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Value Based Pricing Web Development and Marketing
Charging based on value
Fortune Hunter




msg:787702
 1:05 am on Oct 27, 2005 (gmt 0)

I have just finished reading Alan Weiss's great book the "Million Dollar Consultant". For those of you who have read it his biggest claim to fame is the value pricing system he advocates.

For those of you who haven't read it, basically the idea is to convince the client how much his business will save or grow over time by using your consulting techniques. Once the client has bought into this idea then you simply set some arbitrary fee that can be very high.

I know someone else posting around here has said he has applied this technique to web design and I would like to start a discussion on how to do this, especially since...

1. Most developers have a ton of competition so the idea of saying your unique method of coding is so superior that they should pay you a ton of cash is unrealistic.

2. Web development is being turned more of a commodity by people everyday. As long as this trend continues I can't see how someone can charge more then the average price going in the market.

Now having said that I believe there is a way to create value pricing in web development and I know other people here have said they have done it, I would like to see what types of ideas people have on how to implement this form of pricing for projects.

Fortune Hunter

 

vincevincevince




msg:787703
 6:57 pm on Oct 27, 2005 (gmt 0)

webdesign is being turned more of a commodity

Commoditisation is just where you find differentiation and your market niche. When 20% of designers were churning out commodity-class sites, you were up against the other 80% in market for sites which are more than (a x pages + b x graphics + c x CGI). If in the future 90% of designers are in the commodity market, you're now the 1 in 10 designers who can actually deliver what the customer wants.

johntabita




msg:787704
 11:40 pm on Oct 27, 2005 (gmt 0)

Value pricing has been a hot topic for me over the past several months. In a nutshell, you establish the project's value to the client and charge a portion of that value. Even if you don't use that value as a basis to set your price, it's still important that you take the prospect through this process because, as the saying goes, "Until you establish value, any price is too high."

Value pricing can be a double-edged sword, because if the cost of the project exceeds its value, you walk away without a sale. But, IMO, this is a much better selling model because you are truly putting your prospect's best interests above your need to close a deal. When people realize this about you, it speaks volumes about your integrity and credibility.

What Alan Weiss doesn't really get into is the details of how to actually do such a thing. But it all boils down to this: your prospect wants some type of return on his investment (ROI), and that may not necessarily be monetary. In fact, if you can get to the bottom of what your propect really wants, you'll have differentiated yourself in a way that few others in our field ever do. I certainly can't claim to be an expert, but here are a few examples from my own experience:

One client wanted to increase his company's revenue by 10%. I thought that was his ROI, but I didn't dig deep enough. He had a personal motivation. As general manager, he earned a percentage of the company's annual revenue. Also, when a business consultant they'd hired told them their website was great, he got to look good in front of the owner.

Another client wanted me to redesign his existing website because he was "too embarrassed" to put the URL on his business cards. With such a low expectation of a return, how much value do you suppose he'd see in the project? A few hundred buck, tops, perhaps? This was looking like a case where the cost was going to exceed the return, and I'd have to walk away. However, over the course of the next hour, I asked him a lot of questions and the light bulb began to go on. He started to realize that his website could actually help him gain new business, so we began to talk about what that meant to him. His ROI changed from "having a website that won't embarass me," to "not losing any more hair chasing new clients." His objective changed to using his website to help gain 4 new clients a month.

Now, if I'd followed the value pricing model, I'd have determined what those 4 new clients represented in annual revenue and charged a portion of that. Instead, that additional potential renenue allowed him to justify paying a much higher price than he'd intended, one that was more realistic and equitable for the amount of work involved. So I didn't use value pricing, per se; but I established value to show that the potential return justified the higher cost. Make sense?

One objection I've heard to value pricing is that it's not fair to charge say, a large corporation a higher price than a mom-and-pop shop for a similar project based merely on the return they'll receive. But IMO, it's unfair to charge the mom-and-pop shop the same amount as the larger company, because in all likelihood, the larger company is in a better position to receive a higher return, for all kinds of reasons. Discussing value not some "technique" to get the prospect to pay more money - it's sincerely helping him determine what's best for his business. If the cost isn't going to justify the return he'll get, then it's truly not worth it for him to proceed, and by discussing value, you've helped him see that.

