What to charge: does value-based pricing live up to the hype?
Demystifying pricing techniques + value pricing implementation tips
Pricing is hard.
Even after 17 years of freelance design, I can still second-guess my pricing strategy.
Could I do something better to make more money for less work?
Does my price reflect the value my clients are getting?
I currently price most of my work by the hour. I’m making a darn good living at it, despite using this seemingly antiquated method. I hear you yelling at your screens in unison already:
Hourly pricing is terrible. Start value-pricing!
I hear that over and over again, but I’m struggling to jump on the bandwagon. Not because I don’t understand or like the concept — it sounds great in theory. But I’m struggling to get past the challenges of putting value-based pricing into practice with real clients.
Hourly rates
What’s wrong with hourly rates?
Quite a lot, as it turns out.
- Hourly rates are dangerous to compare. When potential clients compare rates they see a price detached from the value your services will bring to their business. Your service becomes a commodity. There will always besomeone willing to provide cheaper services than you. You usually lose this comparison, and you cannot escape it.
- You only have so many hours in the day for focused work. When you run out of work hours you cannot make more money, unless you ruin your work/life balance by working too much, or you raise your rates. You eventually reach a ceiling of potential earnings when your rates hit the top end of what’s acceptable in your industry and your lifestyle doesn’t allow for more work each day without burning yourself out.
- Hourly rates create unknown pricing for clients. You have to provide an estimate up front, but even for experienced pros there’s always an element of guesswork to your estimate, and projects almost never go exactly to plan. What happens when you go over that estimate? Unless the final cost is excessive (more that 10% over) your client is obliged to pay, but they may feel aggrieved that they have to pay more than anticipated, even if that extra cost comes with extra value.
- Hourly rates discourage efficiency. Your client wants things done as quickly as possible because it saves them money. Naturally, you want to give them the best value by working quickly, but the more efficiently you work the less money you make. Over time — as you master you craft — you earn less and less for the same outcomes, unless you jack your rates up all the time to compensate for your increased efficiency. Then you run into the ceiling again.
What’s good about hourly rates?
- Hourly rates are easy to understand. Your client knows exactly what they will get from you in exchange for what price. It’s a method of pricing that’s been around since money was invented and everyone knows how it works without explanation.
- Hourly rates appear most fair.Your client pays for only the time you spend on their project. No more, no less. No plucking figures out of the air that you have to justify in other ways. It’s very transparent, assuming you’re honest.
Does project pricing solve these problems?
It partially solves a few of them, but adds more problems of its own.
Project pricing is the strategy of providing a flat-rate quote for a well defined deliverable. Usually you calculate that rate based on estimated hours worked, but you don’t have to share those calculations with your client — they only see the final price. It works great for productised services, but becomes anightmare for anything very complex that it likely to change in scope over time.
- Project pricing gives clients absolute certainty, but at a cost. The only way to provide that certainty is by padding your quote to account for contingencies. In the end your client may pay more for the same result.Good, organised, helpful clients get punished by paying for padding they don’t use. Difficult, disorganised clients get rewarded by forcing more work into the same budget.
- Scopes creep will be the death of you. If you cannot nail down a very precise scope and have the client stick to it, forget it. Some projects — like a startup app — need the flexibility to change and adapt as they go. If you price that on a fixed quote you’ll find yourself having to revise the quote over and over again at every little change of direction. Everyone will be pulling their hair out by the end of the project.
- Project pricing rewards efficiency, but at a cost . If you get the job done quicker, you make more profit. But incentivising speed can mean cutting corners and reducing quality. I hate pricing like this because I pride myself on quality. I never want to feel constrained by cost — unable to explore and discover better design solutions without eating all of my profit margin.
- Project pricing doesn’t escape direct cost comparison. The same scenario as hourly pricing applies, except they compare a fixed fee instead of an hourly rate. You’re still a commodity. You still always lose that comparison.
