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How To Get The Most Out Of Each Project With Value Based Pricing

How To Get The Most Out Of Each Project With Value Based Pricing

Dennis Ivanov (Ivy)

Dennis Ivanov

Posted: Sept. 19, 2021, 6:09 p.m.

When it comes to pricing services for clients, there are typically 3 main ways to go about it:

  1. Hourly based pricing
  2. Fixed pricing
  3. Value based pricing

While all three options have their place in time, in my opinion value based pricing is by far the best way to get the most out of your clients and deliver confidence in your service. This method not only helps you price a client well but also helps deliver the message to your client that you know what you are doing, it can also ensure you get by far the most for your time while creating a true partnership with your clients.

Value based pricing, in short, is simply pricing your service based on the value you bring to your clients.

Imagine for example that you build a website for a client that you know will generate an extra $50,000 for your client. Instead of setting an hourly or a fixed rate, you use that value that will be generated and base your pricing off that number. With this method I’ll show you how you can charge 10x what you might normally charge with hourly or fixed pricing and still have your clients write you a check with a smile on their face.

I’ve seen people's jaws drop when they hear the prices I charge while they struggle to sell their valuable services for $5 on websites like Fiverr. You see, it's not just about the quality of your service, but how you present your value. I like to say, 

“If you can't explain to a client why you are worth what you think you are, then they have no reason to pay your asking price.”

So are you ready to learn how you can deliver for your clients and get the most money for your efforts? Then keep on reading 😉

First, I want to talk about hourly based pricing and fixed rate pricing. Hourly seems simple enough, find what you want to earn per hour and pass the bill to your client, right? Well… it doesn't always work that way. Unless you already have a solid reputation and clients waiting for your services, this can really hurt your business. Not saying it doesn't work at all and that there are no times when I may add some sort of hourly rate for additional services but this is not the typical route I choose. 

My first issue with hourly billing is the way it can be interpreted by clients. For one, it can really freak clients out. Let's say you are asking for $50 an hour. Your client may think, “are you really worth that?”, “How long will this take?”, “Why would it take that long?”. With hourly billing you leave the clients imagination open to a nightmare of a bill. All they hear is $50 per hour multiplied by a large number of hours. 

This is giving the client too much insight into your business and takes the focus away from the service. 

Hourly billing can also disincentivize you from working more efficiently. Now I know there's ethics that should come into play here but who's to say that a less experienced developer who may take 20 hours on a project that can take you only 3 should get paid more? It just doesn't seem right. You should get paid what the service is worth, not by how long it takes you to complete a project. There have been cases where I would make $50 an hour on one project and $400 an hour on another. Why? Because I had most of the templates in place and knew exactly what I needed to do. Why should my service be worth any less just because I found a more efficient way of completing the task?

Now with fixed pricing you have a little more control over what you earn but you’ll still probably leave money on the table. While you dont have the same limitation as the hourly rate, you are still putting a cap on your value with no room for growth.

So how do you decide on pricing that maximizes the full value for you AND your client? 

The answer is to know your client, their industry and communicate your worth. As a freelancer this is part of the job. You must be able to sell. Like I said earlier, “if you can't explain to a client why you are worth what you think you are, then they have no reason to pay your asking price.”

You are the “expert” right? Then the client needs to know that. Show up to that meeting prepared and well informed on their business.

Let me share a quick story.

At one point in my career, I was pursuing a coffee shop as a potential client to build a website and do some SEO (Search Engine Optimization). I did what I always do before the meeting: I studied their market, found all their competitors and even did keyword research to find out how many searches they were missing out on by not having a website and no ranking on Google and Yelp. I showed up to that meeting and told them all about my findings. I told them that they were missing out on average 25,000 searches a month from people in a 5 mile radius looking for coffee. I found when there were busy hours where and how full they were during those hours. They were stunned by the amount I knew about their business and even more so when we calculated what pulling in just 3% of that 25,000 would be like for their business. At a $7 average transaction and an extra 9,000 potential customers a year they were looking at $63,000 potential revenue. So what do you think they said when I quoted them $1,800 + $300 a month for a simple 3 page website and some SEO services? “When can we start and what do you need from us”? They never even hesitated.

You see the difference here? This was a website that the coffee shop owner wanted to pay her little sister $50 for. They already had the Wix template in place and the domain. By doing my research and showing my value they stopped comparing me to every other developer they heard about and chose me, not my price. Now imagine if I came in there and told them my price and left it at that. They would have coffee coming out of their mouth in disbelief at my outrageous prices. But instead I presented an opportunity, not a bill.

Now how do you decide where to set your price point? To do this I use a term called “price anchoring”. This is where I find what kind of value I can deliver to the client and I set my price anywhere between 5% and 15% of the revenue I can bring to the client. Now this is not always going to be exact but it's a place to start since most businesses are typically comfortable with allocating 10% - 15% of their revenue to marketing. 

Once this price point is set I give them 3 options to choose from in my proposal. The first option is going to be my ideal bid for the project, typically a little bit higher and I’ll see if they bite. For this I’ll usually add on an extra service of some sort to make the offer look better. The second option is what I think they will pay for the project and will contain everything the client needs to be successful, and the last option will be a cheaper price with a few services removed.

So when the proposal is presented, the client feels like they have options and they are not embarrassed when the price is much higher than expected. In many cases the client will say, “Give me the full package”, and will pay top dollar. In many other cases the client will start with the cheaper option and will upgrade a few months later. 

This strategy ensures that your client feels good about their decision and minimizes the potential of your client ignoring you for weeks after you send the proposal.

I hope this gives you some better insight into how you can price your clients and add value😉

Dennis Ivanov

Posted: Sept. 19, 2021, 6:09 p.m.