Captain’s log, stardate 20210316

Why not ask for 100%?

When pricing a custom project, my advice boils down to this:

  1. Determine what the client’s desired outcome is worth to them (i.e., their perceived value)
  2. Set three prices that are a fraction of the client’s perceived value
  3. Reverse engineer a scope for each price that you are happy with

Let’s go a little deeper into the second point. Specifically, the “fraction of the value” bit. What fractions should you use to come up with the prices?

My favorite pricing curve (i.e., set of fractions) for value pricing is what I call Goldilocks Pricing.

The fractions in that one look like this:

  1. 10% of the value
  2. 22% of the value
  3. 50% of the value

So with a value of $100,000 the prices would be:

  1. $10,000
  2. $22,000
  3. $50,000

(You can play around with your own numbers using my value pricing calculator)

Okay...

With all that said, a TPS student recently asked a juicy question related to all this:

“Why not charge 100% of the value?”

In other words, if the client stands to make $50k from the project, shouldn’t you charge $50k?

Aren’t you leaving a ton of money on the table by offering options at $5k, $12k, and $25k?

No, probably not.

There are a several good reasons for NOT charging 100% of the value.

Here are four:

1) Calculating the value to the client is not an exact science, so setting your prices well below your guesstimate increases the odds that you’ll close the deal (and offering three options decreases the amount of money you’ll leave on the table).

2) There is good chance that your involvement is upstream from the client’s success metric, which means that you can not guarantee their desired outcome.

For example, if the client’s ultimate goal is to double MRR and you do branding, there are a lot of things the client could screw up that would stop them from reaching their goal even though you did an amazing job.

3) Using the branding/MRR example again... If you do branding, your contribution to the client’s increased MRR is just one piece of the larger undertaking, so “taking credit” for ALL the value creation doesn’t make sense.

4) Even if you can single-handedly deliver the client’s desired outcome, charging 100% of the value doesn’t leave any profit for them.

In other words, they would be spending $50k to make $50k. This can trigger inequity aversion, which - although irrational - reliably leads to lost deals and/or buyer’s remorse.

Here’s the thing...

Unless you’re selling overpriced trinkets to tourists who you’ll never see again, you should strive to deliver mutual profit with every single client engagement.

If your clients always feel like they make more money than they give you, then they have a strong financial incentive to give you more money.

Sounds good, right?

Yours,

—J

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