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You want to do good work. You want to be paid well. You want to work with great clients.
There’s only one thing stopping you: your broken pricing model.
The way you’re pricing right now is holding you back. Everything is based on arbitrary numbers. Hourly rates and flat rates both have the same issue: they have to be based on arbitrary numbers at some level.
What’s wrong with that? The problem is that your goal and your client’s goal are not aligned.
With hourly, you’re trying to work as much as possible so you get paid more. Your client wants you to work as quickly as possible so they can pay you less.
With flat rates, you’re trying to get the job done as quickly as possible because there’s no other way to increase your earnings. But where does that flat rate come from? It can only be arbitrary.
When your pricing is based on arbitrary numbers, you can never be certain if your price is fair. It could be unfair to the client (you may be overcharging), or it could be unfair to you (and you should have been compensated more).
Enter Value-Based Pricing.
For two years now, Justin Michael and I have been working on a course called Value-Based Pricing. This curriculum teaches you how to price on value. It is the only method of pricing that is not based on arbitrary numbers. It is the only method of pricing that aligns your goals and your client’s goals.
With Value-Based Pricing, you are incentivized to make the client more successful, because this directly affects your compensation. In fact, the value the client receives is the only thing that affects your compensation. This is why Value-Based Pricing is win-win for everybody.
Today’s episode is the first of a new 3-part series on Value-Based Pricing. Justin and I have spent the past half year teaching this curriculum to a Pilot Program. In this episode, we give you the background story and overview of Value-Based Pricing, as well as talk about how to fix your broken pricing model.
Highlights, Takeaways, Quick Wins
- The cornerstone of Value-Based Pricing is fair pricing based on the value of helping your client achieve their goals.
- Other pricing models, like hourly and flat-rate, are based on arbitrary numbers and, thus, are not fair to you or your clients.
- Value-Based Pricing aligns your goals with your client’s goals and allows you to work with them instead of against them.
- When the amount you charge is tied directly to the amount of value you can provide there’s no cap on your earning potential.
- Value-Based Pricing is win-win because your client gets an incredible amount of value and you charge a fraction of that.
- A value-based price is always a no-brainer decision for clients.
- Value-Based Pricing only works for bespoke work tailored to a specific client that will result in monetary gain.
- One of the keys to using Value-Based Pricing effectively is understanding the context and psychology of your potential clients.
- Value-Based Pricing takes your financial situation and your goals into account, making sure you’re never operating at a loss or in danger of not making a living.
Learn to Price on Value
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- 01:57 Sean: We have a three part Value-Based Pricing series for you, and Justin is developing the course with me. He’s coming on to help give everyone an introduction and an overview of what Value-Based Pricing is and how you can do it. We did a three part series a long time ago, over a year now (Related: e145 Getting Started With Value-Based Pricing, e146 Attracting Clients and Positioning the Conversation Around Value, & e147 The Nuts and Bolts of Value-Based Pricing).
- 02:40 Justin: It simultaneously feels longer and shorter than a year. In the interim, we’ve been working really hard on the course, making sure it contains everything it needs to contain. At the time, when we did those episodes, we said, “We’re barely scratching the surface,” and we weren’t kidding. The course is going to have about 70 lessons in it, and that’s a lot.
- 03:11 Sean: And that’s with us focusing heavily on how we can condense this down as much as possible.
- 03:20 Justin: People’s time is valuable, and we don’t want to ramble on and go at length when we don’t need to. Condensing it down was one of the more challenging parts, so it wouldn’t take six months to learn and get through.
- 03:39 Sean: Speaking of six months, that’s actually how long we’ve been developing this material so far with a pilot program. Since last year, we’ve been developing the material and going through with a group. We’ve been revising and refining it, so by the time we launch the course, which will tentatively be the end of May, it will have been about eight months of development. Really, we’ve been building, planning, and talking about this course for nearly two years now. It’s quite in-depth. The purpose of today’s three-part series is to get you, the listener, up to speed.
Discovering the Value-Based Pricing Model
- 04:30 Justin is a developer, so he actually built the chat system that we custom made for the Community. Originally, I hired him as a contractor, so we told this story a little bit more in depth in the previous three part series. Long story short, Justin is now on the team full time at seanwes. We’ve been developing the Value-Based Pricing course together. Back when we did this chat project, building the custom chat system, pricing was one of the interesting parts of that project. I shared in that other episode that I had no idea what a chat system would cost. I had a ballpark figure in my mind. I thought it might be $20,000 or $25,000.
