Taking Value-based Pricing Too Far

Posted: February 09, 2015 Comments(1)

Value-based pricing has been a hot topic for the past couple of years. As is often the case with newer concepts, many people have varying definitions of what ‘value-based pricing’ really is. For some it’s simply a flat rate for a project. For others it’s an in-depth analysis of project scope to determine a market value of both the process (e.g. consultation) and the deliverables. Ask a third person and they might say it’s something in between the two. For argument’s (and this article’s) sake let’s just lump value-based pricing under the umbrella of not billing by the hour.

Hourly billing is by far one of the things I’m most thankful for not having to do anymore. We cannot ignore that the topic has been discussed ad nauseam, but I think disclosing my strong aversion to billing by the hour will help provide context here.

Value-based pricing benefits all parties

One of the cornerstone arguments for value-based pricing is that unlike hourly billing it works in favor of both the consultant and the client. Billing by the hour works against the consultant simply because as you become more proficient in skill you are able to charge less. It works against the client because it introduces a metric the encroaches on the relationship, putting a focus on time (now directly correlating to money) instead of the goals of the project. By contrast, value-based pricing places a bottom-line cost on the project as a whole.

Billing by the hour is much more straightforward on the other hand, which is why it became so commonplace over the years in design and development. Over time processes have changed and focus has reoriented to new areas. The actual legwork put into building a website has shifted to make room for discovery, consultation, and planning phases of a project. Putting more effort into these initial steps of a project has contributed to the higher level websites we see today. We are learning what it takes to truly provide solutions to clients by way of better preparation and consultation. The process is iterative and requires continuous refinement with each project, which contributes to the idea of providing value.

Taking “value-based” to the extreme

When considering the value a project may provide, there are many factors to consider. We’ve all heard value propositions ranging from one extreme to the other. On one end someone may equate it to buying a tangible product, where the deliverable has some sort of inherent value mostly based on the estimated time it will take to design and build it. At the other end someone may attach ‘value’ to the project when considering that taking on the project therefore prevents her from taking on another project throughout the time she is working on the accepted project. It’s interesting to see where people take the concept of providing value to clients through the work we do. What sparked the inspiration for this article is something different though.

While I do fully stand behind value-based pricing being a superior way to provide consultation and deliverables to clients, I think there’s a great potential to over-dwell on the concept of value. I recently listened to a podcast that outlined positioning when in the value-based mindset. While the bulk of the information was really great there was one point that caught my attention. The hosts were speaking about budget considerations when working through project inquiries, and it was mentioned that discussing budget too early in the process essentially ruins your positioning as it sets you up to be an expense versus an investment. I think that is some fantastic food for thought, but I also feel like not discussing budget early in the process can set you up for quite a bit of wasted time and effort.

Budget vs. value?

I think positioning yourself accurately is very important, I like that it’s become an ongoing topic of conversation amongst freelancers and companies alike. There are a lot of us out there, and figuring out how you can differentiate yourself right out of the gate can be of great benefit. I think though that choosing to not talk about budget early in the process (and subsequently avoiding the conversation on purpose until the value proposition/scope has been finalized) can be dangerous to the longevity of your business.

Circling back to the roots of value-based pricing, the overarching idea is to present a project cost that accurately represents the value of everything that went into (and everything that resulted from) the time, effort, and materials involved in the project. In parallel with that comes the notion of simply doing the best job you can for your clients, but that doesn’t solely pair with value-based pricing. If you’re billing by the hour chances are you’re working your hardest to do the best work for your clients as well. Based on the foundation of wanting to do the best job you can, the natural inclination is to suggest the best possible solution to the problem(s) at hand, thereby providing maximum value to the client.

But how does budget come in to play then? It can be argued that when it comes to providing value, the solution to the problem(s) at hand will cost what they cost, regardless of the allocated budget. While I agree that positioning yourself as an expense as opposed to an investment is going to be troublesome, I think we owe our prospective clients the respect of their time. When it comes to the work we do, a project budget will keep our proposals grounded. In my experience to date, clients are not interested in receiving proposals with a cost that far exceeds the intended spend, in fact it can be offensive at times.

In my experience, clients have an allocated budget to spend on a project. They might not know how much a project is going to cost, but they have an idea of what is acceptable to spend on getting it done. To forego that very important specification sends us on a pursuit that has great potential of wasting a lot of time for everyone involved. Without having to consider a budget we can blue-sky potential solutions that will go into a project for weeks on end. Having that restraint in place will allow us to focus on prioritizing what needs to be done versus what would be nice to have done. Nice things also provide value, that’s why cars come with leather heated seats, but not everyone has budgeted for (or wants) those amenities.

An argument can be made that if a proposal includes (and backs up) a project cost that exceeds the budget, the conversation can cycle back to the beginning and the superfluous bits can be left for a subsequent phase or dropped altogether. At that point though a significant portion of time has essentially been wasted, and conversations will now need to be had about which bits can be included to fit within the budget. Seeing what’s possible but not feasible can greatly distract and delay the completion of a reasonable proposal. Further: what happens should the budget be so limiting that you can’t accommodate it at all? That’s time simply better spent on another proposal from the get-go.

Providing a proposal that meets expectations is valuable

Providing the highest value for a client should take into consideration their budget. We are likely dealing with a never-ending flow of inquiries, spending time on proposals is not something we should take lightly. In an ideal world yes, the budget would not be a consideration and the client would be ready to spend what it takes to get their problem solved. There is truth in that, I agree, but at the same time I feel that a budget gives a discussion gravity, something to facilitate a wise use of time.

There’s more to value-based pricing than the project itself, it’s the entire package. From our inquiry form to our proposal process and then to the actual work, there is value from the moment a potential client hears of us. We need to keep in mind the business end, the fact that keeping margins low should still be an important business goal. Trekking down what could be a fruitless trail because the budget proves to be a major limiting factor isn’t the best way to use our time. Not positioning yourself as an expense is definitely important, absolutely, but not valuing your client’s time can prove to be a liability.

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Comments

  1. I know exactly which podcast you were listening to you, and while I agree with a lot of what the hosts said, I also disagree with not discussing budget upfront.

    If you don’t talk money early in their client on boarding process, you’re going to waste some time with people that just don’t have the money to do a project. I wish that all people everywhere, this includes developers as well as clients, had a sense of what projects should cost, but it is not universally the same.

    There are many people that have no idea what a design project should cost. Discussing budget in the first conversation is something that needs to happen. “Positioning” be damned.

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