You don't hear much about value pricing (often called "value-based pricing") in the freelance community—at least not in the creative side of freelancing.
But it's catching on with freelancers who are trying to shift to a more consultative approach to their services.
I've been meaning to bring up this topic...
But I wanted to bring in a guest who could speak to this from real-world experience—not from theory.
I finally found the guy. His name is Kirk Bowman.
Kirk has worked as an entrepreneur since graduating from college. One of his businesses is Mighty Data—a software development company serving small and medium size businesses.
He also recently started Art of Value, a start up consulting firm that helps businesses switch to value pricing.
In this episode, Kirk explains what value pricing is all about, whom it's for, how you can use it to grow your business, and how you can deploy it, even if you start small.
The notes that follow are a very basic, unedited summary of the show. There’s a lot more detail in the audio version. You can listen to the show using the audio player below. Or you can subscribe in iTunes or Stitcher to get this show delivered straight to the Podcasts app on your smart phone, tablet or iPod.
What exactly is "value pricing"?
Value pricing is a business model. It affects not only how you price, but also how you position and market your business.
Under the value pricing model, you focus on the value you deliver to clients. What are clients trying to achieve? What does your work mean to clients? Then you price in a way that creates a fair return on investment for clients.
Why did you decide to adopt this model?
For 15 years, Kirk billed his software development clients by the hour.
During a conference, a panel member made the point that when you bill by the hour, you put an artificial limit on your income. (Kirk was also on the panel, arguing in favor of hourly pricing.) This discussion sparked his movement to value pricing.
Within 90 days, he made the decision to switch to value pricing. He started with new customers and within one year, he had switched all his clients.
How do most professionals price their work in your industry?
Hourly pricing is predominant. It’s always been done that way, and it’s easy to do. But when you price by the hour you end up setting your hourly rate by comparing yourself to what others in your industry are charging.
With value pricing, you frame your price in terms of what you can deliver to the client, not how you compare to your competitors.
Kirk has been using value pricing for five years now. When he’s presented with opportunities to deliver extraordinary value, he can also receive an extraordinary price for it. Value pricing works equally well when times are good and when times are tough.
In terms of growth, how has it impacted your business?
In Kirk’s first year of value pricing, his gross went up 56 percent. In his second year it went up 79 percent.
How does value pricing differ from flat pricing?
Every value price is a fixed price, but not every fixed price is based on value. Most fixed prices are based on cost plus. It’s hourly pricing camouflaged as flat rate pricing.
How can you make this work if you’re a writer or designer?
You aren’t competing with Fiverr or 99designs. Don’t get into a race for the bottom. When you price by the hour, it’s easy for prospects to compare you to your competitors.
The best way to differentiate yourself is show how you create value.
How can writers and designers place a value on their work when they can’t tie it to revenue or profits?
Value falls into two categories: tangible and intangible. It’s easier to price when your value is tangible and quantitative, such as sales, profits, gross revenue, cost savings or productivity.
Intangible value includes public perception, reputation, morale and quality of life. These are harder to price, but you can still do it. You have to know why these things are important to the client and then frame your work in that context.
How do you communicate your proposal to the client?
Kirk’s team always presents their written proposals during a client meeting. They don’t email it in advance because they want to provide context.
Each proposal includes a value section that includes five bullet points on the value they’ll create for the client through the project.
Kirk gives each client three options to choose from.
It increases the odds of getting a “yes” by 25 percent.
Kirk recommends Dan Ariely’s TED talk video to learn more about how number of choices influences our decision making.
How should listeners transition to this model?
Start by making a mental commitment. Commit to stop sending invoices with hours. Commit to stop tracking time for billing purposes.
Then implement value pricing for new customers, especially smaller new customers.
Don’t implement value pricing for existing customers when you’re mid project. Wait until your current project ends, and you’re ready to start a new one. You will lose some of your existing customers, so be prepared for that.
Are you able to change conversations about hourly rates to conversations about value?
Sometimes. Kirk’s goal is to help customers self-select before getting to the proposal stage. Kirk would rather prospects disqualify themselves early if it’s not a good fit.
Where can listeners learn more about you and your resources?
Kirk Bowman’s Art of Value podcast: http://artofvalue.com/show/