- 05:19 We did around two months of project discovery, so we spent months on this. We were researching and seeing if there were alternate options, going through the things my project needed, what it would be used for, and what it was worth to me. We went through this value-discovery process. It wasn’t as refined as the course we have now, because we’ve spent so much time on it. This was a couple of years ago. We both came to this concept of Value-Based Pricing through similar routes. The other pricing models that were so prevalent in both of our industries had issues and problems. They were all arbitrary.
Other than Value-Based Pricing, all of the other systems used to come up with prices are based on arbitrary factors.
- 06:22 One of the things I want to talk about is the problems with pricing models, with hourly pricing and flat rate pricing. Why are these pricing models broken? The title of this episode is Make More Money While Doing Your Best Work, and that’s what we want to do. We want to make more money, and we want to do great work. There are a few ways you can do this. You can try and get as much money as you can from your client, and maybe that’s fair to them or maybe it’s not. You can’t always be sure when you’re using these other arbitrary methods whether or not the way you’re pricing is fair to them.
- 07:10 You’re always running the risk that the price is either unfair to the client or unfair to you. Something about that wasn’t sitting right with us, and that’s what started us on our journey toward discovering a pricing model that’s fair to the client and fair to us, as the professionals. We were seeking a situation that would be a win-win for everyone.
- 07:43 Justin: We’ve been deep into the course, developing it, putting it together, and working on the details. Sean just talked about the origin piece. Sean was off in his industry and I was off in mine, and we both had the feeling that this wasn’t quite right. This pricing situation just didn’t feel right. The timing worked out so well as we came together, not just because of the projects we wanted to do, but because we also wanted to solve this pricing problem. It’s not just that, but it’s a problem of how you do the best work you can. It’s about not just getting good clients, but getting great clients. There’s so much that goes into it. It really takes me back.
- 08:43 I’m thinking about this, and Value-Based Pricing probably started for both of us, independently, before we even met each other. Back when I still had my day job, I was doing client work on the side and charging by the hour. It didn’t quite feel right. There was something nibbling at the back of my mind, but because it was just a little bit of part time work here and there, I didn’t take the time to sit down and figure out what was wrong. When I left the day job and transitioned to doing full time client work, I knew that there was something wrong with this. I started to sit down and devote time to figuring out the actual problems, what the issue is here. Why does hourly pricing just not feel right?
- 09:41 I tried some other things, too. I thought that if hourly didn’t feel right, I could charge by the project. What if I said, “Okay, here’s this project I’m going to do, and I’m going to try and come up with a price for it.” If I do a website for someone, that costs the same amount for whoever, a flat rate. That felt even worse, in a lot of ways. Each website is so unique, each project and each piece of software… whatever it was I was doing. All of it was unique and tailored to the client, but the pricing wasn’t. It felt out of whack. I’m sure Sean was doing his stuff having similar thoughts, so we came together and started working on this pricing situation to figure out what was wrong and what we wanted to be right.
- 10:42 Sean: What we came up with on our own, while it was closer to what we were searching for, both of them had holes and problems. I came at it more from the flat-rate perspective, but something about it wasn’t quite right. A lot of people think that hourly is the problem when you’re selling time, because it can’t be based on value.
Although some people laud flat rates over hourly rates, flat rates are not inherently Value-Based Pricing.
- 11:19 There are a lot of people online talking about raising your rates, increasing your rates, and charging more. They even say pricing on value or Value Pricing. Today, we’re talking about the model called Value-Based Pricing that Justin and I have developed that is 100% quantifiable. Nothing is based on arbitrary factors, and that’s really the cornerstone of it all. The cornerstone of Value-Based Pricing is value as defined by the client. It’s never guessing, assuming, or basing anything on arbitrary rates. It’s math. That’s why we have numerous tools inside the course.
The Problem With Broken Pricing Models
- 12:17 Justin: One of the biggest problems with both hourly rate pricing and flat rate pricing of any kind is that your goals and your client’s goals are not aligned. The incentive for both of you is different. You’re working at odds to each other, in some ways. I want to work with my clients. I want to work toward a common goal. I don’t necessarily have a bunch of my own goals while they have a bunch of their own separate goals, and we just kind of work in parallel and hope everything works out. Some of our goals may even be at odds with each other.