Up to now, I've been talking about real or tangible value, that which can be measured. But there's another aspect to value, and that's perceived value. Perceived value is intangible and for that reason, it's subjective - that is, it's whatever your client thinks is valuable. Too often, we look at what we perceive as valuable and attempt to project those values onto our prospective clients. Case in point, there have been many discussions on this forum and others about the "value" of web standards. But the problem is, web standards only provide value if your client perceives that to be so. You see, clients perceive tangible value as a commodity. Our products, service or features (such as web standards) do not provide additional value because most of our competitors can also provide that same tangible value. An often overlooked way to add value to your offering is to increase your intangible value, by regarding how you interact with the prospect to be more important than what you're selling. Weiss talks about being "competitive" in your products, "unique" in your service, but "breakthrough" in your relationships. Consulting is a relationship-driven business and a big part of the value you bring ought to be you. If you change your thinking to accomodate that, you'll find that many of your clients won't want to do business with anyone else.

vincevincevince




msg:787705
 9:19 am on Oct 28, 2005 (gmt 0)

One thing with value pricing is that it doesn't have to mean you charge according the the value, it can be adopted just as a justification process.

Mom & Pop store, your website will bring you $1500 of business over the next year, so you can afford my $1000 price tag and will be in profit before next christmas.

Big corp, your website will bring you $150,000 of business over the next year, so you can afford my $1000 price tag and will be in profit before wednesday.

Both arguments are convincing, and, in my opinion, fair.

Fortune Hunter




msg:787706
 3:36 am on Oct 31, 2005 (gmt 0)

johntabita:

Great post! You have obviously read and understand Alan Weiss's material. I understand your point about competitive product, great service, and breakthrough relationships, but in this business (web development) I don't know how you cross into that territory so fast.

For example, if I get a call for a new site I may not know the owner and we may have a few conversations before I give a proposal, but I wouldn't say that time frame has put me anywhere near breakthrough relationship. Therefore I doubt it would work to simply quote a value based price and expect my relationship to make it happen. I think I need something more.

Unfortunately in our business prospects don't (in many cases) see the difference between one developer and another outside of simple price. They just don't seem to understand that a developer with considerable marketing expertise is going to provide better value then a guy who doesn't know how to market, but can code anything well if you tell him what you want as opposed to him telling you because of his excellent marketing information.

I run into this more then I would care to count. They hear what I am saying about bringing in more customers, increasing sales, creating more prospects, better qualified prospects etc, but at the end of the day if my proposal is 50-100% higher then the next closest I am pretty confident I don't get the work even though I am bringing exceptional value that will easily pay off over time vs. the lower proposal which will give "a" web site, but fall short of actually achieving a marketing goal.

My questions is how do you work around this in our field in particular?

Fortune Hunter

johntabita




msg:787707
 2:42 pm on Oct 31, 2005 (gmt 0)

I read an article recently that pretty much sums up what you're saying:

The fundamental problem with most aspects of current Web sites is the hurdle they need reach to be released is so incredibly low. It's probably measured in inches rather than meters. For too many companies, the ease of putting up a Web site -- any Web site -- ends up fogging the true goal of creating the right Web site that actually accomplishes corporate goals such as persuading visitors to take action.

As you already know, the answer is to this problem is, stop being a developer and become a consultant. I'm sure that's why you're reading Weiss' book. I'd say the first step in that process is don't be so quick to present a proposal. This isn't something you can do if you're playing the RFP game, but personally, I avoid competitive bidding situations entirely. Most of my prospects aren't even talking to another developer. That's because I seek out and associate with relationship-driven individuals.

The problem with proposals is that they can become a crutch. We spend too little time engaging our prospect in meaningful dialog then throw a proposal his way, hoping that it will do the "selling." Personally, I do not submit a proposal without the firm commitment from the client that they will hire me. Obviously, this requires much more upfront conversation than the typical "prepare a proposal and hope" method. And guess what? It also builds the relationship. By the time I've had a few conversations of this manner, the prospect either sees me an an expert he can trust, or I've discovered he's price-driven buyer and we've gone our separate ways.

The other part of the problem is in your comment, "if I get a call for a new site I may not know the owner..." By the time someone "gives you a call" they are already in "buying" mode. There's nothing wrong with having people call you (in fact, it's a great thing), but consider finding ways to engage prospects before they are in buying mode. How much more time does that give you to build breakthrough relationships?

