There are a few key moments in your life where your jaw drops from amazement; time where the way you perceive life changes forever.
One of these moments happened a year ago when a freelance writer friend of mine told me he was making $2,500 per article.
Yes, two thousand and five hundred dollars per article. Unbelievable.
When I asked him how he managed to do that, he looked at me and said: “because I price myself based on value.”
Interestingly, his content wasn’t miles ahead of mine; you could barely consider it to be better than mine. He simply knew how to price his content—based on its value.
From that moment on, I started to learn what value pricing was and how I could use it to increase my revenue and spend less time dealing with those few clients that bring all the headaches.
Today, I want to share with you how value pricing works, why it matters, and how you can use it too. Hopefully, your jaw won’t hit the table as mine did.
What is Value Pricing?
Value pricing (also known as value-based pricing) is a method where you set your price based on the value—real or perceived—of your service.
With this type of pricing methodology, you take the time to understand what your client gets from your service so you can charge accordingly. It represents a win-win to both parties since your client gets the value they want (and pay for), and you make more money in the process.
Unfortunately, most freelancers tend to use one of two pricing methods:
- Cost-based pricing, where you base your price on the cost that you incur to bring a given service to your client
- Markup-based pricing, where you take your costs and add a markup (often 50% or 100%) to it
In either case, you aren't thinking about the consumer; you’re only thinking about yourself. But as you already know, your clients don’t care about you; they care about their business.
It’s a common sales practice to put yourself in the customer’s shoes and sell your services based on what they need. Why stop at the sales process? Why can’t you keep your focus on the consumer and price your services based on what they get from you?
The key here is to consider the way your customer perceives your service, something professor Hasan Huseyin Ceylana explains in this paper:
The important thing in this technique is [the] perception of the consumers. In other words, value-based pricing, based on the value attached to [the] product by consumers, is a consumer-oriented pricing technique.
In value-based pricing, business organizations use consumer’s perceived value instead of [the] cost of the products or services.
Perception is a tricky animal. Branding, your sales techniques, and the quality of your services all play a key role in here.
For now, let’s focus our efforts on understanding the value you bring to your customers—whether that's real or perceived—and how you can use it to increase your revenue.
Learn more about how to increase your prices in The Six-Figure Freelancer Audio Course.
How to Find Your Value
There are two ways you can find the value of your services:
- By understanding the actual results your services bring
- The perception your customers have about them
Think about the results first. Whatever you do, your customers pay you because they get something in return. Your job is to find that "something" and understand its value.
Let’s take an example of a freelance writer like myself. People pay me because they need content. But is that the only reason they do so?
One famous technique companies use to find the deep reason why someone does business with them is Toyota’s “Five Why’s” methodology. With this method, you ask five "why's" to any given situation to find the deep reason why something happens.
Let's say you wanted to find out why someone would pay you for your writing services:
- Why would someone pay me to write articles for them?
- Because they need content.
- Why do they need content?
- Because they need to attract traffic.
- Why do they need to attract traffic?
- Because they need to generate more leads.
- Why do they need more leads?
- Because they need more customers.
- Why do they need more customers?
- Because they need to grow their user base by at least 20% by the end of the year.
The final answer is actually something that a client of mine once told me, so I can attest this type of exercise works.
Based on the answer, you can see where your services play a part in your customer’s life.
Your job is to find the way your services help them to achieve that target and how much money that entails.
The closer your services are priced to the real dollar value of your value, the better. This is easier said than done, however.
In this case, unless you have access to your customer’s analytics and their revenue attribution models, it’s hard to tell if one of your articles that brings 1,000 visitors will make them $2,000 or will end up converting 250 of them to users.
For that reason, it’s much easier to work on the perceived value.
Large companies often make highly detailed financial analysis of the benefits of their offers, both from the perspective of the increased revenue they generate to the lowered costs. You can find a good example of such analysis in this paper from Andreas Hinterhuber:
Since you don’t have access to such information (doing so would require some deep interviews with your customers to quantify the real value of everything you do), you need to make an educated guess of what this value is.
To do that, the author of the paper recommends adapting the value pricing definition of another team of researchers — Nagle & Holden — which says that “a product’s economic value is the price of the customer’s best alternative (i.e., your competition) plus the value of whatever differentiates your offering from the alternative.”
That means you need to find the price of your competition and know what makes you better than their services.
Let’s say you’re a designer who specializes in branding. You charge an average of $1,000 per project, and this consists of the development of an entire company’s branding, including their visuals, their design, and their typography, among other design elements.
Your competitors, on the other hand, charge $500 for their services, but don’t pay enough attention to the positioning of their customers; they work like a turnkey solution.
The question you have to ask yourself now is:
Is the $500 dollar difference between you and your competitor’s service worth it?
Forget about your costs of living, the cost of your software, and the time you spend interviewing your customer’s customers. Think about the value they get from the bespoke branding you develop.
If you’re in doubt what this value is, you can pick up the phone and talk to past clients to see what they liked about working with you and the results they got.
After some thought, you remember your customers told you that they saw an increase in customer loyalty (i.e., the number of times a customer makes a purchase from them). That means your customers make more money from your service.
They can expect to see more purchases per customer, which both increases their customer’s lifetime value and also lowers their acquisition costs.
Is that worth $500?
It most surely is. If you’re in doubt, you can ask your customers how much money they make per customer and make a rough calculation of the increased revenue after a customer comes back to buy from them a second or third time.
There’s a lot of speculation in this calculation, but it still shows you that the benefits they get from your services surpasses the lowered costs of working with your competition.
The perceived value makes your price worth the investment. You can now say it out loud: “yes, I can charge more!”
Push past discomfort
The process of finding your value can be hard at first. You will feel like you’re guessing too much and wonder if it makes sense to use your customer’s perceived value as a way to price yourself.
You will have to push yourself to get out of your comfort zone, but once you do, you will see that it was worth trying.
If everyone used value-based pricing, then we’d have happier and less stressed freelancers. Unfortunately, we don’t. But you now know better.
It’s time you get your revenue up and your time back.
Have you ever thought of using value-based pricing? If not, will you use it now? Let me know in the comments below.