When negotiating with prospects, it is sometimes difficult to reason with them in favour of value based pricing rather than cost-based. Here’s how to convince a prospect that value-based fees are best.
Value versus Cost
Just to make sure we are all on the same sheet, here is what I mean by Value and Cost.
Most business you come across will set their prices based on what the product or service costs them to make. So for example, if it costs $100 to make a doohickey, the manufacturer adds a margin to this cost in order to reach the retail price, say $125.
In consulting, coaching or agency type businesses, your cost will be fixed costs, such as office, equipment, pay, electricity etc, plus a variable cost connected to the specific project. A variable cost may be travel related, or you may need to hire a freelancer for some aspect of the project.
Add up all of these costs, add a margin, and hey presto, you have a figure for the client fee.
If this is how you are currently pricing your services, stop!!! There is a much better way …
To keep things simple, let’s just say that the project will deliver a million dollars extra profit for a client. I recognise that it’s probable that most projects will have much lower value, but stay with me.
Question – what would your client pay if you were going to bring them an extra million dollars in profit? Would they pay 20%, or maybe 10%?
It is this ‘calculation’ that you need to make in order to arrive at a value-based fee. If you were using cost-based pricing you may charge the say, $10,000. But in this example, with value pricing, your fee may be $100,000!
So in value-based pricing, you set your fee to be commensurate with the value you are delivering to your client.
Sounds good doesn’t it? Well it is when the client agrees the fee. But what happens if they kick back and try to push you to a cost-based fee?
Convincing the prospect
Here are my top 3 arguments you can make in order to convince the prospect that using a value-based fee is in their interest too!
- With value-pricing, you are not counting costs. Therefore they can have a greater call on your time without worrying about racking up a bigger and bigger bill. The fee is fixed – no surprises!
- Because the fee is value-based, your team can use me as they need, without having to worry about their budget.
- If I need additional resources in order to complete the project, there is no additional cost to you.
Now, the key to persuading a prospect that value-based is best is to introduce these arguments early in the relationship building phase of your negotiation. Talk through your approach to pricing even before you give them a figure for your fee. That way, by the time they see your actual figure, they are hopefully more comfortable with your rationale and hence less resistant.