Does that help answer your question?

Fortune Hunter




msg:787708
 11:42 am on Nov 5, 2005 (gmt 0)

johntabita:

Yes, it does answer my question and I have a number of things I do to try and engage new customers, i.e. speaking about Internet marketing topics to groups and sometimes that gets people deciding to seek me out for more advice.

As you know in our business when you begin talking to a new prospect you can present them with a ton of fantastic ideas of how to make a truly awesome web site that will meet marketing goals, but unfortunately I think too many of these people still think of a web site as a "thing" that you put a simple price on and can compare to other "things". Sometimes I get prospects who get excited and that relationship you are referring to does begin to blossom.

My experiences to date have always come back to the big "P" word, PRICE. No matter how great the conversation seems to be going or how excited they appear to be getting eventually everyone wants to see the price. Now Alan Weiss says that he gets conceptual agreement and THEN writes the prosposal, but he also says that the client never sees the price until his proposal, but yet has an amazingly high close ratio.

That is the part that is sketchy to me in our business. I feel like I do the same thing, I get clients excited, I get them feeling like they can trust me and I know what I am talking about and I get them understanding the conceptual goals we are going to achieve with it, then the price question comes up. I try to avoid it, but most persist. To keep from writing a proposal that is wasting my time I give them a "ballpark" and I can tell right then if this is going to happen or die.

What I want to figure out is how do you get the conceptual agreement Alan talks about without letting the discussion degenerate to simple price and hence a price based proposal that will end up not getting acted on or compared to another web site proposal or a "thing" as I said above.

Perhaps the problem is the prospect, maybe you need a certain criteria for the prospect before you even begin the process. Once you have that exact type of prospect maybe these other steps fall into place better. What are your thoughts?

Fortune Hunter

johntabita




msg:787709
 12:21 am on Nov 6, 2005 (gmt 0)

I heard someone talk on the subject of time management the other day, and she made an interesting comment: We find time for the things that we value. The same is true with our prospects and their money. I've spoken with people who only had a few hundred to spend, but ended up paying more, because the saw the value in my solution.

Yes, a website is a "thing," and to overcome the commodity mentality, I emphasize that it's a tool not a strategy. I could design the most beautiful 4-color, eight-page brochure for a client, but if he has no plans on how to get that brochure into the hands of his prospects, then it's useless, isn't it? Same thing with a website, so I pitch the strategy, not the website.

What Alan Weiss probably isn't saying or doesn't practice is that you close the conceptual agreement by getting the prospect's verbal commitment to do business with you, conditional on price, and that the proposal doesn't get presented until you have that commitment.

Perhaps the problem is the prospect, maybe you need a certain criteria for the prospect before you even begin the process. Once you have that exact type of prospect maybe these other steps fall into place better. What are your thoughts?

Your dead-on here. This "criteria" is a prospect who needs, wants, and is able to afford your services. Determining if you have that type of prospect requires that you "dis-qualify" the people you speak with. That is, you actively look for reasons why someone wouldn't buy from you. One of those reasons may be price, so when the "P" word gets brought up, I don't avoid it, but use it as an opportunity to do just that.

Now, I firmly believe that you ought to discuss value before talking price, but your prospects don't always give you that opportunity. Avoiding the subject when they bring it up only makes you appear shifty. If the other person brings up cost right away, and I know nothing about the scope of the project, I'll give them a minimum cost. If we've had enough dialog to give me an idea of project scope, I'll give a ballpark price range. If my price is going to blow them away, I'd rather know that up front, rather than two meetings, five phone calls and a 10-page proposal later. Personally, I want to get to the subject of price once the conceptual discussion is over, because that means I can close that step in the sales cycle.

It's been my experience that people generally start talking about what's most important to them. I've yet to close a deal with anyone whose first question is "how much?" The people who start talking about why they want a website or why their existing one's not working generally are the ones who end up becoming clients.

Any more questions? Fire away, and I'll try to answer them, if I can.

Fortune Hunter




msg:787710
 3:36 am on Nov 6, 2005 (gmt 0)

johntabita:

This is one of the most valuable dialogues I have had here! Back to Alan Weiss, how do you think he gets around the price issue when getting committment and still have such an incredible close ratio.

