The pros and cons of Value Pricing
Earlier this week, I talked about the pros and cons of retainer pricing, and some folks responded, asking, “So if I’m not doing retainers, how should I be pricing?”
What is value pricing?
When we solve a problem for a client, it creates value in their company.
We either help them to sell more, spend less, or get things done with less cost or risk. Each of those outcomes produces value for the client. Because of that, they are willing to pay us some of that value to obtain our services and solution.
So value pricing is when we base the value we charge on the value that our client will gain from working with us.
Note: The client defines the value, so the effort we put in does not determine it, nor how long it takes, or any kind of hourly rate.
Value pricing works best when we are talking about a specific scope for a specific deliverable. So that client has a clear way to evaluate what they stand to gain from the work we do together.
In a pure value pricing company, everything is a project.
Value pricing pros
- Because the price we charge is decoupled from the effort, time, or rate, there are opportunities to improve margins significantly through value pricing.
- Value pricing reveals less of “how the sausage is made” and can help you to stay in the leadership position with your client. It avoids any talk of hours or rates that can be so contentious and result in a lot of micromanaging.
- Value pricing can have a more straightforward sales process (when done well).
Value pricing cons
- Because everything is a project, it can make it harder to forecast your cash flow and your resource demands.
- You assume all the performance risk. If the project is more complex or takes longer to solve, it hurts your margins.
Ultimately, when a client of mine adopts value pricing effectively, their increase in margin more than makes up for the execution and forecasting risk. To do it, you have to be willing to live on the edge and tolerate a lot of uncertainty — but it can be enriching.
What questions do you have about value pricing for your business?