September 17, 2020

“Should I value price based on revenue or profit?”

Fellow list member Daniel Lopez wrote in with a super juicy question (shared with permission):

Quick question I always wanted to ask you.

When you say "worth to the client" are we talking revenue or profit?

If I help the client make €1M but their margin is 10% do I calculate VP from 1M or 100k?

Thanks a lot for your content. Let me know if there is anything I can do for you. I build MVPs at a startup studio based in Spain.

Great question! I’ve got a short answer and a long answer...

The short answer is this:

It depends on whether the client wants to increase revenue or increase profit.

The long answer is this:

What something is worth to someone is often more gut instinct than rational thought.

Don’t believe me? I can prove it. Let’s do a thought experiment.

Think back to your most recent non-trivial purchase. Maybe it was a trampoline for your kids. Or a deck in your back yard. Or gym equipment for your garage.

Was it worth what you paid? Or would you like to return it for a refund?

If you don’t want a refund, then you are satisfied with your purchase.

Now think about how squishy your reasons for being satisfied are. The stories you tell yourself and your friends and family.

Lemme guess... They’re about how the purchase made your life better, aren’t they? Not about gross revenue or profit margin.

I mean seriously, what’s the ROI on a trampoline? You’re either glad you bought it or you aren’t.

Here’s the thing...

To do value pricing well, you use The Why Conversation to uncover what the project is worth to the client by identifying the story that they are going to tell themselves to rationalize their satisfaction with the purchase.

This could be increased revenue or more profit or something else entirely, like employee moral or customer satisfaction or process adoption or whatever else it is they care about.