Is value-based pricing the best pricing strategy for your business?
Does hourly billing for accounting and bookkeeping still make sense? Probably not!
With cloud accounting software and the rise of remote work, hourly billing is becoming redundant, and value-based pricing and fixed-fee pricing are on the rise. But of these pricing models, which will lead the way?
- Let’s Define the Terms
- Why Value-Based Pricing? Why Fixed-Fee Pricing?
- My own experience with Value-Based Pricing
- Testing Fixed Fee pricing
- Our Journey with Fixed-Fee Pricing
- The Turning Point – Giving Ourselves Permission To Experiment
- The science of pricing
- Keeping the goal in mind:
- Comparing Value-Based and Fixed-Fee.
- A Final Word
- It’s Down to a Matter of Choice. What’s Yours?
- Frequently Asked Questions
Let’s Define the Terms
Value-based pricing places emphasis on what each customer is willing to pay. It asks, “what is it worth to the customer” instead of “how much does it cost to deliver?”
A fixed-fee pricing method is setting one price across the board. The question is, “what price will allow me to serve the maximum number of clients profitably?”
As an example, here’s our current Bean Ninjas pricing table for Australian customers:
I have experience with both pricing systems, having utilised Value-Based pricing in my consulting business, and having adopted Fixed-Fee Pricing with Bean Ninjas.
Why Value-Based Pricing? Why Fixed-Fee Pricing?
The promise of value-based pricing is that you can charge more per client. That’s the appeal, and that is the motivation of many accounting and bookkeeping firms for adopting value-based pricing. Determining what that magic number comes at a price – it involves a time-intensive scoping process.
Winning theses deal requires strong technical and communication skills. Not everyone has both of these skills – you need to be able to persuade your client that the price you propose represents the value of the price of the work for them. You need to be able to justify your cost and negotiate if necessary.
This is time-consuming, and you may have to compromise from your best position. The benefit of this process is that detailed scoping creates a deep understanding of the client’s needs and deepens the client relationship.
My own experience with Value-Based Pricing
An example of Value-Based Pricing from my consulting days: I worked with a business who wanted to replace an under-performing Finance Manager, who earned a $70k per year salary. I quoted $35k per year to complete the work. The client agreed as the price was more than fair due to the cost-saving to him.
My profit on this contract was attractive and well above many of my other clients, but this came at a cost… the file required a significant amount of my time to understand the client’s business and their accounting practices and systems. To perform the work, it was necessary to have a deep understanding of the businesses operations.
This is a good example of a successful value-based priced transaction – with a win for both the client and the bookkeeper. But it also illustrates the challenges of creating value-based pricing where the business truly wins.
I found that whilst I was winning value-based transactions, it was difficult to delegate the custom project work to my team, so my time commitment was significant. I was working harder than I was as an employee, I’d taken on more risk and for little tangible benefit. This was a wake-up call for me.
I realised that I wasn’t capitalising on the repetitive processes involved in creating client solutions. I was providing each and every client with a bespoke solution! We needed to find a niche and focus on solving problems for that market, rather than trying to solve problems for such a broad range of clients.
Testing Fixed Fee pricing
If you know our story, you know I originally founded Bean Ninjas with my business partner Ben. Bean Ninjas was our way of building something scalable – taking customers who had similar needs and creating a standard solution to a defined set of problems. Eliminating the hand-crafting and delivering a defined solution to a specific market.
We implemented fixed-fee pricing from the very beginning. This reduced the time spent on sales and left us with more time for improving our systems and building a team. It also created an opportunity for our team to focus on improving the way we deliver the standard solution. The great thing about when you do something over and over is that – you get better at it!
Think of the first time you ever got behind the wheel or a car? Were you nervous? Did you go through the checklist of things to check before you turned the key? Did your heart flutter at busy intersections, or 3 point turns?
Yes!! And now that you have performed those actions, thousands and thousands of times – are you better at them, have you found a way to do things more efficiently? Yes!!
That’s what it’s now like for our team. They have delivered the same bookkeeping solutions to a similar set of customers over and over. So, they’re getting pretty good at it!You may charge more with value-based pricing, but is it the best option to grow your business? Click To Tweet
Our Journey with Fixed-Fee Pricing
Bean Ninjas was a side project at first.
The initial pricing tiers were $99, $189, and $374. We chose $99 as the minimum price to mirror WPCurve, which largely inspired us to start BeanNinjas. I think the $99 tier was instrumental to our success because it helped us get out and talking to lots of different customers and potential customers.
We priced one tier at $374 to anchor the $189 tier. We hoped that the $189 tier would draw a lot of sales. One thing that surprised us was the number of people who actually bought the premium tier.
That made us think.
Test Higher Pricing
We later changed the tiers. We kept the $99 and $189 tiers, introduced a $289 tier, and changed the premium tier to $469. It soon became clear that the four options were too much.
People love having three options. It’s easier for them to compare; it helps them make a quicker decision. There’s a grey logic that goes with three options. You intuitively know the options are small, medium and large; then, you can drill down on the detail.
