Cost-plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, you add together the direct material cost, direct labor cost, and overhead costs for a product, and add to it a markup percentage (to create a profit margin) in order to derive the price of the product.
What if you allowed the value you are creating to help define your pricing? Given that every project and client are different, this would allow your pricing to become more fluid and be directly tied to the impact you create for their organization and their customers. This opens the possibility to charge rates that fit your customer's expectations outside of any standard rates, and the chance to impact your revenue and profitability tremendously. This price model can be defined as value-based pricing.
Value-based pricing (or value-optimized pricing) is a pricing strategy which sets prices primarily, but not exclusively, on the value—perceived or estimated—to the customer, rather than on the cost of the product or historical prices.
In comparing these methods, a major problem to consider with standard hourly rates is how that limits your potential customer base. Take the story of pricing Goldilocks’ creative work for example. Goldilocks might feel a little strange if your rate is a lot lower than her expectations (no one wants the cheapest), and on the other hand might react very negatively if your rate far exceeds her expectations. What if she received a price that fits her expectations just right? She loves it! Value-based pricing is the “just right porridge,” allowing your customer’s expectations and produced outcome to drive your pricing. Having a conversation about expectations up front better informs your decision-making, ensures more mutually-fair pricing, and allows every lead to be a potential partner.
“Value-based pricing is the ‘just right porridge,’ allowing your customer’s expectations and produced outcome to drive your pricing.”
Every sales conversation we have at Focus Lab is centered around understanding the potential impact our relationship could have on our partner's business. Below are just a few questions we like to ask to start understanding the potential value of our partnership.
How will our service add value to your company?
What is your business model?
How do you make profit?
What will the success of this engagement look like?
What growth plans do you have?
If you were to redesign nothing, what impact would that have on your company?
What is your budget for this type of service?
How will our service add value to your customer?
Having the answers to these questions allows us to have a deeper understanding of our clients’ expectations, and sets the foundation for pricing based on the value we can deliver with our creative work. If you're looking to step outside of your typical billable-hour-comfort-zone, take a dive and give value-based pricing a chance. You might be surprised at how your clients would value your work.