Value Based Pricing – Who Wants to Be a Millionaire?

Pricing is timeless, so there are certainly trends and preferences but ultimately it's all about choosing what YOU want to do & then it's your job to have it make sense to your potential clients.

I have recently been looking into value based pricing again, which (back in 2011 that is) I hadn’t heard of it in any formal sense, in that it actually was a form of pricing at that time. I freely admit, this concept was totally new and quite eye opening for me, and a while ago, I was looking into it much more to see what it’s really all about and whether this could be used in an online business manager / multi-VA business model.

I have noticed that it’s used a lot in the world of designers, accountants, lawyers, consultants to name a few and now also virtual assistants. This is a really long post, which only touches on the subject - it’s vast, so worth doing your own homework on.  

After evaluating all of the material I have been reading online, and trust me, I have read a lot, there are many arguments for and against value based pricing in general, but I have also noticed, and this is very important to consider when reading this article – there are several different interpretations of value based pricing, so it’s not straightforward at all. Some people will say it’s about fixing a price of a product or service based on the unique benefits of it, but all consumers pay the same price, others say it’s purely based on providing value to an individual, and then you charge different prices to different people, so there's:

‘Market’ value based pricing where consumers still all pay the same price, for the same product.

‘Per person / company’ value based pricing, where the consumers pay different prices, based on what it’s worth to them.

There are a few others, but those are the primary two versions of VBP.

Please note this article is not just aimed at VA’s it’s about the concept of value based pricing as a topic for both consumer products and services – however because I'm a virtual assistant and also an online business consultant, I have slanted it towards a client / VA relationship in some places. The more I read about value based pricing, the more I see of people documenting the good stuff, such as much higher profits, less administration and it being better for the client because you charge on the results you're going to provide. Overall it sounds really good, and leaves little room for argument in terms of business.

There are many articles and resources which I’ve found online and many of the value based pricing ones make a compelling argument. According to some, the concept of value based pricing seems to be based purely on only one thing – the results (the value) you achieve for the client – not how much you like the client, how much additional business they could potentially bring to you, how much you personally need the work at the time, how long they (your clients) have worked with you, the nature of your business, their connections and contacts, your own circumstances, any existing relationship with the client etc… Just the value of your work to the individual in question.

WHAT IS VALUE BASED PRICING?

Dr. Larry Robinson briefly explains it in the video… He says in a nutshell, you price to achieve the maximum amount of money from the customer – and most customers would be willing to pay more, if they understood the value they were getting, although I am wondering as a VA would they be willing to pay more if they knew every other client getting the same virtual assistant service is paying less, because the value of the service is less to them? This is the grey area in VBP.

Here were a few more random thoughts while researching:

#1 – WHAT IF THE CLIENT DOESN’T GET THE VALUE

Because in some cases you’re quoting the client who has never used the services of an independent contractor before, you're essentially getting the client to speculate on your value to them based on results which haven’t yet happened, but could happen, or relating to a service they have no experience of hiring before. It's suggested you do a preliminary project to determine the value, but do you charge value based pricing for that project, which is sort of back to square one?

I read an article from a guy who said 2 people could come to him for the same work, where if he felt that client (1) would earn more from the work than client (2), he would charge more. But what if his guess was wrong and the value he perceived was incorrect, does that have any implications?

Or what if the client gets it wrong, and your value to them wasn’t what they had originally anticipated? If you don’t actually deliver the perceived value, whether because the service or yourself, or things outside of yourself, are there any implications to that, or is it just “tough luck” for the client?

#2 – COULD IT GO WRONG AND YOU END UP DOING MORE FOR LESS?

I usually sell my services as roles inside 1nSourcing packages. If you'd like to know more about this check out my Packaging & Pricing Workshop. Yes sure, some things might fall outside my packages – although I primarily apply an estimate if that's the case. But what if you fix a price for a client based on the value, but end up spending much more time on it than you initially thought? This could reduce your profits, unless you were doing a heavy markup. Would this mean you could potentially end up worse off if you make a mistake, as we're all human and we all have the potential to make mistakes?

#3  – SOMEONE GETS A BETTER PRICE – BUT IS IT THE BETTER CLIENT?

It seems we feel, as contractors, that if we're better or faster in our work, or we have a high degree of knowledge and expertise we should charge the client more (okay, I agree with this) and we feel penalised charging by the hour because we work harder and faster than others. If that was the case, you can easily raise your published rate to reflect this and factor it in - but I'm wondering here, on the other side of the fence, if someone applying VBP could be penalising the clients for being better at what they do…

Take the guy from point one, he actually creates Web Apps, perhaps his work could have a greater outcome or value for client (1) because the client’s idea for a Web App was better than client (2), or his business was more established, and he has bigger sales potential than client (2), putting him at an advantage, that would indicate that client (1) has a higher potential of gaining more from the service the contractor provided.

