This post lays out the principles behind value-based pricing.
Its premise is to charge for your head, not your hands. In other words, expertise is over labor and results are over deliverables.
As you understand, it’s a general approach. The industry doesn’t matter here. What matters is the ability to understand the value your services have.
It’s no easy task as no paradigm shift is. Especially for those who have been charging on an hourly/daily/weekly basis a decent amount of time.
Good news is that there’s a way to reason about it.
First, you have to admit that the time-based approach punishes the expertise you have. That expertise you acquired over the years and spent sleepless nights for.
When I start to think about this topic like this I always come back to one example. It’s the story of a woman approaching Picasso in some restaurant. She asked him to draw something on a napkin and agreed to pay whatever he thought it was worth. He complied. The conversation then went like this:
That will be $10,000. — Picasso
But you did that in thirty seconds. — Astonished woman
Madame, it has taken me forty years to do that. — Picasso
I’m sure you agree it is the correct answer. What would you do in Picasso’s place? Of course, it doesn’t even matter if the story is even authentic. What matters is charging for the time spent is not the best way for the service provider. That’s why it’s so omnipresent probably.
Other than being a non-lucrative method for the service provider it’s also a method leading to the highest amount of stress for the client. It puts them in a seat where every minute you spend on a project is considered an expense. Therefore it must be accounted for and reported. Imagine thinking in such a manner on a day-to-day basis. Then let’s add worries about the limited budget. No doubt, it’s an easy way to alienate the client and get annoyed with the whole collaboration pretty quickly.
Yet most of us continue doing that.
It’s a trap
Once you start working with a time-based approach, it’s hard to switch to value-based pricing with the same client. Why? Because once you charge $100 an hour, no project made in 6 hours is worth $10k. It’s worth $600 in the client’s mind, not a penny more. That would be correct, wouldn’t it? It’s rational to think that. You gave a client a reason to do so after all.
How to fix that? By replacing the context of a conversation. It allows you to replace everything including the price you charge.
Now, approaches vary because not every industry is the same but I do have an approach to reason about it on a general level.
First, we have to understand that the time-based approach doesn’t make sense.
Once that’s done, let’s use the template:
I believe that people want to $ability so they can $outcome, and they would pay a lot for that because of $value.
Hmm, that’s it? Yes! Let’s take a real example for a system administrator at Some Inc.:
I believe that people want to have servers running without crashes so they can reliably run applications for internal and external use, and they would pay a lot for that because those bring revenue and increase the productivity of the staff.
Pretty easy, right? Let’s see how to build a proposal out of that. We’ll just reverse the statement using the template:
If you $value, you can $ability with the $company so that you can $outcome.
With the same example of a system administrator it would look like this:
If you want to bring revenue and increase the productivity of your staff, you can have servers running without crashes with Some Inc. so that you can reliably run applications for internal and external use.
That’s pretty valueable, isn’t it? What did we just do? We now have a business proposal statement that can be used anywhere. The trick is that one system administrator has tens or even hundreds of proposals like this. Various industries, various niches require specific value-based statements. The task is to dig through them all and find those nuggets of gold.
Remember, you are as only as good as the material you have.