Maybe you’ve heard the term value-based pricing before, but don’t know how it applies to your business or why it may matter to your customers. It may seem cliche’, but this pricing model is as much a philosophy as a way to determine how much to charge for your services.
What is value-based pricing?
The Harvard Business Review defines it as “the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor.”
How this works is that you sit down with your prospective clients and discuss an agreed-upon fee based on your level of experience, knowledge about the subject and more. Essentially, you are removing the stigma of industry-set prices, and determining the price of your services based on the value you will provide your client.
Why value-based pricing may help your organization
As a busy consultant, lawyer or other professional service provider, you likely charge the traditional “hourly rate” for your clients. While familiar for them and easy to measure against your competitors, you may find you’re not raking in as much profit as you used to be. Also, although customers will appreciate your time based on the hourly rate, they may not appreciate your expertise.
To increase your profit margins, you may be contemplating sleeping less or working long hours on the weekends just to make ends meet. Though there’s nothing wrong with hard work, maybe it’s time to consider switching to a value-based pricing model instead.
Value first, not service
With traditional hourly rates, your price focuses on the service first, not quality of your work. If you create a model for this method in terms of descending importance, it would show service first, then cost for that service, followed by the price needed to make a profit, then the value perceived for this service and finally, attention to the clients’ needs, according to BiggerProfits.
On the other hand, value-based pricing relies on you and the clients coming together to determine the precise value they will receive from your service, and then agreeing on a price. This method will not only bring clients’ voices back into the equation, but also allow you to be compensated based on your quality of services, not just on an industry-recommended hourly rate.