- 13:12 They often are in those situations, especially if you’re charging by the hour. Your client is looking at you and your hourly rate and thinking, “Every hour this person does work for me, I have to pay them more.” They get stuck on that, even if the work is really valuable and it’s really going to help them, and the more work you do, the better off they are. It’s really hard for them to see past that number on that amount of time. It’s hard for them to make the leap to, “The more they work, the better off I am.” No, they think, “The more they work, the more I have to pay them.”
- 13:54 You’re viewed as an expense. That leads to the other big problem. The more you work, the better you get and the more experience you get and the more efficiently you work. As you gain experience and you get more efficient, you’ll do more work in less time, which means that the more work you do, the better that work is. The faster you get it done, the less you’re going to get paid. Wow. That doesn’t make sense.
- 14:27 Sean: The only way to fix that is to arbitrarily inflate your hourly rate. You’re always chasing it.
- 14:35 Justin: Before we even get there, we’re talking about arbitrarily inflating the rate, but the rate is already arbitrary. What is your hourly rate actually based on? At some level, it has to be an arbitrary number. You can look at your competition, your industry, or the “going rate” of what you’re doing, but where did those numbers come from? What are these numbers based on? Are they based on actual factors in the real world that have to do with the value you’re providing, the worth of your work, and the actual contributions you’re making?
The numbers you choose for hourly rates are arbitrary to begin with, and they have to be arbitrarily inflated as you go to make any financial sense.
- 15:30 Again, you’re working faster, better, and harder, so the quality is going up. You’re getting it done in less time, so if you don’t raise that rate, you’re making less.
- 15:41 Sean: It’s arbitrarily based inherently, but then, as you get better and you work more efficiently, you spend less time working. That means that you get paid less, so you have to continue to increase that hourly rate and figure out how much to do it. There are all of these arbitrary factors woven into an hourly rate, but there are a bunch of other problems with things like tracking time.
- 16:15 Justin: As you raise that rate, it goes to those goals. Your goal is to make a living. Your client’s goal is to pay you less money to do more work. When you raise your rate, they’re already fixated on that hourly rate. They think, “The more you work, the more I pay you. Now you’re raising your rate, so the more you work, the more MORE I pay you?” It creates adversarial relationships, puts bumps in the road, and causes friction. That’s the last thing you want. Again, when I was doing development work with clients, I didn’t want to be at odds with them at any level. I wanted to work with them to help them succeed.
- 17:01 I wanted, through that work, to make a living on my own. That’s what everybody wants. You’re charging by the hour, and you have to track hours. That can get in the way of so many things. You’re sitting there, and you’ve got this constant overhead and this mental pressure to keep track of every minute you spend doing any kind of work with any kind of client. In some cases, you have to denote exactly what it is that you’re doing during those hours. It adds overhead, and oftentimes, the client will want you to provide a list of what exactly you’re doing at every minute of the day that you’re working on their stuff.
- 17:48 Again, it speaks back to the misaligned incentives and misaligned goals. Their goal is to make sure that you’re not inflating hours arbitrarily or doing anything that will make them pay you any more than they possibly have to, and that’s the worst type of relationship to be in with a client.
- 18:21 Sean: This changed everything for me. I never realized that my goals were not aligned with my clients’ goals. When I’m charging by the hour, I want to work more hours because that’s the only way I can increase my profits. When I’m working with flat pricing, at a flat rate the only way I can get paid more is to work fewer hours.
If I charge a flat rate and I get the work done really quickly, I’m effectively making more money with my time.
- 18:56 The client’s goal is that they want to become successful. They want to be profitable and receive value from people. If your goals are not the same, which is making the client successful, you’re at odds. Now the client is worried that your goal is to work more hours because you’re getting paid hourly or that your goal is to get the job done as fast as possible, because you already get the flat rate, which means that the work you do isn’t going to be as good. You won’t be giving it your full attention. Value-Based Pricing aligns your goal with the client’s goal, because your goal is to make the client as successful as possible. As we will explain, the simplified version of what you price is a fraction of the value that the client receives. What you get increases as you increase value for the client.
- 20:04 Justin: When you’re charging by the hour or you’re charging a flat rate, you are inherently capped by the industry that you’re in. There’s that “going rate” for whatever you’re doing and you can’t get too high above that. Everyone out there, when they see, “This person charges this much an hour,” or, “This person charges that much for that kind of work,” they comparison shop. Potential clients will do that inherently. They’ll see that price and they’ll see the price over here for this other professional, and they’re going to compare those. That’s all they’re going to do. They’re just going to compare those numbers.
