Value-Based Pricing
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🕓 8 Minute Read
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TL;DR
Value-Based Pricing can feel lofty and unattainable when the focus is on the client while creating value in the sale — however, true value creation stems from understanding your own business first. Providing clarity, flexibility, and value to clients is the natural outcome when you’re prepared.
Key Takeaways ⭢
The three crucial steps to performing value-based pricing in your business.
Start with expenses
Acquire the budget
Calculate the value
Surely by now you've heard of a little thing called Value-Based Pricing (VBP) — It's currently all the rage in the design community.
Value-based pricing is the idea of pricing your services proportionately to the hypothetical value that you provide to your client. It usually sounds something like, "If I could deliver a $100k profit increase in the next 12 months, is that worth an investment of 20% ($20k)?". If it were guaranteed, that kind of investment return would be hard to turn down.
Trying to predict the future is messy business. This sort of VBP is fully contingent on the fact that your clients have a clear understanding of their own businesses, know what it would take to radically improve their profitability, and that you can actually deliver on those crazy-sounding promises (with no real guarantee). Doesn't sound so dandy now.
Not to mention, you've got bills to pay no matter what your clients think their problems are worth — those expensive Adobe Apps and that snazzy new MacBook aren't gonna pay for themselves. You can't leave the fate of your business to chance. Which is why we have our own version of Value-Based Pricing. It goes something like this:
1. Start with expenses.
Understand exactly what it costs for you to stay in business, pay your taxes, pay yourself, and turn a healthy profit with every sale. This is where a healthy dose of cynicism is helpful. You’re not whipping up a random number that would make you an instant millionaire. Look at your actual expenses — rent, income tax, phone bills, Chipotle consumption — and regardless of your income in the last 12 months, use these numbers as the basis for understanding what you need to charge. Again, real numbers, not “would be nice to get” numbers.
Divide this annual amount down to a weekly rate (Annual / 12 Months / 4 Weeks) — this is the key variable you need to know in VBP. It's also a good metric to know in establishing your minimum level of engagement (the lowest-priced project you'll take on). This is why we use a weekly rate and not daily or hourly: You're able to quickly know if a project's scope can be completed in a given timeframe and budget, without much calculation.
2. Acquire the budget.
This is where pricing anxiety generally kicks in... "What if they can't afford my (completely arbitrary) pricing?" — "Will they just hire my cheaper competitor if I'm too expensive? Maybe I should lower it..." Not this time. Value-Based Pricing equips you with the understanding required to capture value for both you and your client, without compromise from either side.
Note: Pricing is an art form, and there’s no set in stone method that works every time. The best you can aim for in any client situation is clear communication — let go of any preconceived notions that you *should* work or negotiate in any particular way, and simply seek a human approach, understanding the client and their needs to the best of your ability. Confidence in your value, paired with willingness to listen and understand will go a long way in your journey of pricing.
To put this step into practice, imagine that your ideal client tells you, "My budget for a new site is about $5k."
What's your next move?
3. Calculate the value.
In the above example, let's say you typically charge $10k for a 5-page website that takes four weeks to create. And according to your weekly operating expense, you'd have to complete the project in only two weeks in order for a $5k project to be profitable. Here's the most important question in applying VBP to this scenario: What kind of work can you deliver in two weeks instead of four?
You: "Well, my standard 5-page websites usually start at about $10k — but given your budget, I could probably make a 2-page site that would still do the "XYZ function" that you're looking for and in less time than I normally take. How does that sound?"
People love getting a deal — or at least, feeling like they got a deal. When you're crystal clear on the details of your expenses and process, it gives you flexibility to serve clients in a way that doesn't devalue your services, but still enables them to acquire the value they set out to attain.
Bonus Step
This concept also scales up, not just down. Take the same example: If your client has a budget of $15k, consider the value you might be able to add in the two extra weeks of Operating Expense that you would generate, thus maximizing both your income and their outcome. Perhaps more features, or a more in-depth analysis of their strategy. Don't get so stuck on deliverables that you ignore obvious opportunities for value creation.
Your Next Step
“If pricing is an art form, these are the tools of the trade.”
After years of quoting custom websites, we’ve built a comprehensive value-based calculator to help you price your next design or development project with confidence. With key variables entered like your operational hourly expense and desired markup, you’ll be able to set your ideal profit margin, determine a realistic timeline, and outline your project expenses with no surprises.
