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Are you charging based on what you’re bringing to the table, or the time you spent working on the project? If you’re charging clients hourly, you are losing money. Period.
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What is Value-Based Pricing?
Value based pricing, also known as value optimized pricing, is a pricing strategy where you set prices based on the perceived value of your product or service, not based on what it actually costs to deliver the product or service.
This type of pricing model usually results in higher profit margins and profitability because you can make more money without having to add an excessive number of additional clients or customers.
It’s also a great time to fill in a business model canvas if you’ve never done this, as it will help you see what to charge, and what the next steps you need to take are.
How to Calculate Value Based Pricing
Calculating what you’ll charge your clients with this pricing model can be as complicated or simple as you’d like to make it.
A lot of larger companies will spend a ton of time doing market research to find this ideal pricing structure.
As a freelancer, this can be a simple calculation of determining value your clients typically get. If you usually drive 5 leads for a customer in month 1, then you can charge them based on what those leads might be worth to them.
Time is valuable as well. If you are able to save them 50 hours of setting up an email marketing campaign and another 20 hours of learning how to do it, then charge them accordingly.
I wouldn’t charge them for the exact amount it would have cost them to do it themselves, but you can use that as a guide to determine the value you’re actually providing them.
You can always iterate on this pricing strategy and charge more or less for your products as you learn what works.
Examples of Value Based Pricing Strategy
Here are a couple of examples of value based pricing in action:
As a marketing consultant, you are spending your time helping customers build marketing campaigns and generate more leads and sales for their business.
Let’s say I run a YouTube ad campaign for a client. It took me 14 hours to research, build, and launch the campaign, and I end up getting them 12 new customers that first month.
Each customer is worth $2,000 to them, so 12 x $2,000 = $24,000
A lot of freelancers charge based on an hourly rate, but I think this is a terrible way to price your services.
If you charged by the hour, let’s say $100 per hour – at 14 hours that would be $1,400. Not terrible.
But when you realize the customer got $24,000 in up front sales (not even mentioning the lifetime value of that customer for them), that is a huge amount of value that I generated for that client. And I only charged $1,400?
Instead, you could setup an agreement where you get 20% of sales, or even decide on a flat price to charge up front.
20% of sales is $4,800!
That’s a lot of missed opportunity there.
Pricing of Art
One of Picasso’s paintings sold for $179 million in 2015. Do you think he used $179 million worth of art supplies to create that painting?
Of course not!
The painting’s value is measured in a lot of ways, but most notably is the perceived value of the painting.
The Benefits of the Value Pricing Model
In my eyes, there are definitely more pros than cons when it comes to a value based pricing model, especially for freelancers and consultants.
Charging based on what results you can offer a client is going to result in being able to make more than if you charged based on an hourly rate. The only way this wouldn’t make sense is if you’re not able to provide your clients with results. If that’s the case then you should go back to the drawing board and learn how to do that.
Less Customers Needed
Since you are able to charge more per client, you wont need to find as many customers to hit your target income.
Depending on your audience, your customers might be used to buying your product or service based on the materials or time it took to produce.
Finding customers willing to pay based on value might be a little more challenging.
Charging based on value is a great “win-win” for you and the customer. They can pretty much make sure they’re keeping their costs in line with the value they receive, and you can earn much more than you would have if you just charged a flat rate.
Other Pricing Strategies
Value based pricing isn’t the only option you have when setting the prices for your products and services.
Cost-Based Pricing vs Value-Based Pricing
You can also use cost-based pricing.
Cost-based pricing where you set your prices to reflect the actual cost of the products or services being sold, with a percentage or fixed amount added to the cost.
This is a good model when your customers are willing to pay and used to being charged for the actual goods cost.
You can also sell your product or service based around what your competitors are charging their customers. This can be helpful when you’re getting started because you can at least gain some kind of understanding of what customers will pay.