For example, like you I like throwing out budget questions after the conceptual strategy discussion. I don't want to write proposals for nothing and so I have found this helpful to dis-qualify people I know don't have the money or are not willing to spend it. Alan doesn't appear to do this, which I find interesting.

Now when I start probing questions about budget the typical response is that they have no idea, which I have discovered over time is only a partial truth in most cases. They generally have an idea what it should cost based on their research or how much they are willing to pay, but they never want to reveal that number. I guess I don't blame them.

However in Alan's scenario he doesn't appear to dis-qualify up front, but as you said probably does get some type of committment conditional on price. Since I think that one is the biggie, how do you think he gets such high close rates without at least giving the prospect some type of idea or ballpark to expect.

I am located in the mid-west and our conceptual experience with consultants pricing is probably very different then companies in LA or NY. Therefore if an Alan Weiss was presenting to me I would have an idea of what I think it would cost and/or what I was willing to pay. If he did nothing to qualify me and my idea of expensive is 25K as opposed to say 125K in NY we are probably going to have a problem when I see his proposal. It would seem without some type of dis-qualify or pre-qualify on price that his close ration wouldn't be that high (80%). I might find it completely outrageous to pay him 125K for some conceptual agreement no matter how great, it is economics.

What do you think?

Fortune Hunter

johntabita




msg:787711
 6:06 am on Nov 6, 2005 (gmt 0)

Back to Alan Weiss, how do you think he gets around the price issue when getting committment and still have such an incredible close ratio.

I have no idea. But I do know somebody who knows him personally. Perhaps I can get him to ask.

Now when I start probing questions about budget the typical response is that they have no idea, which I have discovered over time is only a partial truth in most cases. They generally have an idea what it should cost based on their research or how much they are willing to pay, but they never want to reveal that number. I guess I don't blame them.

My experience has been the exact opposite. Sometimes, the other person has a dollar figure in mind of what they'd like to spend, but it's rarely based on any due diligence on their part. These prospects are often embarrassed to even say, because they know they're just pulling a figure out of a hat.

Besides, I never have a "budget" discussion. Sometimes, a prospect will bring up cost, without directly asking for the price or a ballpark. They may say something like, "I don't have a lot to spend," or "I have no idea what something like this costs," to which I might ask, "How much did you hope to spend?" Those that ask directly get a direct answer.

Ideally, though, you'll have established the project's value in the conceptual stage. During one such conversation, I asked the prospect what his average sale was. Turns out that a single sale from his website which he wouldn't have otherwise gotten would have covered its entire cost. When I quoted him the price, he acted like, "Well, it's more than I wanted to spend, but I guess I don't have a choice." Yet I'm sure having established the value equation helped him come to that conclusion. So it helps if you can put a monetary value on the project, if that's your prospect's objective. So after establishing that a $12,000 project will bring in an additional $24,000 in annual revenue, it's a bit difficult for a prospect to have much credibly when he says, "I'm sorry, but my budget's only $5,000." At that point, you can say, "Perhaps I misunderstood, but I thought you wanted me to achieve a result and produce a positive return on your investment, not meet a budget."

If the goal is to meet a budget, then you ought to know that up front. I'm working with a client right now for whom that was her intial goal. She had "so much to spend," so I agreed to see what could be done within that budget. That meant doing some minor changes to the existing site, and not much more. But somewhere during our conversations, her goal began to change, and now it's become a complete redesign. For this client, the value is intangible, not a monetary. It's the value of having a more professional website that, ultimately, will translate into more sales.

However in Alan's scenario he doesn't appear to dis-qualify up front, but as you said probably does get some type of committment conditional on price. Since I think that one is the biggie, how do you think he gets such high close rates without at least giving the prospect some type of idea or ballpark to expect.

I could be wrong, but I think his reputation has a lot to do with it. You and I don't have the advantage of being a published author and the additional credibility that brings. I mean, he's regarded as the consultant's consultant. If you were known as the web developer to whom all other web developers looked to for advise, how much easier would it be for you to close business?

