Value-Based Pricing Explained

VBP centers around aligning your pricing with the value perceived by your clients regarding your products or services. Essentially, it’s about setting prices based on how much your clients believe your offerings are worth.

However, it's important to note that VBP isn’t universally applicable across all industries. For example, convincing someone that your gasoline is worth more than that of a competitor across the street may prove challenging. This pricing strategy is most effective when your product or service stands out from the competition.

Designers frequently utilize VBP, as their work often influences clients’ self-perceptions. For instance, customers are generally willing to pay a premium for recognized brands when purchasing clothing. If you can enhance your clients' self-image and your offerings are tailored to them, VBP could be the right approach for you.

Identifying Client Needs

The first step is to ascertain whether your client genuinely needs your product or service, or if they merely believe they do. Consider this scenario:

Client: "I need help optimizing my website. Can you assist me?"

Business: "What challenges are you facing that make you think website optimization is the solution?"

Client: "We aren't getting enough sales from our online store."

Business: "That sounds more like a marketing issue, which I’d be glad to help you with."

It’s vital to determine if your client truly requires your solution. While it may be tempting to accept the job for the paycheck, I find that approach ethically unsound. When you are confident that your solution addresses the client’s needs, you can create genuine value and justify a higher price.

Assessing the Value

At this stage, it’s essential to engage your client with probing questions. Sit down with them and inquire:

• "How much do you anticipate your revenue will increase if I create this website or develop this marketing strategy?"
• "I see that you require this urgently; what would it mean to you if I could reduce the delivery time by 10 days?"
• "If I assured you that you would achieve specific targets, what value would that hold for you?"

Some clients may respond with, "You’re expected to know the answers to those questions." But that’s not your responsibility; you can’t possibly know their business as well as they do. If clients are unable to provide answers, it indicates they might not fully understand their own needs, suggesting that you should reconsider taking them on.

A strong client might respond, "That would be worth $500,000." You could then reply, "Typically, I’d charge 20% of that, but for this project, let’s agree on 10%." This could lead to a $50,000 fee for the project, assuming the client is on board.

Charging Differently Based on Client Wealth

While I’m not in favor of imposing penalties on wealthy individuals in terms of taxes, when it comes to pricing your services, you should definitely charge affluent clients more. Here’s why:

Consider two individuals: Person A earns $36,000 annually, while Person B rakes in $5,000,000. The obvious difference is that Person A has a lower budget for expensive projects. More significantly, their perceived value varies greatly. For instance, a website that takes 20 hours to build might be valued at $700 by Person A but could be worth $100,000 to Person B. This discrepancy arises because if both were to invest that time learning the necessary skills to build the website, Person B would lose significantly more potential earnings. Consequently, they are often willing to pay a premium.

In summary, remember this: affluent clients often perceive greater value in your offerings compared to those who are less financially endowed.

Recap

• Utilize VBP if your offerings are customer-centric and distinguishable from competitors.
• Determine if the client genuinely needs your services to facilitate value creation.
• Ask insightful questions to gauge how much your services are worth to them.
• Adjust your pricing strategy based on the client's financial capacity, as wealthier clients may place a higher value on your offerings.