March 8, 2020
Ball parks, wiggle room, and a monkey wrench
Here are some nuances to keep in mind if you’re thinking about using value pricing for project work...
In your sales interview with a prospect, your goal is to uncover what their desired outcome is, and roughly how much that outcome might be worth to them.
The perceived value that you uncover in the sales interview is the starting point for your pricing calculation. It is the upper bound. They will reject any price that is higher than the value.
Establishing the perceived value of the client’s outcome is more art than science. You won’t get an exact number. But as long as you’re in the ballpark, you should be able to set an acceptable price just fine.
Why?
Because your next step is to write a proposal that has three options, with the lowest option priced at one tenth of what you have estimated the value to be.
Let’s plug in some numbers:
Estimated value: $100,000
Project option 1: $10,000
Project option 2: $22,000
Project option 3: $50,000
Even if you over estimated the value by double and the outcome is really only worth $50,000 to the buyer, both of your first two options are still potentially in the running because they are priced at amounts that are less than the value.
By starting at one tenth of the estimated value, you give yourself a ton of wiggle room to be wrong about the value but still set potentially acceptable prices.
Now, lemme throw a monkey wrench into the works...
Let’s say prospect is interested in option 2 at $22,000.
If the client shops around and finds a competitor who will give them option 2 for less, AND the client sees no meaningful difference between you and the competitor, then you’re not going to get the deal even though $22,000 was an acceptable price for the outcome.
In other words, losing the deal does not mean that $22,000 was not an acceptable price, it just means that the client found “the same thing” cheaper.
This is not a failure of value pricing, this is a failure of positioning. If a client can’t see a meaningful difference between what you offer and what someone else offers, they will pick the cheaper one.
This is why one of the things I’m always talking about is positioning. Whether or not you’re using value pricing, you need prospective clients to view you as meaningfully different from your competition if you want to avoid the race to zero.
Positioning and value pricing are like chocolate and peanut butter... they go great together :-)
The better positioned you are, the more value pricing will help you increase your profits.
Yours,
—J