- 20:53 They’re not going to compare the quality of the work, the attention to detail, or what makes your work stand out and what makes it special. They’ll see that number, and that’s all they’ll see. They’ll say, “This person over here charges $75 an hour to do this kind of work, and this person over here charges $65 an hour to do this kind of work,” and we’re talking about a whole lot of hours for this project. It’s very tempting to look at that $65 and lean very heavily in that direction without looking at the merit behind that number.
- 21:34 The person charging $75 could have ten more years of experience. If the client went with them, it’s highly likely that they would spend 100 fewer hours on this project. The client, who’s shopping and trying to figure out who to select to do this project for them, isn’t going that far mentally. They very rarely think that far ahead. They see $65 and they see $75, and they think, “$65 is cheaper. I’m going to go with that.” That’s the last thing you want.
Benefits of Value-Based Pricing
- 22:09 Sean: If someone’s goal is to make more money, and all of the listeners hearing this podcast right now want to make more money, there are several routes you can go. You can go with an hourly price, where you need to make the job take as long as possible. That’s the way you make the most money with hourly pricing. With flat rate pricing, you need to do the quickest job you can, because the money is fixed and that’s what you’re going to get. In both cases, the work is going to suffer. You’re dragging on the completion of the project, or you’re completing it in too short a time and possibly cutting corners. In either case, the work suffers.
- 22:52 You’re fighting the very thing that will make the client want to work with you or want to work with you again, that will make the client want to find other projects for you, or recommend you. When you do Value-Based Pricing, which we will be explaining, it’s aligned with what the client wants. Your goal is to make them successful, so you get all of these benefits with it. The more you work, the greater value you create for the client, and the more successful they are, the more you get paid, the happier the client is, and the more they want to work with you again or to refer you.
- 23:35 Justin: I tried using a flat rate on a couple of projects. It was, in a lot of ways, worse than hourly. I thought it would be better, but it was worse. You charge this flat rate, and now you’re capped for that project as far as the resources you can put into it and the time you can put into it. During one project that I did at a flat rate, I got the base of work done and I had to stop, even though there were a couple more things I could have done. It would have gone from an okay project to an outstanding project with these few touches, this little bit of polish that I could have added had I had a little bit more time and resources to devote to it.
- 24:35 I just didn’t have it. It was flat rate, and that was the rate. That was the amount of resources I had, and it killed me. I don’t like doing things halfway. I don’t like doing okay work or even good work—I like doing great work. I like having the client be extremely satisfied and helping them be as successful as possible, and I like my work to speak for itself. When I was doing the flat rate project thing, my work could only speak for itself up to the point where the money would stretch. That’s as far as it could go, and that killed me emotionally. I looked at my work, and I thought, “This functions, but it’s not high quality. It’s not the kind of work I want to put out into the world.”
If your earning potential is capped, the quality of the work you do is capped.
- 25:42 Sean: You can only ever afford to to do as good of a job as you’re being paid to, essentially. You’re only able to make as much time as you have in a day or as much as you can pitch for a flat project, which is something you have to complete in a short amount of time for you to be able to make more money and be more profitable. Value-Based Pricing is the only method of pricing where your earning potential isn’t capped, because you’re helping the client. They’re incentivized to give you more work, to help you create more value.
- 26:25 Justin: There are all of these logistical problems that we’ve just talked about. The earning potential is capped, the incentives aren’t aligned, the hourly rate situation is upside down, where the faster and better you work, the less you make. There are all these logistical problems, but higher than that, the most important thing and the biggest problem goes back to the arbitrary factor. The hourly rate was arbitrary. The flat rate pricing was arbitrary. When these numbers are just plucked out of the sky, they’re not fair. More than anything, I wanted to be fair with my clients. I wanted them to pay a fair price for the work, and I wanted to be as fair as possible with them.
- 27:25 It goes back to the relationship you have with them, the lack of friction, and the goal alignment. I wanted everything to be fair for both parties. All this arbitrary stuff was not doing that. Ultimately, that was the biggest factor in why these other methods didn’t feel right. They didn’t feel right because they weren’t fair.
Why Value-Based Pricing?
- 27:55 Sean: Tell me more about the things we were looking for with Value-Based Pricing, what we wanted to come up with, and the problems we wanted to solve with this pricing method.
