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Here is Part II of the Value-Driven Pricing....
Changing your pricing model will help you grow your business in a totally client-centric way. To learn how to apply value-driven pricing to your business, read on.
What is value-driven pricing? It’s a pricing model that focuses on the value of the work versus the time it takes to do it.
It’s human nature to undervalue what comes easily to us. I recently heard a publicist friend say “Oh, that only took me two phone calls, so I won’t charge him.” But these two calls lead to a feature story in a major daily newspaper. Small investment of his time. Enormous value for his client.
So, how do you figure out what to charge?
This article will show you how to engage your clients in establishing the value of your service and subsequently, the fees you charge them. When you do this, you’ll see how much they value what you do, allowing you to grow your business in a client-centric way.
If you’re interested in trying a value-driven pricing model, but aren’t sure how to apply it to your business, consider my friend Michelle’s story.
Michelle is a personal trainer who has billed hourly for years. She’s got a full schedule of clients but still isn’t making enough money. She recently tried to raise her rates with a few of her clients and got a lot of push back. Of course she did! Who wants to pay more for the same service?
She knew she needed to try a new approach, so instead of raising her rates, she’s going to redesign them. And here’s how.
Understand How Your Clients Define Your Value
Talk to your clients and prospects to fully understand not just what they want, but why they want it. Ask questions about what they want to achieve; what results they hope for.
This is your basic needs assessment, but listen carefully for underlying meaning, because this is where you will find the real value of your work.
Michelle may hear her client Lisa say that she’s put on weight since having kids and needs to get back into shape. But, as Lisa shares more details, she discloses that her mother, after losing her own fitness while raising her family, died of breast cancer without ever knowing her grandchildren. Michelle now realizes that what Lisa wants most is to be around for a long time and she fears that her unhealthy lifestyle will keep her from this dream. Lisa’s goal is less about shedding pounds for the sake of looking good and more about gaining long-term health and vitality for the sake of her family.
Ask questions until you and your client understand what problems you’re trying to solve and/or what opportunities you’re working to seize. Once you know your client’s key objectives, you can begin to determine the value of achieving them.
Lisa has said that she fears she won’t be around for her kids and wants to find a way to be fit and healthy for many years. It’s up to Michelle now to ask Lisa what that would be worth to her. Not in a tell-me-what-you’d-pay infomercial way, but in a what-would-that-mean-to-you way. Lisa may respond with words like “the greatest joy in the world” or “invaluable.”
The cornerstone of the value proposition has now been laid. And not by Michelle, who’s selling the service, but by Lisa, who’s buying it.
This holds true for business-to-business services as well. The CEO, when asked what a decrease in employee turnover would mean to his business, may say “happy shareholders,” or “a savings of $10,000.”
Now you really have something to work with in determining your price.
Agree on How You’ll Measure this Value
One of the best questions you can ask a client or prospect is “How will we know if we’re successful?” This question gets the two of you talking about the measures of success and collaborating on how you’ll know when you’re delivering value.
By having this conversation, you signal to your client that you will work together to achieve their goals. For most of us, whether it’s personal training, life coaching, web site development, or business consulting, this is a critical distinction. Success requires that both parties work together. You’re collaborating with your client and establishing very clear expectations – for both of you.
When Michelle asked Lisa this question, they determined that the measures of success included not just losing 10 pounds, but sticking with a more healthy diet and weekly fitness plan, as well as scheduling her first mammogram. By laying out these measures up front, Michelle and Lisa both know what’s expected in the relationship.
Assess the Alternatives and How Your Solution is Better
Find out what alternatives your client has. Are there other people or firms they could hire? Do they have internal resources, like staff or friends they can turn to for help? Is it possible they would choose to do nothing at all? Assess these alternatives and estimate what your client would pay for them.
For Michelle, she knows that Lisa has many personal trainers to choose from. She could find friends or family to help with her fitness goals. Michelle knows that Lisa has trouble self-motivating so she’s pretty sure she’ll hire a personal trainer. Michelle wants to be the one. Here’s how she’ll do it.
After weighing her competition, Michelle knows that she’s different from other personal trainers in the way she cares for her client’s emotional, as well as physical, well-being. She’s thinking about her clients even when she’s not with them in the gym, finding relevant information while surfing the web, coming up with training plans while taking a shower, creating menu ideas while making her own dinner. Her mind is always turning on ways of helping Lisa make progress.
Michelle has always provided this kind of support to her clients, but now she’s going to package her services so that these “extras” are explicitly listed as part of what her clients can expect from her. By doing so, she’s now able to charge for the things that she used to give away.
Determine Your Pricing
So how does Michelle figure out how to charge Lisa?
Michelle starts by putting together the package that makes the most sense for Lisa. In this case, she’s going to create a 6-month plan in which she trains Lisa once a week in the gym and once every other week at a local park; lays out a weekly workout schedule that feeds Lisa’s ongoing progress; provides advice on food choices for weight loss and cancer prevention; and calls or emails Lisa once a week for questions, moral support, and useful information.
For some of you, it will make more sense to take a client’s project and, with their objectives in mind, break it into pieces (like work phases or individual deliverables). Or, if the nature of the work is ongoing, you can spell out the details of your monthly engagement.
Whether you offer your services as a package, as a project or as a monthly commitment, you need to calculate your costs.
If you need to hire outside resources or buy materials of any kind, estimates these costs. Think about the time you will put into the work and estimate its value to you (I repeat, its value to you). Please don’t get hung up here on hourly rates. Think instead about the value of your time, as you define it. Ask yourself, for this project or client and the value you will deliver, what seems like the right fee? What did your client tell you about the value? What’s this worth to them?
Come up with a fee. Now test it against what you know of the market. Are you more or less expensive? If you’re more expensive, can you justify it? Are you going to deliver that much more value? I bet you will.
In the case of Michelle and Lisa, they had the conversation about Lisa’s real motivation and desires. She wants to live long enough to enjoy her grandkids. She’s afraid that the unhealthy habits she’s fallen into will lead to breast cancer. To overcome this fear and commit to the possibility of lifelong health, Lisa told Michelle that it was her highest priority.
Having had this conversation, Michelle’s custom package and price make total sense to Lisa. Even if Lisa divided the price by the number of hours spent in the gym and saw that it was higher than other trainers, she would understand that she’s receiving a whole package of services, all designed to give her the emotional and physical support she needs to achieve her goals.
This is how you create a pricing model that’s centered on your clients and their perception of value. And when you do this, you will grow your business in a way you never thought possible.
Learn more about the author, Amy Harcourt.