Value based pricing
Many contractors, myself included, create projects estimates based on amount of effort * hourly rate + margin + overhead. The problem with this, is you are easily undercharging for projects which may provide a lot of value for the client. Value based pricing focuses on understanding the benefits the project contributes to the client, and pricing accordingly.
Value based pricing falls into two buckets.
- The value of the skills you are providing may command a much higher rate than a market-priced generalist
- The problem you are solving may result in a beneficial impact to the companies financials
In both cases, it is important to understand the effect your work has on the companies ability to earn or retain revenue. By knowing these factors, you increase the ability to charge a higher amount based on the expected outcome of the project, rather than just the hard cost + margin.
For example, a company looking to build software that improves customer conversion rates. After careful analysis, you conclude this software will increase revenue by $100,000/yr, but will only take you 2 weeks to build.
Assuming a rate of $100/hr, 8 hours a day, 5 days a week, and a 50% margin, you get
That’s $12,000 to help a company earn $100,000 MORE a year.
Value based pricing dictates that by understanding the value the company is receiving from your solution, you should price as a factor of their net gain. Watch his short video to learn more.