen to the full conversation on Value Based Pricing Strategies on Episode 10 of the Extremely Valid Points podcast. Or to continue a more personal conversation about value based pricing strategies, please contact us today. WorldLight Media LLC would be honored to help.