- 28:09 Justin: One of the biggest ones is aligned goals and aligned incentives. I want to work with the client, toward a common goal. I don’t want us to be at odds with one client over here and one over there, adversarial, with friction. I don’t want any of that. I want to work with people toward a goal, and I want it to be a peer relationship. I don’t want it to be either a subservient relationship or a technician type relationship or a “Just do this list of things” type relationship. I wanted it to be more of a partnership, where it was teamwork in the truest sense of the word. I wanted us to be a team, where we had a goal that we were working toward together.
- 28:56 I wanted it to be fair. It needs to be equitable, and both parties need to feel like this is a win. It should be! Client win should be a win for both parties, for the client and for you. You’re doing great work and your client is benefiting from it, so if everything goes well, why can’t it be a win-win for everyone across the board? Going back to the money aspect, which is a critical aspect of this, I don’t want my earning potential to be capped by anything other than the quality of the work that I do. When you have that hourly rate situation, you’re capped by the “going rate” of the industry. When you have the flat rate project, again, it’s the “going rate” of the industry.
- 29:56 These prices, because they’re arbitrary, don’t reflect the quality of your work. You put these prices out there, and you have these rates that are set, and that invites potential clients to do that comparison thing where they don’t look at the quality of your work. They just look at the price, and that’s the last thing I want. I wanted to be in a place where I was doing exceptional work for clients who appreciated the fact that that work was exceptional, and that I wanted that exceptional work to contribute greatly to their success.
I wanted a pricing model that felt right, that didn’t constantly nag me in the back of my mind.
- 31:00 Sean: I always had that nagging feeling. At the back of my mind, whenever I approached pricing, it was an uncomfortable feeling of, “Is this price fair? Will the client even pay it? Am I doing this the right way? Am I taking advantage of them? Am I getting taken advantage of? Am I not making what I should be making for the value I’m creating for this client?” It always felt weird. There was always this feeling that I was doing something wrong, and something wasn’t quite adding up.
- 31:37 Justin: That feeling that you have is so distracting. Whenever you’re doing the work, you’re reminded of it. Especially if you’re tracking hours, every time you go to record what you’ve just done, you’re reminded of the pricing model you’re using and you’re reminded that it doesn’t feel right. Even the hour-tracking itself felt weird to me. The hour-tracking is part of the work, and I wondered, “Is this the best use of my time, to be recording time like this?”
- 32:22 Sean: What’s the hourly rate for the tracking of the hours?
- 32:26 Justin: It didn’t feel right. It felt like I should be doing more useful work. Another thing I adore about Value-Based Pricing is that it gets rid of so many of the distractions. It gets rid of the hour-tracking overhead nonsense and a bunch of other stuff. It eliminates the distraction of wondering whether you’re taking advantage of someone or someone is taking advantage of you. Is my client going to be happy? Am I going to be happy with the work I produce? With Value-Based Pricing and it’s whole process, when you apply it, all those questions are answered and all of this stuff is taken care of.
- 33:09 You can feel really good about the work you’re doing, you can do the work without being distracted by all of this stuff, and you can just focus on the work and your client’s success. It works out. It was a long road to figure out something that did this, but we did it, and it’s amazing.
- 33:30 Sean: Two years, to be specific. Now you understand where we came from, why we thought something was off, and why we wanted to develop a pricing model that made sense, was fair, and was a win-win for both parties.
The Limits of Value-Based Pricing
- 34:10 Karma asks, “Is Value-Based Pricing for things like the pricing of say a course or product, or just a service?”
- 34:19 Justin: We’ve thought a lot about this, and we spent a long time figuring this out. With services, like maintenance work or products that you mass produce or even products that you produce a small batch of, anything like that where you have multiple clients or customers that will pay you for that, Value-Based Pricing breaks down and it no longer makes sense. When you’ve got more than one person or entity on the other end consuming your work, the value proposition starts to fluctuate a lot. One customer or client will value your work much more or much less than the next customer or client.
- 35:16 Value-Based Pricing is predicated on the fact that you’re doing unique, one-off work that’s never been done before and will never be done again for one client. That client could be a business with a bunch of people in it, but the idea with Value-Based Pricing is that it recognizes the unique nature of those projects. You’ve got a project that’s never been done before and will never be done again.
- 35:47 Sean: When Justin says that, he’s talking about the fact that it’s tailor-made and it’s made to accomplish the goals of the client. He’s not saying that if you make an application, you can’t make another application again or that you can’t make more than one logo. He’s saying that this unique iteration is not made just for the sake of creating the application or the logo, but that that application or logo, for instance, is the unique solution to this client’s unique problem.