I am located in the mid-west and our conceptual experience with consultants pricing is probably very different then companies in LA or NY. Therefore if an Alan Weiss was presenting to me I would have an idea of what I think it would cost and/or what I was willing to pay. If he did nothing to qualify me and my idea of expensive is 25K as opposed to say 125K in NY we are probably going to have a problem when I see his proposal. It would seem without some type of dis-qualify or pre-qualify on price that his close ration wouldn't be that high (80%). I might find it completely outrageous to pay him 125K for some conceptual agreement no matter how great, it is economics.

Well, I just relocated from the LA area to the mid-west (Ohio, to be exact), and I don't see any difference on how people perceive value. Remember, value pricing is determing a project's value, then charging a portion of that value. Getting 500K of value in return for 125K is the same value whether you're in NY, LA or Ohio.

Fortune Hunter




msg:787712
 12:51 am on Nov 7, 2005 (gmt 0)

johntabita:

I mean, he's regarded as the consultant's consultant. If you were known as the web developer to whom all other web developers looked to for advise, how much easier would it be for you to close business?

Very good point! In fact I am trying to do more consulting and less actual development work and all the stuff I have been reading including Alan's stuff is to become a "guru" which you do through writing articles, books, professional speaking, etc. Overtime if you do enough of this stuff on a topic people begin to regard you as a guru, which is where you want to be to do things like Alan does them.

You mentioned you were located in Ohio, whereabouts? I am also in Ohio, Toledo to be exact. In my neck of the woods it just seems that people have a different form of thought about pricing. Most clients that are local to me, though I have a few out of state, seem to regard prices like 5K high for a site. I could be off base, but it seems that if you quoted that price in NY the person would think you are the cheapest thing around.

I think about Eric Meyers the CSS guru and people do come to him concerning CSS. He can probably get some nice fees for his work and it is probably much easier for him to close contracts as well. He is in Cleveland, not that far from me and I have met him once or twice, pretty down to earth guy.

Alan has a book published called "How to write a proposal that is accepted everytime" I just got the book and started reading it so I haven't made it too far yet, but he starts off by giving you questions and processes to go through the whole sales process and ask the right questions to get areement to the conceptual value. The book was pretty steep at $115 used from Amazon, but if I get one proposal out the thing it was worth it hands down.

Fortune Hunter

johntabita




msg:787713
 2:01 am on Nov 7, 2005 (gmt 0)

In fact I am trying to do more consulting and less actual development work and all the stuff I have been reading including Alan's stuff is to become a "guru" which you do through writing articles, books, professional speaking, etc. Overtime if you do enough of this stuff on a topic people begin to regard you as a guru, which is where you want to be to do things like Alan does them.

I'm on the same track as well, looking for speaking and writing opportunities. I send out a quarterly newsletter packed with marketing (not web development) information that my clients and prospects will find useful and will position myself as that expert. Anytime I stand up and do my "30-second commercial" at a networking meeting, I take the same approach.

You mentioned you were located in Ohio, whereabouts? I am also in Ohio, Toledo to be exact. In my neck of the woods it just seems that people have a different form of thought about pricing. Most clients that are local to me, though I have a few out of state, seem to regard prices like 5K high for a site. I could be off base, but it seems that if you quoted that price in NY the person would think you are the cheapest thing around.

To a certain extent, it may be relative to the cost of living. In California, the cost of living is 50%+ higher than the national average; whereas, here is something like 2% higher.

Back in California, people seem to think even $500 was too much to pay for a website (and I charge a lot more than that). I'm basically associating with the same small business/sole proprietor crowd, but I'm not getting that reaction here. I'm in Canton, BTW.

I think about Eric Meyers the CSS guru and people do come to him concerning CSS. He can probably get some nice fees for his work and it is probably much easier for him to close contracts as well. He is in Cleveland, not that far from me and I have met him once or twice, pretty down to earth guy.

I bought his book just before we moved here and found out he was in Cleveland, which I thought was interesting.

Alan has a book published called "How to write a proposal that is accepted everytime" I just got the book and started reading it so I haven't made it too far yet, but he starts off by giving you questions and processes to go through the whole sales process and ask the right questions to get areement to the conceptual value. The book was pretty steep at $115 used from Amazon, but if I get one proposal out the thing it was worth it hands down.

I've heard of that book. Let me know if you think you got your money's worth, when you're done. Also, check out the following link and either buy his book or read his free online version. There's a wealth of practical advice on how to apply what Alan Weiss teaches, and more.

www.honestselling.com/

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