December 15, 2017

How do you value price if the client’s financial outcome is out of your control?

The fundamental premise of value pricing is that you set your prices based on the VALUE your service delivers to your client, NOT based on how much it COSTS you to deliver the service.

The tricky part of value pricing is that the value is in the client’s mind, not yours. You have to coax the value out of their brain in order to set your price.

For some types of services, this is relatively easy.

For example, if you can reliably cut hosting costs in half for a prospect who is spending $4M per year on AWS, you can pretty easily make the case that they should pay you $200k, even if it only takes you five minutes to deliver.

This is a 10x bottom-line ROI. It’s tangible. Which is to say, it’s easy to measure in dollars. It will show up on a balance sheet somewhere. It’s a clearcut financial outcome.

But how do you value price if you work in a discipline where the client’s financial outcome is out of your control (e.g., product design)?

Or where you are legally prevented from making promises about financial outcomes (e.g., investment services)?

Or where there is only a weak link between how well you perform and any financial outcome the client receives (e.g., code refactoring)?

Or where it takes months or years to know if there is any positive financial outcome at all (e.g., brand advertising).

Here’s one thing I’d do:

I’d try to find out from my clients why they ACTUALLY hire me. What is the direct value that they are getting in return for their money?

A great way to pose this question to a client is:

“Why not NOT hire someone like me? Why not hire someone cheaper? Why not do it yourself? Or go without completely?”

In the case of things like product design, investment services, or brand advertising, the direct outcome - the thing that clients are ACTUALLY buying - could be something intangible like a sense of decreased risk.

Once you know what they’re buying, you can orient your marketing around that, and perhaps even give a guarantee. Essentially something like:

“We guarantee you will feel safer when you hire us.”

Of course, the next question is:

“How much is ’feeling safer’ worth?”

The answer will be different for every person, and for the same person in different contexts.

Think about it like this:

How much is a seatbelt worth?

To me, maybe as much as a couple thousand dollars.

Driving without having my seatbelt fastened makes me extremely uncomfortable. I feel like I’m going to fly out of the car at every turn. It’s worth something to me to not feel that way.

The point is, a big part of the value of the seatbelt to me is immediate and constant. I don’t have to get into an accident for it to be valuable to me.

If I was going to try to value price a seatbelt, I would not ask the buyer about “what’s it worth to you to walk away from a 30 car pileup” because that accident will probably never happen.

Even if it did, my seatbelt won’t guarantee they’ll walk away from it.

And if they did walk away, they could attribute it to more than just the seatbelt like the airbags, shatterproof windshield, collapsing steering column, etc.

But I CAN guarantee that my seatbelt will make certain people feel a lot safer every time they drive. And I can certainly have a conversation with them about how much that feeling is worth.

(If you can’t imagine how to apply this concept to your business - or if sounds like nonsense - please hit reply and ask questions.)