johntabita - 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.