Intro to Value Pricing

Show Notes

Value pricing defined.

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Do you have questions about how to improve your business?

Things like:

• Value pricing your work instead of billing for your time?
• Positioning yourself as the go-to person in your space?
• Productizing your services so you never have to have another awkward sales call or spend hours writing another custom proposal?

Book a one-on-one coaching call with me and get answers to these questions and others in the time it takes to get ready for work in the morning.

Best of all, you're covered by my 100% satisfaction guarantee. If at the end of the call, you don't feel like it was worth it, just say the word, and I'll refund your purchase in full.

To book your one-on-one coaching call, go to:

https://jonathanstark.com/call

I hope to see you there!

Creators and Guests

Host

Jonathan Stark

The Ditching Hourly Guy • For freelancers, consultants, and other experts who want to make more and work less w/o hiring

What is Ditching Hourly?

For solo professionals who want to make more and work less without hiring.

Hello and welcome to Ditching Hourly, I'm Jonathan Stark. In the previous episode, I talked about the limits that hourly billing places on your income and some other downsides of hourly billing and suggested that there is a way around those limitations and one way around it certainly is to value price your projects. So in this episode, I'm going to talk about what value pricing is and how it works. Okay, so value pricing is like fixed bids on steroids. So unlike doing a typical fixed bid project quote where you calculate your price based on your costs or time and materials basis, the prices in a value priced quote are based on the client's perceived value of the project outcome instead of the price being based on your costs. So what do I mean by value here? So I like this definition I found from Ron Baker. He says, value is the maximum amount that a consumer would be willing to pay for an item. So I think this is a really elegant definition because it concisely illustrates the inherent subjectivity of value. So value is not some intrinsic property of an item. It's a vague sense of what something is worth to a particular person in a particular context, that person being the buyer. So how do you figure out what something is worth to your clients? How do you sort of look into their mind, read their mind and say, okay, this project that Alice brought to me is worth probably $100,000 to Alice or Alice's company? How do you figure that out? I suppose you could come right out and ask, but they wouldn't be able to answer. They don't really know exactly. It's a hazy type of thing. But what you can do is you can get close enough to drastically increase your fees. So like I said, it's a very gray area. It's a hazy thing. And folks, especially software developers, are pretty uncomfortable with this, but it's the key to closing big deals. It's the key to increasing your profitability, decreasing your labor intensity, and increasing your revenue. Okay, so how do you figure out the perceived value in the client's mind? So what I suggest you do is when you first jump on a phone call with the client or the prospect at this point, prospective client, what you want to do is let them brain dump. They're going to brain dump for probably 10 to 30 minutes about all the things that they want you to do and all their thought process that led them to where they are. But they're probably not going to tell you anything about their goals or motivation, and you need to figure that out. You need to find out those things. And you do that by asking why. And you have what I call a why conversation. So three categories of why question. Why this, why now, and why me? And so, for example, you could ask questions like, you know, why not just leave things the way they are? Why pay me a million bucks to change this? You know, is there an important reason? Because I want to make sure that you get good ROI from working together, and I don't want your investment to go to waste. You could say, why not use an off-the-shelf solution? Why bother hiring me to build something custom when, you know, there's something that exists, a SaaS or some existing product that you could just purchase, and you wouldn't have to take all the risk of a custom project? You could say, why do you need to tackle this now? Is it something that you could keep your eye on for six months to a year and then make a decision later? Or if it's something that they've been aware of for a long time, you can say, why have you waited so long to address this? Did something change suddenly that makes it urgent? Or what? What's going on there? You can ask, why not handle this internally? You can say to the client, oh, you mentioned that you have internal web developers. Why don't they just do this? Why don't you just train them to do this? Why not hire some junior contractors who could do this for you if you don't have internal employees? Or why not just outsource this to an overseas team that would be much less expensive than me, who's situated here in the US and is an expert in this area? So when you're having this why conversation, it forces the prospect to articulate the reasons for doing the project. It gets them out on the table. It makes sure that they're actually top of mind in the client's mind. So it might just be so obvious to them that they need this project done that they haven't really stepped back to think about why they think that. You're helping them by questioning their motivation, and it will get the value on the table, also get the goals on the table. And by the end of this, you'll have a rough idea of what it's worth to them, and then you can use that as the basis for a value price quote. All right, so

