Could value pricing be a win-win for you and your clients?
Learn how this powerful pricing strategy can improve your business model and the customer experience.
Value pricing is a powerful business tool.
Implementing it can increase revenue and drive future growth. It creates the incentive to improve business processes so you add more value and it increases the value you offer to your customers.
Some pricing models aim to gain market share and a high volume of commodity sales by undercutting the competition. Others simply calculate costs and add a reasonable target percentage on top. Value pricing, however, seeks to leave no money on the table by charging for the perceived value of services, instead of the actual cost of services. With value pricing, you get paid the exact amount you deserve to be paid, an amount designated for profitability.
Value pricing bundles services into a package with a single, up-front fee.
For example, with value pricing a business charges clients a flat, monthly rate with the understanding that certain expertise and services will be delivered, rather than charging clients per task or per billable hour.
Under a value pricing model, clients know how much they're paying and what they will receive in return.
Value pricing allows you to provide your clients with real expertise, strategic solutions, and timely service, while you get paid for the actual worth of the services your company provides.
Why Choose Value Pricing? See How It Compares to Other Models
Working within the hourly billing model, you track the hours required to complete a certain service and bill your client at an hourly rate based on the type of work being done.
Since more hours spent working translate to more revenue, this pricing strategy creates no incentive for you to work more quickly or streamline processes, reducing efficiency. Hourly rates must also be frequently changed, as they are largely affected by outside, economic factors like inflation and cost of living adjustments. In addition, hourly billing has a built-in revenue limit because there are only so many billable hours in each day. The only way you can increase revenue is to cut costs or raise your hourly rate.
In Comparison: Hourly billing provides no incentive to go after more clients, improve processes, or increase the value of your service. Value pricing, however, separates time from revenue, while also providing incentives to improve all aspects of your business process, client pool, and services.
With this pricing model, a company uses job costing to determine the exact cost of providing a service and then charges customers a percentage on top of that fixed cost. With cost-plus pricing, it is typically necessary to determine a floor and ceiling price (the minimum and maximum amount you can charge). Your actual prices will likely end up somewhere between the floor and ceiling, at a number largely determined by your competitors' prices and the market. This margin-based model doesn't leave much room for when expenses increase, making it difficult to grow your business, as your fixed costs rise.
In Comparison: The value of services establish value-based prices, rather than actual costs. For example, an interior design firm, offering designs by a big industry name like Joanna Gaines, could set a value-based price point far above the cost-based one.
Using this pricing model, businesses charge a fixed price for each service — regardless of the time or resources required to complete that task. Fixed pricing leaves little room for making price adjustments based on the different level of each client's specific needs. Putting together a 60-second ad for a pharmaceutical with complicated regulatory requirements takes a lot more expertise than creating a 60-second spot for a restaurant. With a fixed price model, both the pharmaceutical company and restaurateur would be charged the same.
In Comparison: Value pricing allows you to adjust your prices based on each unique client, the value you can provide them, and the resources you will need to deliver high quality service to that customer.
Other Value Pricing Perks
Customers never experience sticker shock when they receive a bill.
Your collaboration and communication with clients will improve. With value pricing, clients know what they're paying for, and they will do their part to make the most of it.
Employees can work more effectively and efficiently. Helping clients and generating revenue improves morale, fosters loyalty, and provides incentive to learn new skills.
Navigating the Transition to Value Pricing
Value pricing is a win-win pricing model, improving transactions for both businesses and their clients. So, why is it that businesses often choose other pricing strategies?
Although it's a powerful pricing model, value pricing is not without its challenges. Gaining customer buy-in, for example, requires a different sales strategy than other pricing models. Overcoming challenges likes these, however, is well worth the benefits.
Successfully transition to value pricing by:
- Determining the Right Price - Value-based prices aren't determined by your costs, the hours you work, nor by your competitors. Establish prices by comparing the true value of your offerings to that of your competition. When setting a value price, consider what sets you apart in the marketplace, what you offer clients that no one else can, and think about how sustainable your differentiating factors are. You should also consider whether your services generate revenue for your clients and how significant the number is.
- Getting Employees On Board - Be sure your staff understands the benefits and reasons behind transitioning to a new pricing model.
- Adjusting Internal Processes - From sales and services to time-tracking and incentive pay, value pricing will affect your internal processes. Be sure everything's running smoothly by testing the process with only a few clients to start.
- Embracing Technology - Hold up your end of the bargain by delivering promised value to clients. Embracing technology solutions whenever possible will help you streamline processes, increase efficiency, and provide clients with a high-quality experience.
- Managing Client Expectations - It's important that clients understand exactly how much they are paying and exactly what they will receive. Explain how the pricing model will affect your processes and if anything different will be required from them.
- Making Adjustments - Don't be afraid to adjust your value pricing model or service bundle structure. Pay attention to what works, what doesn't, and make changes accordingly.
Perhaps most importantly, remember to be patient.
Anytime you make a significant change to your business model, you will face challenges and encounter setbacks. When transitioning to value pricing, don't lose sight of your goal. The flexibility of this new pricing strategy will unlock your company's potential for future growth, increase your perceived value, and allow you to improve processes, strengthening your business from within.
To learn more about value pricing for profitability and optimizing your company's pricing strategy to improve cash flow, contact a management accounting expert at GrowthForce today.