True value-based pricing explained
Value based pricing is a strategy to price your services based on the value your deliverables will bring to your client. Like project pricing, it’s a fixed fee. The difference is in how you arrive at and justify that fee.
An overly simple example: the project you create for your client might net them $100K in new sales. You charge 20% of that ($20K). Any smart client will be willing to invest $20K to earn $100K.
It doesn’t matter how long it takes you to complete the job. The effort you put in is no longer part of the pricing equation.
Let that sink in for a second.
If you practice value-based pricing, the cost your client pays has nothing to do with how long or hard you work.
Disconnecting your earnings from your time is a huge paradigm shift. Selling time is baked in to nearly all service businesses at such a deep level that it can be difficult to fathom all the ramifications of what this strategy changes.
Suddenly that artificial ceiling of hourly billing is gone. Now efficiency is rewarded, and not to the detriment of your client.
Your services are now defined, led, priced, and justified by the goals, outcomes, and overall value of what you create.
In theory, it sounds fantastic. But how do you actually do that? Applying this method properly is more difficult than it seems.
Value-based challenges
True value-based pricing is only successful if you have complete buy-in from the client. A fundamental shift in mindset is needed for them to see you as an invested partner and remove all sense of commodity from your service offering. Remember, they’ve been used to paying hourly or flat rates forever, and just as it is for you, that’s a difficult habit to break.
Value-based pricing means basing your project price as a percentage of the value you bring to your client’s business. This only works if you can gather the information needed to calculate that value!
Think about what you need from the client in order to make this strategy work:
- Your client needs to share their goals and KPIs for the project — because you must tie your service proposal directly to these outcomes. This is important to any project — no matter how you price it — but with value-based pricing it becomes a core necessity very early on in the discussion.
- Your client must be willing to divulge the monetary value of what they are hiring you to create . If you’re designing a new ecommerce experience that may increase conversions by 1%, how much will your client earn from that improvement? If your goal is to increase sign ups, what is each new member worth? Value projections like this may be difficult to calculate . Even when projections are available, is your client going to freely share that kind of data with you? If they share it, will it be honest? (They will be incentivised to make the value appear lower, so your price is lower.) It’s vitally important that they voluntarily tell you the value. You cannot value it yourself, otherwise the justification for your price is meaningless to your client.
- The project goals must have quantifiable outcomes. What if the goals are more emotional, like creating a brand identity that resonates better with millennials? Or increasing customer satisfaction by improving support processes? Some goals aren’t easy to monetise. If you can’t convert goals to dollars and cents, how can you price based on that value?
- Each proposal must be well-researched and unique. A project worth $10K to one client might be worth $1M to another, even if the effort you put in and deliverables you complete are nearly the same. This is the tremendous upside of value-based pricing (assuming you are getting the clients of higher value) but also a huge roadblock.
The pains of value discovery
Think for a second about how much discussion and research needs to go into the project before you’re even able to produce a price quote. You may need to work with your client for hours or days to paint a clear enough picture of the project’s scope and value before you have the data needed to calculate a value-based price.
- Are you getting paid for that time?
- Do you sell that pre-planning time as a separate discovery/roadmapping services that is a prerequisite to the real job?
- How do you even begin the discussion around high-level business goals, success metric, and projected monetary project value?
I think of myself as a business strategist as much as I am a designer. So many aspects of design, done correctly, bleed into strategy. But even with clients who appreciate that approach, broaching the subject of monetising projected business goals can feel like a bridge too far to cross. And even when you cross it, will you find a client who buys in to your pricing justification? Will you get all you need to inform a value-based price?
Once you’ve successfully completed a job with value-based pricing, you can’t turn to another client and quote them the same price. Their project scope, goals, success metrics, and monetary value of deliverables are highly unlikely to be identical. Value-based pricing must be unique to each client and each project, because that’s precisely how you justify the price. Value-based pricing takes a lot of work, assuming you even get buy-in from your client on the concept.
