Value pricing for professionals who are committed to building great client relationships.
Many small business owners are stuck with the outdated approach of time-based billing, undercharging and setting rates based on what the competition is charging; a situation where the customer and the market are driving your rates and not you.
Value-based pricing was pioneered by Alan Weiss, who advocates that the customer is the final arbiter of value. He goes on to say that ‘there is no law, nor any ethical imperative, that says two clients should be charged the exact same amount for the same services. First, the services are rarely identical, second, the value to their respective customers will always be different.’ I am inclined to share this point of view, and in this article I intend to walk you through the 7 steps to value pricing and increasing profitability in your business.
1) Be clear who you work with: Jeff Bezos, the founder of Amazon is famous for saying “start with the customer first and work backwards”. This is a great approach, and it starts with getting as clear as possible about your ideal customer: what they look like, their needs, wants, and desires. Business owners are often unclear on who their ideal customers are. Clarity is power, and working with everyone who walks through the door only creates frustration, exhaustion, and keeps you from providing excellent service to your top customers.
2) Develop a healthy self-esteem: Having a strong sense of self-worth and self-confidence prevents low prices, offering discounts at the first quibble, and having to chase payment after the job is complete. Nathaniel Branded in Self Esteem at Work, says that “self-esteem is the reputation we acquire with ourselves.” It’s difficult to quote a rate that is outside of your comfort zone, especially if you don’t believe in yourself or have confidence in the difference you can make to the client’s bottom line. Your mindset and self-esteem is a critical factor when it comes to setting rates. Spend some time analyzing your way of thinking and your self-esteem.
3) Create packages for your services: American Express has green, gold, platinum and black cards. Each has a price value based on the value and the services they offer. Divide your service offer into packages. Think about your customer and offer different entry points for them to use your services.
4) Set clear goals, measures and value – A key aspect of value pricing is relationship building and helping the customer see how much they will benefit in the end. It’s not about their process or methodology. The first steps is to be clear about your objectives. To begin to understand your goals, you can ask questions like: what are you looking to achieve here or where are you now?
Measurements or some form of them are a great way to assess progress against agreed objectives. A useful approach would be to have the prospective client explain how they would measure the success of the project or intervention. This may take some time, but it is important that they say what success would look like if it were achieved.
Values are the true drivers of our decisions. These are the intangible ‘soft attributes’ that help you understand what is really important. To understand what all this means to them, you could ask questions like: – if you achieved this goal, what would it do for you?
5) What makes you unique? Imagine you’ve walked out of a meeting feeling pretty confident, but not sure how you can make your business stand out from the competition. Think about what sets your business and your services apart. Is it your reputation, knowledge, experience, or are you in the right place at the right time? Take a moment to answer these questions.
6) Pricing: Setting fees can cause a high degree of anxiety. There is always the fear that they might be too low or too high and you might be out of a job. Self-esteem also plays a very important role here. However, it is perfectly legitimate to price your services above the range that the customer is willing to pay, and below the range as well. Do what is comfortable for you, and for each opportunity, answer these questions to price your services:
• What price would be so expensive that the customer would not buy?
• What price would be expensive, but the customer would still buy?
• At what price would the service be considered cheap and low cost?
• What is the lowest price that we would not beat and be prepared to walk out of this business?
• What is our ideal price, a price that would give us an excellent profit?
• What would be the price that if we achieved it would suppose a fantastic profitability for the firm?
7) Write a successful proposal: The proposal should be a summary and not an exploration of your needs. It should be a clear explanation of what you understand your requirements to be, how they will be measured, and the value to the business. Submit a preliminary copy before submitting the final version, and do so exclusive of fees. In the proposal, give them a variety of fee options and not just one fee. When you file just one rate, there is nowhere to go but yes or no. The options are a set of ‘yes’.
Value-based pricing is the way to go for service-based businesses. The time-based billing model doesn’t help anyone, neither you nor your clients, and most of all the focus is in the wrong place, how much will it cost compared to the bottom line. If you apply these steps patiently, your self-esteem will increase, customers will be happier and, above all, your company’s profitability will increase.