Tried Value-Based Pricing? Try Value-Based Buying

John Tabita

Last week, I talked about four methods to avoid when setting your prices. So what should you base your pricing on? The answer, of course, is the ever-elusive value.

The Case for Value-Based Pricing

Value-based pricing is determining how much the project is worth to your client in revenue, or how much the problem is costing, then charging a portion thereof. For example, if a client had an IT problem that had been costing him $10,000 month for the past six months, then charging him 25 percent of that would not seem unreasonable. Some people believe value-based pricing is an unrealistic ideal that never really worked in the “real” world—especially in today’s economy. Yet, there are many industries where value-based pricing is commonplace. Alan Weiss pioneered the concept in the early 90s and continues to use it today, so it’s difficult to write it off as “fantasy.” (Besides, it’s hard to argue with someone who holds a PhD.)

Can value-based pricing be implemented in the web industry? Weiss has taught accountants and architects how to bill based on value, so why not web designers? I never tried it, even after reading his book. I told myself it was too difficult to implement in the web industry because what we do is not unique. You’re free to learn how it’s done, or convince yourself it doesn’t work without even trying, as I did.

Value-Based Buying

Whether or not you embrace value-based pricing, you’ll be hard-pressed to successfully sell your services without value-based buying. That’s when clients choose to hire you based on no other criteria other than the value you provide.

Pricing your product is actually simple, as long as you consider it from the buyer’s point of view. How much it costs you to make something is irrelevant. They don’t care …

- Seth Godin

When we consider it from our point of view, we look at our skillset and ask, “How can I sell this?” But the proper question is: “How does this serve the market?”

You see, up until now, the focus has been on pricing and selling: How do I price my services? How much should I charge? Let’s change the focus to why people buy.

“Who do people buy?” is a thousand times more important than “How do I sell?” No, let me correct that … it’s one million times more important than “How do I sell?” No, let me correct that … it’s one billion times more important than “How do I sell?” Get the picture?

It never ceases to amaze me that companies will spend thousands of hours and millions of dollars teaching people “how to sell,” and not one minute or ten dollars on “why they buy.” And “why they buy” is all that matters.

Value First; Price Second

That’s from Jeffrey Gitomer’s Little Red Book of Selling, in which he lists 12.5 reasons “why they buy,” such as:

  1. “I perceive a value in the product I am purchasing.”
  2. “I perceive this product or service will increase my profit or productivity.”

Any work for which someone’s willing to pay you must create value; and value isn’t always about money … but it is always about increases or decreases. If you can increase or decrease something your prospect wants increased or decreased, you have the potential to create value.

Formula are great for determining a base price or “cost” you won’t go below, but there are some crucial steps you must follow before “coming up with a price” for the client:

  1. Ask yourself, What value can I create?
  2. Have a fact-finding conversation to discover what he wants increased and/or decreased.
  3. Make sure you ask the right questions.
  4. Do a return on investment analysis to show him the economic benefits he will get from your solution.
  5. Once you know what he wants, show him how you are the one who can help him get it.

Then, and only then, should you talk about price.

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  • http://contrarianconsulting.com Alan Weiss

    Thanks for the kind mention. I’ve had a lot of web people in my Mentor Program and they’ve successfully used value based fees. No one will ever do well charging by time units, and that’s a self-esteem factor.

    - Alan Weiss

    • http://smallbusinessmarketingsucks.com/ John Tabita

      It’s a privilege to have you here. I’ve benefited much from your advice over the years. Keep up the good work!

  • http://www.axiavalue.com Mike Wilkinson

    John
    Great post and so utterly and absolutely true itmakes you wonder why everyone doesn’t realise it and act accordingly. I think there are two reasons:
    1. People just don’t understand value
    2. It’s obvious common sense really. But common sense just isn’t very common

    • http://smallbusinessmarketingsucks.com/ John Tabita

      Mike,

      Sometimes “value” is a difficult concept to wrap your head around, especially for technically-inclined right-brainers. The fact that it means different things to different people further compounds the problem and makes it challenging to apply in a real-world scenario.

  • http://www.liberteks.com Larry Zimbler

    the old expression “there is no value, just perceived value” is 100% accurate in a free market. Your post expresses that sentiment well.