Once you understand their motivation and the goals of the project, you have a rough idea of the perceived value in their minds, what it's worth to them, you'll have a rough idea of the scope from this conversation. And you can estimate your cost. And the cost to you is kind of the inverse of the value to the customer. It's kind of your walkaway price. It's your floor. It's the least amount of money you would accept for doing the project. If they wanted to pay you less than this number, you would rather not do it. And really, this is a hazy number too. It's comprised of mostly your time, probably, how much time you think it's going to take to do the project. But there's also money involved. Perhaps you're going to buy some tools or plugins or something that needs to be, or perhaps fly to the client and have to pay for travel and lodging. There's also stress. The client might be a very stressful client or someone that doesn't click very well with you that gives you the heebie-jeebies, gives you hives to work with them. There could be all sorts of stress. It could be very urgent. It could be a very tight delivery timeline, a very aggressive timeline. So when you take all of these things into consideration, you have a rough idea of, you can calculate a rough idea of what your cost is by just sort of saying to yourself, would I do this for five grand? Would I do this for 10 grand? Would I do this for 20 grand or 100 grand? And you kind of react to it. So if you think, would I do this for five grand? You're like, no, I'd really rather just play guitar or hang out with my kids than do this project if they're only willing to pay me five grand. Would I do this project for 20 grand? Yeah, I probably would. That'd be pretty good, pretty good money. Would I do this project for 100 grand? Yeah, I would, definitely. That would be huge. That would be gigantically profitable. So you can kind of figure out where your cost is by throwing numbers at yourself and finding that one where you're kind of like, yeah, I'd probably do it for that. So that kind of Goldilocks, this one's about right. Now that's your cost and you've got the value that you derived from the why conversation. And you can take these two things and put them into what I call the magic value pricing formula, the magic formula. And this will give you a price. So what you do is you take the maximum of your cost versus the value divided by 10. So if the customer, if you estimate their value is about $100,000, you divide that by 10, you get $10,000. And if your cost to you is 5,000, then you'd present them with the greater of those two numbers, which would be 10,000. If your cost, your walkaway price is 20,000, then you'd present them with 20,000 because that's greater than 10,000. Okay, so this is a little bit of a, this is a training wheels type of formula. Down the line, you won't need to consider your cost. You really shouldn't consider your costs to tell you the truth in a value priced proposal. But when you're getting started, you're probably going to want to because you're probably going to be drastically underestimating the value. When people are new to this, they tend to underestimate the value. And that can lead to problems because they price things too low. They price them below their cost and they end up regretting doing the project and they get frustrated and discouraged and want to stop doing it. So when you're first getting started, I recommend that people do consider their costs in the formula, but over time, you will find that your cost becomes irrelevant and you don't need to calculate it because the value, you get so much better at uncovering value that your cost is like a joke compared to a 10th of the value and customers are very happy to pay your price. And it's dramatically higher than your cost. So you don't even, you know, speaking for myself, I pretty much don't even think about my costs anymore because it doesn't matter. All right, so that is value pricing in a nutshell. Next time around, we will talk about how to transition to value pricing because I think it's something you do need to sort of dip your toe in. You don't want to flip your whole business over to value pricing overnight because you probably will not be great at the why conversation at first. It takes some practice. All right, see you then. Hey, Jonathan again. Do you have questions about how to improve your business? Things like value pricing your work instead of billing for your time or positioning yourself as the go-to person in your space or maybe productizing your services so you never have to have another awkward sales call or spend hours writing another custom proposal. Book a one-on-one coaching call with me and get answers to these questions and others in the time it takes you to get ready for work in the morning. Best of all, you're covered by my 100% satisfaction guarantee. If at the end of the call you don't feel like it was worth it, just say the word and I'll refund your purchase in full. To book your one-on-one coaching call,

jonathanstark.com/call. That URL again is jonathanstark.com/call. Hope to see you there.