So does that mean that client (2) ends up getting a better deal (quoted price is lower) than client (1) because he is not as good at what he does, or his idea had less potential?

The Bookseller

• Man 1 walks into shop.

• Man 1: Hello, I am looking for a copy of “A Rare Book With No Name,” do you have one?

• Bookseller: Yes, we do.

• Man 1: Great! How much is it?

• Bookseller: How badly do you want it?

• Man 1: Well, not that badly… I deal in books and have 2 other copies already…

• Bookseller: Ahhh okay, I do have a few more copies out back myself…

• Man 2 walks into shop.

• Man 2: Oh WOW I see you have a copy of “A Rare Book With No Name!”

• Bookseller: Yes, we do.

• Man 2: I have wanted a copy of that book my whole life, and never found one, I can’t believe it! How much is it?

• Bookseller: Okay, I’ll go grab another copy from out back, for you (Man 1) the book is £10, but for you (Man 2) it’s £100.

#4 – COULD ANY BUSINESS REALLY USE IT?

Many of the articles I’ve read discuss the need to convince the client what you're worth to them, or “help the client to convince themselves.” This will help you justify why you have quoted a much higher rate than you would charge another client, or another seller may charge them. You do this by explaining what they'll get out of it, and why that makes you ‘a bit of a bargain’ essentially, because you're going to generate loads of, for example, money for them. The client will of course need to invest in their business, which is why they're investing in you, but is there anywhere or any circumstances where you draw the line with regard to where this is appropriate, or does this work for every type of occupation? Some argue (per person) VBP can be used in ANY business, but I'm not sure this is a good thing, in the world of humanity.

If you have a person in ER with a broken arm you aren’t going to get a doctor coming in asking the patient how much having his broken arm being mended is worth to him... How do you put a value on that type of thing?

The Vet

• Man 1 walks into the vets.

• Man 1: Hello, my cat has just been run over and I think it’s going to die!

• Vet: Okay, let’s take a look here… Yes, you are correct, your cat will die if I don’t save it right now.

• Man 1: Please help him, he’s all I’ve got…

• Vet: Hmmm yes, it sounds like your cat is very important to you... If you could put a financial value on his life and what he means to you, what would that be then?

Doesn’t sound so good when you look at it that way, because we’re talking about a life here… But does that make people’s money or equality any less important? It would really nark me if I was in a shop buying a product and had to pay more than the person in the queue in front of me (like the bookseller scenario) for the same product, unless it’s a one-off on eBay or an auction and you have no choice - I mean really, would you be okay with that? It seems that the (market) value based pricing on consumer products does encourage a fixed price, but a much higher markup, which is fine if you have a great and unique offering.

I read a few articles on designer label products which of course go down that route. I'm guilty in the past of buying designer products, and also paying much more for better quality, which I can understand, but at least most people pay the same price for the same product. I would much rather charge a higher rate (market) VBP and offer a discount at my discretion, so the client knows they are getting a better deal, than simply quote the client a lower amount than another client, because the value of my skills and service is worth less to that individual (per person) with VBP. Just because the value is less to the individual, it doesn’t mean to say that the value of the skill is any less.

#5 – IS LOWER DEMAND ALWAYS A GOOD THING?

Sure, I've done the math, it’s not rocket science... The more you charge the less clients you’ll need and the more money you’ll make - this is why I created my 1nSourcing pricing model to maximise my potential. (But also the less people there may be out there willing to pay for it.) That’s just the nature of human beings, and everyone will freely say that you will need to shoot for a much smaller market, although it’s fine if you're selling a product that millions of consumers will buy. I'm not saying at all that you won’t be able to get clients in such a scenario, but you have to really look at your own abilities, expertise and skills, and you have to charge appropriately for those – or do I have this wrong? In my chats with clients and VA’s on this subject, one VA I was chatting with made a valid point, “It’s like walking into a shop where nothing has a price tag on it.” In that instance, I believe more people would leave than stay, where the people who would stay I guess are the ones where money is not really an object for them. 

In Dr. Larry’s example in the video below, he mentions light bulbs, but I presume the light bulb would have a price tag, and everyone buying the light bulb would pay the same for it? I also had a discussion about this subject with a very successful client who is a business consultant and coach for multi-million pound international corporations - he has also coached me personally, saying that, “Always there's a peak for everything, there's only so much people are willing to pay for any product or service.” (Unless again we're travelling into the world of the rich and famous of course, where money is no object).

