3 Steps to Start Value Pricing
Changing from time billing to value pricing is an ongoing journey. More than anything else, value pricing forces change in your own mind about the work you do, and how you help your customers to reach their goals.
It can be difficult to get started with value pricing, though. It can seem a daunting, and risky, move. I spent months trying to reconcile the “fixed-price, fixed-scope” nature of value pricing with the fluidity of software projects, constantly worrying about how to deal with scope-creep.
This is the second in a series of articles based on my talk at FutureSync held at Plymouth University on 9th June 2017. In Part 1, I discussed why charging for time is against the interests of both you and your customers.
Eventually, I figured the only way was to jump in 100%: force myself to abandon time-billing altogether, and accept that I will make many mistakes along the way…
As with most things, the hardest step was actually getting started. Once I made the leap, things began to change for the better. In fact, the journey has led to major changes in all areas of my business.
In this post, I’ll introduce three steps you can take to start value pricing in your business. These steps help to change your thinking away from the time you put in, towards the value and results your customers get out.
1. Increase Your Time-Billing Unit
Instant, easy and effective. Increasing the time unit for which you charge has an immediate effect on your business’ top line.
If you are currently charging for hours, start charging for days; if you’re charging for days, start charging for weeks; and if you’re already charging by the week, start charging for 2-weekly sprints, or — even better — monthly.
Of course, this isn’t really value pricing — you are still charging based on your time. However, you’ll very quickly find your customer interactions change. As you move up the time-billing units scale, and particularly once you are charging on a weekly basis, the conversations you have with your customers change dramatically.
As small time increments play less of a part in your work (15 minutes here, an hour or two there), and especially once you’re billing by the week, you should find customers become more concerned with the results of your time, rather than the time-sheets you produce, and in turn you can begin to work with them on the bigger-picture goals of their project.
ProTip: Never use fractional units
The key to this step is not to fall back to your previous time unit. If your new billing unit is a day, that becomes your new minimum fee. No half days (or quarter days, or 0.1333 days…).
I made this mistake in the early days, and it meant the conversations I was having with customers never changed — after all, if you’re just changing the label from hours to days, nothing changes in the eyes of the customer.
Some customers will understandably resist when, for example, your price rises from a couple of hours to a “day” for what they consider to be small task.
Remember that your goal is to price your work based on the value your customer receives, rather than your efforts going in. One way to help reduce sticker-shock for your customer is to simply drop the “days” label, and offering the work as fixed price service instead for a set of defined outcomes instead. More on this below.
Needless to say, the quicker you can move away from labelling your work with time (hours, days, weeks, etc.), the better. That’s where the next steps come in.
2. Have Conversations
This is where you begin to discover the value you’re really delivering to our customers. Conversations are critical to the success of your business, and your relationships with your customers.
Now, it’s important to clarify that by conversations, I don’t mean sales meetings, pitches, or job interview-esque discussions (those one-way conversations where you sit with a customer, they dictate a bunch of tasks, and you head off to get started)
Value-driven conversations require really getting to know your customer’s business, understanding their long-term goals, and building huge amounts of trust between you.
Trust is the key that lies behind every successful project, and what you will need in order to make the shift to value pricing.
As you learn more about your customer’s business, you’ll naturally begin to see new opportunities for them.
Remember that you are likely far more aware with what’s going on in your industry than your customer, and so being able to offer them advice and knowledge about what’s going on — and, more importantly, how it can benefit them — is incredibly valuable.
The goal is to become a trusted advisor to your customer and their business; someone they can rely on to act in the best interests of them and their business.
This requires regular engagement, conversations about more than just the project; and also that you become familiar with their business and industry.
ProTip: Say No
A quick way to gain trust is to start with no. Say no to those off-the-cuff ideas that tend to crop up in conversation, and that you know will deliver little or no benefit to your customer.
We all succumb to shiny-new-thing syndrome once in a while, and your customer is no different. Whenever they ask for something out of the blue (e.g. “we just need to implement live chat on our website.”), force them to justify the business case behind it, and how that will help them work towards their goals.
If your customer can’t justify the feature or request yet, but still feels strongly about it, then suggest putting it on an backlog or wish-list for future consideration, and set a date a few weeks out to review it.
What seems critical and urgent today can and will change as things progress and new opportunities arise.
As you move up the scale of time-billing units, the amount of time you put into your work becomes less relevant (it doesn’t necessarily decrease though).
Through the conversations you’re having with your customers, you’ll begin to see common patterns, needs and requirements. As you do, you can begin to extract the work you do to satisfy those requirements and bundle them into products, or productised services.
Doing this allows you to establish standard procedures for certain functions of your business which you can continuously work to make more efficient, review and test with your customers.
One of the greatest benefits to you and your customer of a product(-ised service) is that you can set and advertise it with a price.
Now you can begin to remove reference to your time from the service, and just focus on outcomes.
Of course, you will want to consider your own time as a cost of business — especially if you have a team of employees or contractors.
As far as the customer is concerned, though, they are getting known outcomes for a specified price. They can determine themselves if the value is right for them, greatly speeding up your qualification and sales process.
ProTip: Give Your Customer Options
Options are beneficial to any pricing strategy, but especially helpful in value pricing. Presented with options rather than a binary yes/no proposal, your customer can determine their own level of return on investment based on the options presented.
Three is the popular number for presenting options, but even a simple A/B choice is better than a single offer, so find a way to increase the value between two options, and make sure you highlight them to your customer.
The higher price options would usually build upon earlier options, increasing the value exponentially as you move up the scale, but this can be dependent on the nature of the project.
(pun intended… :)
Over deliver on absolutely everything you do for your customer.
It’s important to point out that I don’t mean using the tired “under-promise, over-deliver” sales trick (that’s terrible sales advice). Remember, the key to success with value pricing is trust.
You can only really start doing this once you’ve successfully moved your own mind away from time-billing; appreciate the value you are delivering to your customers, and — most importantly — are pricing based on that value.
However, over-delivery comes naturally result of a value-based mindset. You can’t help but want to find new ways to help your customer achieve their goals, because your focus will be on maximising the impact of your work on their business, knowing that you are both getting value out of the transaction.
True value pricing is always a win-win.