How Value-Based Pricing Could Double your Profitability

Text of my newsletter from 8th November

My friend runs a bakery, selling vegan sourdough and bagels. All her own recipes.

She’s doing well, but she wants to move from selling what she’s doing (baking bread), to selling what she knows (baking bread).

So she’s planning to sell recipe books, run baking workshops and sell online courses, all based on her vegan recipes.

These are things she can do on her own, and they would dramatically improve the profitability of her business, without taking on any staff.

But she’s struggling with what to charge.

Product pricing (her bagels and sourdoughs) is straightforward. Service pricing (her workshops), not so much.

Pricing services is mostly done on an hourly rate basis. This safeguards you against scope creep and additional requests from the client, but it limits your potential earnings.

If you’re working on hourly rate billing, the only way you can double your profitability is by doubling your rate, which your customers won’t enjoy, or doubling the hours you work.

That’s not a great idea, especially if you want to maintain a decent work-life balance.

An alternative is fixed price billing.

Quoting projects on a fixed price basis is scary at first. If you underestimate the work involved, you could find yourself with a seriously unprofitable project.

Which is why so many small businesses stick with the hourly rate approach.

But there’s a further difference:

Fixed price charging versus value priced charging.

Fixed price charging is where you estimate the work involved, total up the hours, add in any expenses and arrive at a fixed price – you’re looking inwards, and still basing your price on the time required.

Value priced charging is where you take the time to understand the value to your prospect of what they’re asking you to do, and price the project accordingly – you’re looking outwards, at the value to your customer of the solution you deliver.

This shifts your thinking to a new way of looking at the relationship with your customers.

It’s both tough and scary at first to make that shift, but the more experience you gain, the better you will become at it.

The value priced approach enables you to improve your productivity and, therefore, profitability, because it breaks the link between price and time.

If you’re keen to improve your profitability, embracing the value priced approach is something you should consider, and the first link below goes into it in some detail.

This week’s links

This week’s theme is on pricing.

The first link takes you to a series of 6 articles, each one a 4 – 5-minute read, that show how value pricing can be used to increase your business’ profitability.

I’ve also linked to articles on how to price workshops, how to price services and a comparison of hourly rate billing versus fixed price billing.

How I realised that hourly billing is nuts

This link takes you to the first in a series of 6 articles (a total of about 20 minutes reading time) by Jonathan Stark, on why hourly billing punishes productivity improvements, and restricts growth and earnings.

Click the ‘To be continued’ link at the bottom of each page to get through the sequence:

How I realised that hourly billing is nuts

How to formulate a price for a workshop

Susanna Rantanen takes us through the process she uses to price workshops for her clients.

There are some great reminders of things to include, that are easy to overlook:

How to price your workshop

How to price your service

This article on the Jobber Academy goes into detail on how to price for services.

It goes through a set of pricing terms and then sets out a step-by-step guide on how to price your services:

Service pricing for small business owners

Fixed price vs hourly rate billing

This is another article from the Jobber Academy site, and considers the differences between fixed price and hourly rate billing:

Fixed price billing vs hourly rate

Fun flashback

A gentle ballad this week: ‘How Good it Can Be’ from The 88.

It comes from the The OC, which I didn’t rate as a TV series, but which did have a good music soundtrack:

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Cheers,

Martin Malden

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Website owner: Martin has been working online since 2006 and focuses on two areas: 1) affiliate marketing and 2) designing and building websites based on WordPress. He has his own WordPress agency, and serves clients in Hong Kong, Australia and the UK.