There will always be people out there willing to pay much higher fees, but they are far fewer in number. The less competitive you are overall, the lower the demand will be for your services, so you will be aiming for a certain type of person, or very small niche, which means that value based pricing may work really well for those who need a much lower capacity of clientèle, but if you’re going in for a multi-VA business model, and not every client is looking for a partner, as some would simply like to assign tasks and have them done to an excellent standard, so if you're just starting out, you may (not saying you will) find progress is slower than you had hoped because you'll need more clients to expand.

Another factor (going back to the humanity thing – I’m running the business to have a life) is if you need to maintain an income to support a household, by having fewer clients, could you run the risk of losing a client which could significantly impact your income. That’s even more so if you work with retainer clients who you rely on regularly, rather than project based clients.

#6 – IF YOU ARE A VA, HOW DOES THAT WORK WHEN HIRING?

This one is from a perspective of a VA who hires subcontractors. When I quote my client, I do it on the basis that I know exactly how much the work will cost me, like a base price, and that’s how I can factor in costs and expenses involved in servicing the client. If I was hiring and subcontracting to other VA’s who worked on the basis of value based pricing, the amount that they charge me could differ greatly between one client and the next, which would be too unpredictable for me to control my bottom line, which is important – it’s not the only thing that’s important, but this is a business so obviously I have to consider it.

If you're a virtual assistant offering value based pricing, it could potentially alienate any supporters, partnerships or collaboration when working with other VA’s on a sub-contracting basis, unless they were charging a fixed fee or an hourly rate, so you can manage your budget and profit. You want to ensure your profit remains consistent and your VA's are paid consistently, so by managing the amount being charged by VA's (and what you're being paid consistently by clients) this avoids a lot of issues and potential negotiations, to essentially complete the same work (unless the VA charges you the same based on whatever you were asking for from the client)... Complex, I know.

A NEW IDEA – PERFORMANCE BASED PRICING

I'm no expert in this. I just looked at everything I found available to me. I still have no doubt that results and expertise can be factored into your rates without going down the (per person) value based pricing route (where you charge different people different prices), say for example, if you're an excellent bookkeeper with the ‘ability’ to save your client thousands, and you have significant evidence to back it up, shout about your ability from the rooftops, then factor the ‘value of that skill’ into your rate, or even charge a percentage for your performance on the amount you actually do save them, on top of your hourly fees. Absolutely charge more for your service than someone who is less skilled, and still charge for the time you spend on their account, thus getting the best of both worlds. Your clients are being treated equally in terms of pricing (I appreciate you don’t have to treat your clients equally if you don’t want to – but I do, and it hasn’t done my business any harm whatsoever), and you're still being paid for your expertise and your time, plus with the addition of receiving a percentage based on your performance and what you're able to save them, it just keeps things simple this way.

CONCLUSION

So, is this really a good pricing model for an online business manager or consultant with a multi-VA team?

It seems (per person) VBP could be applied if you’re a solo-VA, but if you actually need a larger volume of work, and you have a larger team of sub-contractors, then using a combination of both VBP for consulting, and traditional cost pricing for VA services (or “market” VBP pricing where you cost your packages / rates / services based on the value of the skills, rather than value to the client) is a much better model, particularly for online business managers who would like to define themselves and the work they do, such as project management and consulting between that of their team who helps them implement for the clients. Don’t forget you can also put packages together which encompass a variety of services, using the 'market' value based pricing model.

It’s really down to you to find the right balance of pricing for your business, and value based pricing really could work out very well for you as a contractor, as if you have the skills and abilities to back it up, you have the potential to make incredible markups to people who can afford it and are willing to pay it, but like everything there are pros, cons & questions, so it depends on the type of person you are, and your business model as to whether it’s best for you. My head says yes, this is a good model for someone with a high degree of skill and expertise in their field, such as someone who provides tailor-made consulting services - I'm all for that, I do consulting myself and I know how varied it can be between clients, but for something task driven like transcription, customer support, website updates etc…  it seems that these ‘action based' tasks rather than ‘consulting’ based tasks would be better charged at a fixed rate to clearly define the difference to the client between your ability as a VA, and your ability as a consultant – both are important, but learning how to provide consulting and advice-based work, does take infinitely more time and experience than learning how to perform a task. 

If you're still undecided as to what pricing structure to choose, trial it out and see what works best for you. The video below shows you how to implement value based pricing, and I think this method could work in a VA business model.

My Personal Feelings May Have Impacted the Thoughts in My Article – Just So You Know!

This has nothing to do with business, and I fully realise that my profits may not be as large as they could be if I applied value based pricing and was charging by the client rather than by the services my company offers, however, there's no logic, justification, reasoning or science that will ever stop that part of my own conscience from saying, there is just something that doesn’t ‘feel’ right about charging 2 different clients 2 different amounts of money, which could be substantially different for providing the same service to each one...