Value-Based Pricing: How To Do It Right! - RD110

What Is Value-Based Pricing? Value-based pricing is a way to not only get paid for your time and expenses but a way to get paid for the value of the services and products you provide to your clients. Value-Based Pricing = Time + Expenses + Value. With hourly pricing and project-based pricing, you are compensated only for your time and expenses. This way is ok for newer designers just starting out. But once you've established yourself and start to build a reputation as a skilled designer, you become more valuable to your clients than merely the time you spend on a project. At that point, you may want to consider switching your pricing method to value-based pricing. After all, If that new website or logo your designing will help your client's business grow and perhaps earn them a half million dollars over its lifetime, that's a great value to them, and your prices should reflect it. Establish a baseline price. Before you start using value-based pricing, you need to establish a baseline price. Your baseline price will be different depending on the scope of each project, but they all start off the same way. When submitting a quote using value-based pricing, it's important to remember the formula: Value-Based Pricing = Time + Expenses + Value. To start, you need to estimate how long you think a project will take and multiply it by your hourly rate. Make sure your hourly rate reflects your skills as a designer. Once you have your time figured out, estimate your expenses for the project. Not just project specific expenses but business expenses as well. Business expenses are something many designers overlook when quoting. How much electricity will you be consuming while working on the project? If you are renting space, you should know how much per hour it costs you and include it as an expense. How much does your Adobe Creative Cloud subscription cost per hour of use? All of these are considered expenses and you should bill for them. Just because it's a business expense doesn't mean you can't charge your clients for it. Remember that besides your time, you should be charging enough to keep the light on and keep your business running as well. Taking all of this into consideration, you will have a different baseline price for every project. A website will take more time to develop than designing a business card will. Don't forget to add a buffer to your baseline price. We all know about scope creep so compensate for it in advance by adding anywhere from 5-20% or more to your baseline price. Once you've determined your baseline price for a project, you can then adjust your quote based on the projected value of the project to your client, that's value-based pricing. Determining the value of a project Determining the value part of value-based pricing is tricky. Through back and forth conversations with your clients, you need to figure out what sort of return they expect to achieve with what you provide them. Only then can you figure out a percentage of that amount as the value part of your price equation. When first starting out with value-based pricing it's normal to offer lower prices as you get used to the concept of how much value design can provide. Over time as you practice and gain experience, you will get better at determining the true value of a project. The trick is to try and let your clients estimate the value for you by asking lots of questions about their business. Be more than a designer When you first start your business, chances are you'll run it more like a technician. A client tells you what they want, you design it for them, and they pay you. Many designers continue using that model their entire career. And there's nothing wrong with that. But If you want to use value-based pricing you need to do more. You need to establish yourself not only as a designer but as a design consultant. As a designer, most of the communication goes in one direction. From the client to you. As a design consultant, communication evens out or even tips in the other direction with you directing the project more than the client does. To establish yourself as a design consultant, you need to be inquisitive about a client's business. Ask them questions like "What sort of growth do you anticipate for this upcoming year?" or "How do you think this proposed design project will affect your bottom line?" or "How much money are you willing to invest to ensure the success of your business?" By asking these types of questions from the start, questions that have nothing to do with the actual designing of the project, your clients will realise that you bring much more to the table than merely your design skills. You deliver insight and value that will continue long after you've completed their project. If you establish yourself as a problem solver, which is what a consultant should be, and you approach clients with confidence, you will build trust with them, and they will be much more willing to open up to you about their business. Once you have that trust and your clients see the knowledge and value you bring to them, they will be ready to invest more with you. Several of my clients use me as a sounding board to ask my opinion on business matters. Matters that have nothing to do with design. That's because of the trust and value I've provided them over the years. Those clients value me more than just for my design skills, And that means I can charge them more for my services based on that trust and value. The tricky part is putting a price tag on that value. Maybe that value is $5,000, or perhaps it's $50,000. Unfortunately, there is no magic formula to figure it out. You will need to judge for yourself what you think the value of each project is to your client and then present your value-based price with confidence. It is trial and error. But with practice, you will get the hang of it, and start to know when you can charge more for a project based on value and when you can't. Before long, you will feel comfortable and confident in asking for what you are worth. I remember years ago when I used to design websites for $400-$700. The first time I quoted $1000 for a website I was very nervous, but I believed the value I was providing was more than what I had been charging. My clients must have agreed because they accepted my quotes, and soon $1000 became my new base price for a basic website. Later, recognising even more value I was bringing, I raised my price to $2000 wondering if clients would laugh in my face. They didn't. They agreed, and $2000 became my new base price. Every time I raised my prices and asked for more money, based on the value I was providing, I kept thinking I was asking too much and I would never hear from those clients again. But you know what? It never happened. Let me tell you what did happen. When I was asking $400-$700 for a website, I had a lot of clients say it was too expensive or they couldn't afford it. I was winning one out of every four or five quotes I submitted. But now that my starting price for a basic website is several thousand dollars, I rarely have a client turn me down. Most clients are referred to me by someone they trust, and they've heard of the value I provide beyond a simple website. With that knowledge, they are willing to invest in my services even though I charge much more than the next guy. You are a professional designer, that's why clients are coming to you in the first place. If a client doesn't like your price for their project, if they don't see the value in hiring you, then you don't want them as a client. There are no bad clients, only bad design choices. Before that statement makes you stop reading let me explain. When I say bad design choices I don't mean a designer's skills, I mean their people perception filters. If you end up with clients that are rude or disrespectful, clients that micromanage you or are stingy with their money, it's not the clients' fault; it's yours for agreeing to work with them. Unless you are just starting out, you should have enough experience in recognising demanding clients to be able to turn them away before ever having to deal with them. The money may be tempting, but the headaches are not worth it. By using value-based pricing, by establishing yourself as a design consultant, a professional in your field, you will project a higher sense of worth which will allow you to charge the prices you deserve for the value you provide. Clients will respect you more and will understand that what you do is much more than just an expense for them. It's an investment. Don't worry about the designers on Fiverr or similar platforms or the ones in your community that are charging less than you. Your prices are not intended to be competitive; they're meant to reflect where you are in your career and the value you provide to your clients. Your goal is to distinguish yourself by showing the uniqueness you can bring by showcasing a positive track record of successful projects. Use your portfolio and case studies and let them speak for themselves. They will prove that the value you provide is worth every penny. Niche Down Niches are a perfect avenue for value-based pricing. Whenever you serve a niche, you are automatically established as an expert and can charge much higher prices for your work. When your business is new, you need to diversify your services to have many sources of design income and to build your portfolio. You may design logos, websites, business cards, posters, you name it. The object is to...