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Value Based Pricing – Who Wants To Be A Millionaire?

Michelle Dale - Wednesday, July 20, 2011



I have recently been looking into value based pricing, which honestly until recently I hadn’t heard of in any formal sense, that it actually was a form of pricing. I freely admit, this concept was totally new and quite eye opening for me, and over recent weeks, I have been 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, 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 is:

  1. ‘Market’ value based pricing where consumers still all pay the same price for the same product.
  2. ‘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 am a virtual assistant and also a 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, much higher profits, less administration and better for the client because you charge on the results you are going to provide. Overall it sounds really good, and leaves little room for argument in terms of business.

There are a 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 in to you, how much you personally need the work at the time, how long they 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 are essentially getting the client to speculate your value to them based on results which haven’t yet happened, but could happen, or a service they have no experience of hiring before. It is 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, 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 contractor have any implications to his inaccurate perception?

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 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 sell time by the hour, VA services as well as consulting, but I also have package options, so I do both depending on the service I provide, yes sure packages can be based on value – although I primarily apply an estimate of approximate time required to implement the package, and my consulting packages are the same if they are straightforward. 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 mark up.

Would this mean you could potentially end up worse off if you make a mistake, we are 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 are better or faster in our work, or we have a high degree of knowledge and expertise we should charge the client more, (ok, 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 am 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 discussed the need to convince the client what you are 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 will get out of it, and why that makes you ‘a bit of a bargain’ essentially, because you are 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 are 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 am 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 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 bookeseller scenario) for the same product, unless it’s a one off on eBay or an auction and you have no choice — 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 mark up, this 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 am guilty in the past of buying designer products, and also paying much more for better quality, that 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) 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 have 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. (But also the less people there will 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 are selling a product that millions of consumers will buy. I am 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 to made a valid point, “It’s like walking into a shop where nothing had a price tag on it.” — in that instance, I believe more people would leave than stay, the people who would stay I guess are the ones where money is not really an object. In Dr. Larry’s example in the video below, he mentions lightbulbs, but I presume the lightbulb would have a price tag, and everyone buying the lightbulb 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, he said that, “Always there is a peak for everything, there is only so much people are willing to pay for any product or service.” (Unless again we are 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, this 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, some would simply like to assign tasks and have them done to an excellent standard — if you are starting out, you may (not saying you will) find progress is slower than you had hoped because you will 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, 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 are a virtual assistant offering value based pricing, it would potentially alienate any partnerships or collaboration when working with other VA’s on a sub-contracting basis, unless they were charging a fixed base fee or an hourly rate for you to manage your budget and profit.

A New Idea – Performance Based Pricing

I am 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 are 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 — 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 are still being paid for your expertise and your time, plus with the addition of receiving a percentage based on your performance and what you are 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, if you have the skills and abilities to back it up, you have the potential to make incredible mark-ups to people who can afford it and are willing to pay it, but like everything there are pros, cons and questions, 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 am 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, article marketing 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 are 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 – So You Need To Be Aware Of This..

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 is 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 – if this is really what it takes to have to make big money in business, like the song in the top right, “who wants to be a millionaire – I don’t.”



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Hi I'm Michelle, an entrepreneur specialising in virtual assistance, a digital and real world nomad, and a down-to-earth mother of three.



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