June 17, 2017
Empathetic vs egocentric
One of the wonderful things about value pricing is that it’s inherently empathetic.
It’s the opposite of the high pressure sale tactics you might associate with the used car salesman stereotype.
For value pricing to work, you need to put yourself in the shoes of your potential buyer to understand what is most important to them.
Once you do that, you can determine a price for the work that will be attractive to the buyer.
This is simple conceptually but difficult in practice if you are used to cost-based methods like hourly billing, time and materials, or cost plus.
Cost-based is inherently egocentric. It conditions you to focus on yourself in the sales cycle by asking questions like:
- “How much work am I going to have to do?”
- “How complex is the business logic?”
- “How many contractors will I have to hire?”
- “How many changes will the client request?”
These questions are good to get answered, but not with regard to setting your price.
Instead, you ask questions like these to determine whether or not to take the project.
The value-based process goes something like this:
- Estimate the perceived value of the project to the client.
- Calculate a price that is a fraction of the client’s perceived value.
- Estimate your level of effort (i.e. “the scope”).
- Compare all three estimates.
If the price is too low to justify your level of effort, the ideal solution isn’t to increase the price.
The ideal solution is to not take the project.
(But what if you really need the work? More on that tomorrow...)
Yours,
—J