- 36:20 Justin: A logo is an excellent example. You’re going to make a logo for a client, and that logo has never been made before. You’re not going to go back and make that logo again, either for them or for someone else. That is the logo for that project. Because of the uniqueness of that work and the uniqueness of that relationship for that project, Value-Based Pricing recognizes that. That’s why it works. You’ve got this client, and they are the only entity that matters as far as the value proposition, because they are the sole recipient of the work. You can look at the value they’re putting on that and price accordingly so everybody wins.
With Value-Based Pricing, the client wins because they’re getting the value of your work and you win because you’re charging a fraction of that value.
- 37:32 Sean: There are half a dozen to a dozen factors that go into comprising a Value-Based Price, and that’s why we developed custom tools to do this math for you. You go through a value discovery process with your client after filtering them with a questionnaire and attracting the right type of client, looking out for red flags. That process is something we teach. You come up with a process for discovering the value of this project to the client. That value is always something that the client defines. You never define the value of the project. You can’t say a number or figure, you can’t estimate, guess, or assume what the value is to the client, or everything else falls apart. Nothing else will work.
- 38:29 You can’t say, “I think this company is so big and this project should be worth about this much to them.” It will fall apart. The value of the project needs to come from the mouth of the client and the mouth of the client only. This value is the value that you are pricing against. This value is many times greater than the price you present to the client. That way, the price you present is always a fraction. We have different percentages we account for in the tools for the Value-Based Price where there is a ceiling—a percentage value—that your price will never go above.
- 39:12 We have designed this pricing model to always result in a price that is a no-brainer to your client. One of the other questions we got was, “How high is too high?” There is no too high. For the price you give the client, what’s on your quote or your proposal, there is no absolute figure or dollar amount that is too high. Through this pricing method, you only ever end up with a number that is a fraction of what the client has said, out of their own mouth, that this project is valued to them.
- 39:54 Justin: Another perspective on this that might be helpful is this: let’s say you write some software, and you sell that software to a market. Let’s say that it’s utility software that helps people get work done or increases their productivity a little bit. One person who’s a customer of that software could very well use that every single day, multiple times a day, because it’s integral to the way they do their work. They make a living partly because this piece of software increases their efficiency, so the value they place on that piece of software is going to be really high. If you said, “I’m going to take this software away from you. How much would you pay to get it back?” They’re probably not going to bat an eye saying that they would pay thousands to get that back, even if it’s just a $50 piece of software.
- 41:07 They’re going to say, “I need that. That is critical to me making a living. I’ll pay you thousands to get that back.” Whereas, on the other hand, you’ve got another customer with the exact same software, and they might use it once or twice a week or even once or twice a month. It’s just a nice-to-have for them. If you ask them how much they would pay to get it back, they might say, “I can live without it.” The context these two customers are in is very different, and the value they place on that product is, thus, incredibly different.
You cannot price against changing value—you can’t have 1,000 different customers who value something at 1,000 different amounts and come up with a Value-Based Price for all of them.
- 42:13 Sean: Your products can only have one price. This is why Value-Based Pricing is only for services, for one-off clients that you work with individually. You can’t do it with products and you can’t do it with projects with clients who can’t define the value. If your client can’t define the value of the service you’re providing to them in actual dollars, Value-Based Pricing will not work. It does not work for intangible value, for sentimental value, or for emotional value. Unless you can lead your client through a value-discovery process that results in them saying, “This project is worth X thousand dollars to me,” then Value-Based Pricing will not work.
- 43:02 This often means that you cannot use Value-Based Pricing for many wedding client projects. You have to come to a dollar amount, an actual numerical figure that the client says this worth to them, and you can’t feed them numbers. This has to be something that comes from them, or everything falls apart. If you can’t do that, you can’t use Value-Based Pricing.
- 43:28 Justin: Going back to the software example, think about yourself as the developer of that software. Ideally, you would be able to charge the person who uses it to make a living $1,000, and the person over here who uses it casually $5, but there’s no magical way to do that. You can’t go through this value-discovery process with every single client. More to the point, even if you could magically determine how much value each customer is getting from this thing, it wouldn’t be fair to do that. Is it fair that this customer or client gets this thing you made for $1,000 while this other person gets this exact same thing and only pays $5?
