Pricing is the most important aspect of your business. In fact, no other variable has a higher impact on driving profit.
Businesses have two common methods by which to price their products and services – these methods are cost-based pricing and value-based pricing. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Alternatively, value-based pricing can be defined as setting a pricing strategy based on the perceived or estimated value, as opposed to basing the decision on the historical price or the amount of money it takes to produce the product or service.
It’s about setting a price that the majority of your customers are willing to pay. Value-based pricing is the pricing model most highly recommended by academics.
Traditionally, accountants, bookkeepers, lawyers, financial planners and professional service providers have used cost-based methods founded on an hourly set rate, or a cost-plus percentage markup strategy. Unfortunately, these common pricing strategies and methodologies forget about the customer, that is, the people in charge of pricing arrive at price points based on internal reasons or existing market prices. Customers are not always driven by how much something costs to produce, neither in content or time.
Most people place greater importance on how much value they are receiving at a particular price point.
In addition, increases in technology and the subsequent ability to increase productivity have called into question the relevance of cost-based pricing structures today.
So what’s wrong with these traditional pricing methods?
- These days clients are more savvy and will shop around to find the best perceived “value”, not just the best price
- If you charge by the hour, raising your hourly rates can become an awkward conversation
- If you charge by the hour, it’s impossible to be rewarded for improving your skills and becoming more efficient
- Increasing your revenue can be difficult – there are only 24 hours in a day, approximately 16 maximum at which you can charge. When maxed out, the only way to add to revenue is to hire more staff, at a significant cost.
On the other hand, value-based pricing is established prior to the service being completed, and is based on the value of the service to the client.
It works on the principle that the work is worth what it is worth to the business and the customer, not the time taken to perform the task.
As a result, value-based pricing enables a greater amount of scalability within a business, and a number of other benefits can be realised:
- Profits and revenues are no longer tied to the hours in a day
- It provides a healthy incentive for people to improve their skills and become more efficient, promoting collaboration so the business can grow sustainably as a whole
- It removes the pricing uncertainty to the client – they know they are not being billed for you thinking about them on your drive home.
Value-based pricing gives you the ability as a service provider to properly service your clients, increasing the opportunity to raise revenues through technological and knowledge-based improvement in efficiencies, whilst adding value to your service offering and to your clients.
Your time is finite, but your value can be infinite. Value-based pricing allows you to charge out your services accordingly.