Another pitfall of value-based pricing is that you expect to be paid regardless of whether the job’s projected goals are achieved. You’re not working on a commission of earnings that happen later, which may be reduced or vanish completely if the projections you based your price on are not met. You’re pricing based on an idea of what may happen as a result of your work. Your client better be confident you can deliver what you promise, or they may feel like value-based pricing was all smoke and mirrors.
How I price — a hybrid approach
I never use project pricing. My design work is bespoke, often complex, and the jobs aren’t suitable for a fixed fee. Hourly rates have been my preferred freelance pricing method, mostly due to their simplicity and transparency.
If you fail to transition into true value-based pricing — like I have—you can still integrate some principles of that strategy into your hourly or flat-fee pricing.
Assumed value and price anchoring
If your client is unwilling or unable to share the data required to calculate a value-based price, you can do your own research and make some assumptions as to what the project is worth to your client. This cannot replace the necessary discovery process for true value-based pricing, but it’s good enough to “fake it” for your own internal pricing strategy.
- How big is the company? Generally, the larger and more successful they are, the more they’ll be willing to pay. You wouldn’t charge Coco-Cola the same price as you would a local kombucha brewer, would you?
- How important is this project to your client’s business success? An ecommerce company may put all their money and effort into a great website. It literally means everything to their business. Contrast this to a bricks and mortar store who may see a similar website as just a small, secondary revenue stream. That client won’t be willing to invest as large a percentage of their resources into it, while the first should invest whatever it takes to make it a success.
You can use these assumed value clues to anchor your hourly or project price when you decide on a quote for each client. Let’s say your minimum base hourly rate is $100, but you’ve determined the client is large, successful, and the project is of very high importance to them. Maybe you bump up your rate to $125 or even $150 for this project.
Value-based hourly retainers
Recently I’ve been working more often under retainer agreements. I willguarantee a client a certain number of hours per week, in exchange for a flat weekly fee. To sweeten the deal I give them a few extra hours per week for the same flat fee, if the project demands it and my workload allows it. Any overage beyond that weekly limit is charged at an hourly rate.
I may use the above-mentioned value-anchoring to help determine the price of my weekly retainer fee.
When I present this retainer proposal to clients I always tie it back to project responsibilities, deliverables, and goals. They see a description of what I will achieve for them, a duration for how many weeks the projects will take, and a weekly rate for the cost of my services and experience.
While it’s not perfect, it goes a long way towards making my rate feel less like a commodity that can be compared to others. Instead, they compare my feeagainst the value of the deliverables I will provide and make a determination as to whether that’s a good investment for them.
This retainer strategy brings a great amount of certainty to my workload. I know exactly what percentage of my week’s time is committed to each client. Even when I need to book my time months in advance I have a clear picture of the extent of my availability. I use Cushion to forecast these workloads.
My earnings are still tied to hours worked. I haven’t escaped that limitation yet. But I’m finding ways to integrate value-based thinking into my more traditional pricing strategies and earning more per month as a result of it.
Have you had success implementing pure value-based pricing?
I’d like to hear from you! Please comment and share your strategy for making value-based pricing a full-time reality for your business.
I’ve been struggling to wrap my head around how to get my freelance clients invested enough in the pricing process to make it work, and it’s made me slightly cynical about the method. I’d love to be proven wrong on this one, so tell me how value-based pricing works for you? What’s your process for the initial discovery and client buy-in?
If you’ve failed, or never even attempted value-based pricing, I’d like to hear your freelance pricing strategy all the same. What works best for you, and why?
All too often, discussion of pricing is taboo. It doesn’t have to be. It’s not black magic. Let’s open up and talk freely about pricing. We’ll all be better off for it.
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Hi, I'm Benek Lisefski. Since 2001 I've run my own independent design business. Join me as I unfold 20 years of freelance business knowledge: honest advice and practical tips to help you take your indie career from good to great.
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