A Year of Value Pricing
Wow! It’s been nearly a year since I made the commitment to switching my business to value pricing. I’ve not updated you in a while, so I wanted to write a summary of what’s happened 12 months later…
The good news is that the switch to value pricing has, on the whole, been very successful.
The move to a value pricing model has fundamentally changed my approach to virtually everything I do, and is even driving a change to the business itself.
As I discussed in my previous post, when you start proposing work based on value, it forces you to begin thinking about what it is you’re delivering (lesson learned: it’s not code, designs or apps).
Here are some of the changed I made and benefits I’ve experienced from moving to value pricing.
Breaking the Time Billing Mindset
One of the biggest challenges is overcoming the general expectation for time-based billing, particularly in service-based businesses. This has been as much my own expectation as anyone else’s.
My commitment was to move the business entirely to value pricing, and I’m pleased to say that this has been the case in the vast majority of jobs I’ve taken on. I’ll confess, though, there have been a couple of occasions when I’ve charged for time for very small development work (minor fixes, tweaks and so on) where the “value” was just getting the job done.
I still wrapped these in fixed-fee quotes, but they were very much what Ron Baker describes as Hourly Billing in Drag. I ensured these jobs were small though; nothing more than a day or two.
However, I knew my mindset had changed when I experienced another unexpected outcome of the switch: I now expect other companies to offer me value-based prices and options, rather than giving me a time estimate or rate.
In fact, I’ve found myself specifically opting for services that are priced in this way (even if the price may seem higher than a time-estimate) because I’m aware of the advantages of value-pricing to me as a customer.
Without doubt, one of the quickest benefits I saw from the switch to Value Pricing has been in writing proposals. They are now considerably faster to put together, as generally they are more a summary of what has gone before them, rather than the “send-and-hope” pitches they were before.
I changed my proposals from a report style to a personalised letter format. As in any business, my goal is to build lasting business relationships, so this personal touch helps in fostering a more collaborative relationship.
The letter format also allows me to cover various things in a far more conversational manner — which is far easier to write! — and reflect on discussions that have happened in the stages before the proposal.
As you would expect, customers are far happier when they know what they are getting and how much it will cost, rather than an estimate of hours, days and weeks.
Coupled with additional benefits that can be offered within a price, such as providing a satisfaction guarantee, customers are usually very happy (if not a little surprised) to learn that I offer prices over rates.
My move to productisation started with introducing Discovery Workshops for new projects.
Rather than the usual “email, chat, coffee, proposal, cross-fingers” cycle, I recognised that those initial discussions with potential customers can deliver incredible value — even if it ultimately means the project doesn’t go ahead.
There’s a lot of value in saving customers £000’s in development costs with some early validation using the Discovery Workshop approach.
Productising these early stages of a project also helped me to start defining a sales process for incoming leads. I eventually offered 3 levels of discovery product— a short consultation, a full-day workshop, and a workshop plus wireframes/working mockups. This gave new customers 3 levels of investment to choose from, as well as helping me to to qualify leads.
Although I only ran a few of the workshops last year, I learned a lot from each one and got positive feedback from customers. Not all customers opted for Discovery (sometimes they wanted to jump right into building a working prototype), those that did got real value from the sessions, as well as something they could take away and use to further develop, refine or invest in their idea.
I’ve used the Sprints straight out of SCRUM as part of my agile process for several years, but I’ve always struggled to move the charging structure away from time.
Previously, I would pitch a Sprint as 1 or 2 weeks worth of work. In a (admittedly basic) attempt to price them by value, I removed “weeks” from the equation.
This worked, but it’s not even close to true value pricing — each Sprint could arguably deliver a very different level of value from the next. However, in the early stages of a new software project, it is extremely difficult to determine any value beyond “getting it built”.
Fixed-price, fixed-scope Sprints offered a quick-fix, but they weren’t perfect. However you frame it, development work is difficult to value price because the end-result is bespoke.
So whilst Sprints provided a way to move my charges away from time, they still weren’t a good for value pricing.
As time went on, I came to realise that development work is so difficult to value price because it’s selling the wrong thing.
The truism goes that::
People don’t want to buy a quarter-inch drill, they want a quarter-inch hole.
I recently listened to an excellent interview with Eric White where he took this analogy one step further: customer’s don’t want to buy the hole — they want the picture hanging on the wall.
The big realisation after nearly a year of value pricing my work is that the implementation (code in my case, but this could be anything) is of little — if any — real value to customers. Trying to sell development is like trying to sell the drill instead of the hole (or the picture).
It’s this that has got me thinking and driven me to start making some big changes to my business.
As time goes on, I’ll cover those changes in more detail, but the first step is to shift my focus to providing Service Plans rather than new-build software projects.
Service Plans are now my main productised service offering, providing a known scope of work for a known monthly price.
I have purposely left time restrictions out of the Service Plans, and instead base their deliverables on scope of what’s included. As well as standard maintenance and monitoring, this approach has allowed me to include more much more valuable benefits such as consultation and (software) strategy services for customers, which are more suited to value pricing.
Service Plans also represent a shift away from delivering code, and instead concentrate on delivering outcomes. You can find out more about what’s included in the Service Plans at plymouthsoftware.com.
Service Plans represent the first of a number of productised services (and products) that I will offer through Plymouth Software. Subscribe to get email updates as I introduce new products and services, and continue my journey to value pricing.
Have you made the switch to value pricing in your software business? How has it changed your business? Let me know by getting in touch or message me on Twitter.