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Value-Based Pricing: What It Is and When to Do It
Many productized services businesses adopt cost-plus pricing because it’s a simple way to determine how much to charge for a service. But a cost-plus pricing strategy can be ineffective because it only accounts for production costs — like software subscription fees and employee salaries — and ignores the value that clients get from your services.
Value-based pricing is a better option for a productized services business because it increases your brand value and allows you to focus on quality over quantity. In this article, we will show you how value-based pricing works for productized services businesses, plus real-life business examples you can learn from.
What is value-based pricing?
Value-based pricing means pricing your productized services based on their qualitative benefits to the customer — rather than how much time or resources it takes to deliver the service. For example, instead of charging per word or by the hour for writing an article, an agency can fix a value-based price because of their subject matter expertise, search engine optimization knowledge, and overall industry clout.
Types of value-based pricing
Productized businesses can implement two types of value-based pricing:
Good value pricing
A good value price is based on the actual quality of the service you provide to your clients. For example, an experienced web developer who specializes in building eCommerce websites might charge more than a generalist developer for an eCommerce website project because of niche expertise.
Consider factors like experience, results you’ve achieved for past clients, and specialization when setting good value prices for your services.
Businesses set value-added prices based on the extra value they think their services deliver to clients. For example, if you're using an advanced tech tool stack to build a client’s website, and this tool stack simplifies post-development website management, you can set a higher fee for this project using value-added pricing.
Clients might also suggest value-added prices. For example, if a client wants a faster turnaround time for a project, they might offer to pay an additional fee.
Advantages of value-based pricing
Switching to a value-based pricing strategy can help you scale revenue for your productized services business.
There’s no pricing ceiling
With value-based pricing, you can set your prices as high as you want, and you can also raise them easily. This allows you to earn higher profit margins, and easily scale revenue and cash flow for your productized business.
Most clients are willing to pay way above the industry average for the actual or perceived value of a service or product. For example, Lamborghini recently announced that all its cars were sold out until early 2024 — even though one Lamborghini costs about $200,000.
It helps you focus on the impact of your services
Instead of dealing with the actual cost of providing a service, you can focus on doing your best work — no matter how many resources are required. This improves the quality of your output.
For example, if you’re charging by the hour to write a blog post, you might extend the writing process (from one hour to three hours), so you can earn more money. With value-based pricing, you don’t need to bother about this — you earn a fixed amount no matter how much time it takes to write the piece.
It makes your pricing more predictable
At the start of the project, you and the client already know how much they’ll pay for the service — no billing surprises. In other words, the client already knows they’re getting “X number of services for X amount of money.”
Predictable pricing reduces pricing conflict that can happen with quantitative pricing methods, like pricing a project by the hour or per word. For example, if you’re working at an hourly rate, the client might set an unrealistic deadline — just to avoid paying more money, even when it’s required for the project’s success.
Disadvantages of value-based pricing
Value-based pricing isn’t the best fit for all productized services businesses.
It is complex
Unlike quantitative pricing methods, there’s no straightforward method for determining how valuable a service is and how much you should charge for this value. For example, a blog post worth $50 to one customer might be worth $350 to another customer and $1,000 to the next person.
In the case where a business’s notion of value is very different from what customers expect, the business might end up pricing its services out of the market, leading to a reduction in sales and customer acquisition.
It requires lots of time and resources
Because value-based price points are subjective, you need to carry out detailed market research and audience analysis to help you make an informed decision. But this can reduce your business efficiency.
Market research involves gathering primary and secondary information from your target audience to understand their needs and how much they are willing to pay for a service that solves those needs. You’ll need to conduct surveys, interviews, and focus groups and synthesize all of the data for valuable insights — which takes time and resources.
It reduces your target market
Typically, value-based pricing reduces customer demand because only a few people can afford services at a higher pricing point. This reduces your target market size and makes customer acquisition harder. For example, you might have to invest in more expensive marketing channels to get your services in front of the people who can afford them.
Examples of productized businesses implementing value-based pricing
Want to adopt value-based pricing for your productized services business? Here are some examples to inspire you!
Portal is a client collaboration system that allows agencies and other productized services businesses to effectively manage the end-to-end project execution process. When you add a client to Portal, you can share files, send messages, receive payments, and manage client interactions easily.
Portal is significantly more expensive than other client management systems because of how it supports project execution from start to finish. It offers three value-based pricing packages — Standard, Professional, and Enterprise. The Standard Plan is the cheapest at $59 per month for a single user, and it has basic but functional features. Customers who want more value can opt for the Professional or Enterprise plans to access more features like third-party extensions, white labeling, and custom subdomains.
Chatty.so is a freelance marketplace where businesses can find and hire top-notch writers and editors. Clients provide project details, and Chatty matches them with the vetted freelance talent in their pool to provide the required services.
Chatty has an interesting value-based pricing model. Instead of prescribing standard prices and packages, it allows clients to build custom packages that suit their budgets. Chatty also provides pricing suggestions to guide clients, so they can make informed pricing decisions. After building their custom packages, clients see all of the pricing upfront for full transparency, which limits pricing conflicts.
Founded by Garrett Smith, GMB Gorilla is a productized services business that helps local businesses set up and optimize their Google Business Profiles to improve search engine visibility. Its services include Google Profile Management, Google Profile Optimization, and Google Business Profile Support.
GMB Gorilla has fixed value-based pricing of $350 per service for each of its offerings.
Vidpros is a fractional video editing service. For a monthly fee, Vidpros’ clients get professional video editors who can help produce high-quality videos within a short time frame — instead of hiring a full-time video editor in-house.
Vidpros has two pricing tiers — The Vidpro and The Agency/White Label plan. The Vidpro costs $700 per month, and it’s ideal for individuals and solopreneurs who require on-call video editing support for their projects. Larger clients who want to offer video editing as a service but do not want to hire a video editor can outsource this service to Vidpros. They only need to subscribe to the Agency Plan, which costs $2,000 per month.
Campfire Labs is a content marketing agency that helps SaaS and tech companies create high-quality content for education, marketing, and sales. It supports one-off projects and flexible retainers depending on the client’s needs.
The one-off projects are priced at $15,000 per project, while the retainers fall within $5,000 to $10,000 per month. Clients can also state their budgets to have customized packages created for them that are in line with their goals.
When is value-based pricing the best option for your productized services business?
The best time to implement value-based pricing is in the early stages of your business. At this point, customers are still learning about your services, and it’s a lot easier to convince them to pay for value instead of the time or resources spent on the project. If you’ve been in business for a while, and you suddenly pivot to value-based pricing, you will lose customers and disorganize your business processes.
How do you prove your services are valuable when you’re just starting out? You can offer discounts on pricing or pro bono services in exchange for client testimonials, customer feedback and real-life results. Once you have these, you can pitch new customers and get them to pay your actual fee.
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