Fees and Finance
Increase your worth with value-based pricing
Life would be much easier if the famed advertising slogan “Because you’re worth it” could be used to explain your rates to customers. Convincing them that it’s true is a matter of pricing according to your value. Here’s how to do value-based pricing.
As an accountant, clients often approach me with cash flow or profitability concerns that can often be traced back to a broader problem – pricing. Freelancers and consultants are generally in the business of selling their time in exchange for services, and services are notorious for being intangible. In other words, it’s not easy for clients to see – or remember – the value they receive for the price they pay.
For this reason, soloists would benefit from using a value-based pricing model. This is where the price is based on the perceived value offered to the client. And the more value they can offer the greater premium they can charge. Sometimes that value is monetary but often the real value lies in the skills, knowledge and experience their client lacks.
Take a web developer, for example. To develop effective websites, they must have direct experience creating them, an understanding of how users interact with them, and often years worth of deep and varied technical knowledge across multiple platforms, languages and devices. On top of that – they need to be aware of the latest trends in digital marketing and design. Clearly organisations get a lot of value when they hire a good web developer, but from the developer’s point of view, getting paid well depends on their ability to demonstrate and reinforce that value.
Here are my tips for value-based pricing:
1. Think it through
Think through your services and itemise the value they offer to your clients. This is also the time to consider costs and profitability. For example, the need to outsource work to another specialist may increase your costs and make certain services/jobs unviable. In this case, passing a lead through to a partner for a commission or referral could be a better option.
2. Write it down
Many soloists would rather trot over hot coals than write a proposal, but it’s one of the best things you can do to create the sort of first impression that will command a higher price. Include work examples and endorsements from satisfied clients – particularly in relation to providing value for money.
3. Don’t self-sabotage
Clients are perfectly capable of bargaining you down, so don’t do it on their behalf. Leave some room to manoeuvre, but don’t mention the ‘D’ word until they do. Make sure you know your margins, so you’ll know how low you can go if you are under pressure to discount. Where possible, offer more value – an extra product or service – instead of discounting your core rates.
4. Lay it on the line
Be up front about pricing and link it to clear outputs and delivery dates. Outline each party’s roles, responsibilities and obligations. Details can be updated but starting with no details means it’s difficult to make your case if things turn sour.
5. Strut your stuff
Once the job commences provide regular written and verbal updates demonstrating the value your client has secured from your services and don’t be too modest. It will reassure your client they’ve made the right decision and your next invoice is more likely to be paid promptly with no questions asked.
6. Get the money in the bank
If cashflow is a particular challenge it may be worth offering a discount for early payment or regular periodic payments. Don’t be afraid to ask – this will suit a lot of organisations as it enables them to spread and fix their costs. Plan time to chase outstanding debtors or use a debt collector to play bad cop on your behalf.
This article was written by small business tax and compliance expert, Craig Jackson. To access many more resources to help start, grow or rejuvenate your business, join the community at Flying Solo.