Value Pricing's Dirty Secrets

January 2018

Happy 2018!

Now that the holiday festivities are behind us, it's time to get down to business.

Let's talk about your business. Is it time to rethink your pricing strategy?

Hopefully, this month's newsletter will provide you with some ideas for improving your company's bottom line.

Pricing Question from a Reader

I help small businesses with their computer problems. I usually charge by the hour, but I am trying to switch to value pricing. It isn't working. The people I've pitched agree with all of my points when I show how valuable my services are, but they still balk at my proposed rates. Is there some secret step in the value pricing process that I'm missing?

You've just discovered one of the dirty secrets of value pricing.

For those not in the know, let me explain what value pricing is. It's a method of setting pricing levels based upon the value that the customer receives, rather than the costs that the provider incurs.

In the case of a person who fixes computer problems, the value that a given customer receives can vary wildly. An individual who rarely uses his computer might value technical assistance at a few dollars, but a billion-dollar firm that relies upon its computer to run a series of assembly lines will likely find technical assistance to be far more valuable.

Let's assume that you find a customer that derives a lot of value from having its computer up and running. You speak to the CEO and explain that you can prevent any problems that might affect his computer. You walk him through some math proving that your efforts will save the firm $5,000,000 per year. The CEO readily agrees with your calculations.

According to standard value pricing theory, you should be able to charge a big chunk of that $5,000,000. Do you think the CEO would be willing to part with $1,000,000 for your services?

Probably not.

There's a big issue that we haven't yet considered: competition.

There are probably many competitors offering services similar to yours. In fact, I'd be willing to bet that many of your competitors would be willing to work for a lot less than $1,000,000 per year. Your competitors might be willing to charge $50,000 per year. Some would be willing to work for $25 per hour. Some high-school interns might even be willing to work for free.

When a CEO has the ability to hire an IT consultant for relatively little money, why on earth would he consider paying value-based prices?

I delve deeply into the question in my upcoming book Premium, but I'll give you a quick answer now.

If you're not differentiating yourself from your bottom-feeding competitors, you'll find charging by value to be extraordinarily difficult.

You need to think about how you can demonstrate that your services are more valuable than those offered by the competition. Better yet, you need to figure out how to convince your potential customers to see you as being far superior to your existing competitors. Remember, shoppers never think to compare the prices or functionality of a Rolex to a Casio. Both brands sell watches, but neither would consider the other to be a competitor.

So how can you change your potential customers' perceptions? How can you convince them that your offerings are vastly superior to those of other IT firms?

Take some time to think about how you can demonstrate that you're a superior choice. Here are a few questions to start you off:

  • Does the client trust you more than your competitors?
  • Are you more reliable than your competitors?
  • Can you offer better guarantees than your competitors?
  • Can you respond faster than your competitors?
  • Do you have more experience than your competitors?
  • Do you appear more impressive than your competitors?

Remember, the number one rule of pricing is to make sure that your customers think that your offering is more than just a commodity. Trying to value price your offerings before you are able to differentiate yourself from the competition is akin to putting the cart before the horse.

My advice is to figure out how you can set yourself apart from other vendors before you focus on value pricing. Your task will be far simpler and you will place yourself in a much stronger negotiating position.

Questions come from readers like you. If you'd like your questions answered, send them my way.

♫This Q&A and many others are now available on the Pricing After Dark podcast.

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