- 44:28 Sean: We’re not talking about bespoke solutions here.
- 44:33 Justin: Because the thing you’re offering is not unique to each client, it could be a piece of software you sell to many clients or a service you provide to many clients, you can’t price it on value. It’s very difficult, if not impossible, to figure out how much each client values what you do. When you are doing tailored work, custom work for a client, Value-Based Pricing makes all the sense in the world. The ideal is to charge a fraction of the value that your client is going to work. When you have just one client, you can talk to them, you can go through a value-discovery process with them—which we explain in detail in the course—and you can figure out how much they value this thing. Once you’ve found that out, you can charge a fraction of that.
Your Price Should Be a No-Brainer
- 45:59 Sean: This is a very simplified example. This isn’t to say that this is what you charge for this much value or how to arrive at this price, because that’s more involved. Let’s say that the client said, during your value-discovery process, that this project is worth $10,000 to them. There’s a time factor, too. The value is comprised of money and the time to realize that money. They tell you that this project will make them an extra $10,000 in the next three months. If you charge $2,000, that would be a no-brainer for the client, an easy decision for them.
You want to design a price that is a no-brainer to the client.
- 47:03 Justin: Think about that example. Put yourself in the client’s shoes. You’re working with a professional, and you know that if this person does this project for you, in three months, you’re going to get $10,000 of value from that work. That’s going to be in the bank if they do this work for you, and they come to you and say, “To do this work for you, I’m going to charge you $2,000.” Why in the world would you ever say no to that?
- 47:43 Sean: You wouldn’t. The thing that holds most people back who work in client services is that they can’t even comprehend that much value. This is honestly what it is. For context, I share real numbers in my podcasts and real revenue in my shows because I’m transparent like that. In 2015, we made nearly half a million dollars. That’s to give you an idea of the scale I operate at. $10,000 here, $10,000 there, that’s nothing to me. That’s just how I operate. I drop tens of thousands on things because I know that I will make hundreds of thousands. It’s very simple. I hired a consultant who’s nearly $1,000 an hour because he gave me advice that immediately made me $18,000 within four weeks.
- 48:48 A $900 investment made me $18,000 in the next four weeks. That’s just the immediate return. If I look over the next 18 months, it will end up being six figures worth of value for $900. No brainer for me.
If you want to be able to make more money, you need to understand the psychology of the clients you’re working with and how much of a no-brainer business decision this is for them.
- 49:15 Even though $100,000 is a lot to you, you need to understand that it’s not a lot to them, nor is the $20,000, $30,000, or however much you price that is a fraction of that. People at this level don’t think of money emotionally like you. If you want to get to the point where you can make that kind of money, you need to be in the same place and understand how they think. I gave that example because we had a question from Matt in the chat. He said, “Could Value-Based Pricing mean getting paid less than usual, if you chose a small client?” I mentioned that there are about half a dozen to a dozen other factors that comprise a Value-Based Price.
Know Your Base Costs
- 49:56 To give you a glimpse of that, one of them is your base costs. We offer tools and calculators that we’ve custom-developed to come up with these base costs for yourself. This is a factor that comprises a Value-Based Price. Let’s say, in this unique project, for some reason, your base costs were going to be $2,000. That’s just what it costs for you to do the work. You can’t charge $2,000. If we zoom this down even more and the client says, “I think I’ll get $1,000 worth of value out of this in the next month,” and you calculate your price and you come up with $200, that’s a no-brainer for the client. I get $1,000 worth of value as the client, and I pay you, the professional, $200. Awesome.
- 50:47 The problem is, you as the professional have costs, and more than likely, those costs will be greater than $200. What you have here is a project that is not viable. We have developed tools to help you determine the viability of the project. If you were to punch all the numbers into one of the tools, it would have big red letters that would say, “Not viable.” This project is not financially viable, even though the Value-Based Price is a no-brainer. It doesn’t cover your own base costs or help you make what you need to make in a year or a month to cover your expenses and cost of living.
- 51:29 That means that you would have to turn down this project. Value-Based Pricing can mean that you come up with a price that is an actual Value-Based Price, but the value is too low or there are other factors that mean that this project is not financially viable and you need to turn it down.
- 51:48 Justin: You’ve got to make a living. You have to put a roof over your head and keep the lights on. The course, the process, and the tools all take this into account.
One of the cornerstones of Value-Based Pricing is that it’s fair, and you have to make a living—if you’re not making a living, it’s not fair.