Pricing is all about experimentation, about finding out where to meet the market. Since implementing the above pricing, we have dropped, reinstated and again dropped our old friend, the $99 tier.
A major take away from the pricing tests is that our MRR divided by the number of customers steadily increased. In other words, our average customer was buying more expensive plans. Our clients’ needs were becoming more sophisticated as we grew and developed our product – we were in tune with the developing needs of our clients and delivering what they needed.Pricing is all about experimentation. Click To Tweet
As we continue to build our brand awareness, and clearly define our place in the market, we removed the $99 tier once and for all. That simplified our pricing tiers.
The $99 tier allowed us to launch successfully and brought many clients in a critical growth period whose needs matched that price point, but we have now outgrown that market.
As we strive to improve our quality of service, to invest in systematization, to attract and develop a world-class team, we need a higher MRR to fund that investment and to do that – we needed to start charging more. Our pricing tiers have evolved to what you can see on our website today.
Related reading: The story behind our new bean ninjas logo and branding guidelines
The Turning Point – Giving Ourselves Permission To Experiment
Value-based pricing has the advantage of discovering how each client values your service. Fixed-fee pricing limits the opportunity to charge exactly what you’re worth but does make it easier to scale the business.
I think the best way to improve the way you price your product / service is to experiment. Talking to customers and understanding their pain points and how they value certain services. Then test, learn, and reiterate. Over time you will develop a better sense of the market and how to price your product / service.
This idea draws on our experimentation and experience as well as what is the current theory in relation to price setting.
The science of pricing
I recently discovered a fascinating talk about the science of pricing – I wish we’d had this before we started. It’s given by the science of pricing. It’s given by an eBay VP and part-time professor at Stanford Business School named Michael Dearing and identified pricing as a judgement problem not a math problem.
He identifies that traditional economics demand and supply curve pricing doesn’t perform well where demand is uncertain – like in developing markets for new products or where decision making is only partly made with reason – which is often (think; items placed by the grocery checkout; “2 for 1”; the “I didn’t really need it, but it was on sale”).
Most of the time, as humans, we handover decision making to our intuitive brains and only call on our slower, greater cognitive load brains when we don’t have a reflexive action, created by a prior similar experience to draw from – we pull out the heavy slow but reliable analytical brain only when we need it.
Otherwise, we would never leave the house – we would be analysing the best method to lock the door – every. single. time.
This is essential psychology to know if you are setting prices.
So how do you appeal to the intuitive brain? You pay attention to substitutes and complements. What might your buyer buy instead of your product? What will it cost them? What else do they need to buy to make your product work? This gives your buyer has a reference point, so the intuitive brain kicks in.Pricing: Pay attention to substitutes and complements. Click To Tweet
You focus on value-based pricing. You do away with the idea that price should be cost plus margin, but on the perceived value to the buyer. This is the fuzzy area, this value to the buyer is not rational, it can include feelings of prestige, a buyer doesn’t always want the cheapest of something (think about an engagement ring! “Honey, I got the Best price for this!”), the appeal of the brand, the buying of a reliable car, or a “cool” cap.
You utilize 3 pricing tiers, the good, better, best system – like we do at Bean Ninjas and many digital products that came before us and will come after us.
Notice that both Value-based Pricing and Fixed-fee Pricing both appeal to this science of pricing. So how do we move forward or choose a preferred method?
Keeping the goal in mind:
Let’s take another look at the benefits of value-based pricing. The top three benefits are:
- decoupling time from money – you are being hired for the job from start to finish, not the hours.
- incentivizing efficiency – you get through the job as efficiently as possible, to get to the next.
- attracting and retaining talented employees – talented staff seeking high-quality work – career-building deals.
When I considered these points and how we wanted Bean Ninjas to play in the market, it occurred to me that fixed-fee pricing can achieve those same goals.When Is Value-Based Pricing Justified? Read this to find out. Click To Tweet
Comparing Value-Based and Fixed-Fee.
“The Dream”: Value-Based Pricing
- It separates time from profit
- Value pricing lets you use your firm’s knowledge and experience to guide your clients’ business decisions. You’ll be compensated well for doing so
- An example is how consultants in the accounting industry price their work in relation to the Research and Development tax offset. Accountants often charge a % based on the grant amount obtained from their clients
“The Vanilla Offering”: Fixed-Fee Pricing
- The firm charges a fixed cost for a specific service
- The cost stays the same regardless of the amount of time taken to perform the task
- It does not attempt to discover each customer’s willingness to pay. Traditionally, the price is usually set in relation to the cost of inputs
Value-based does decouple time from money. But it’s tied up in selling. The sales model is attractive, but sales skills are necessary. You will have to invest in those sales skills and the time to scope the client’s business.
Value-based pricing requires time-consuming sales cycles and doesn’t necessarily lead to predictable revenue – even when done correctly.
Fixed-price means that you might be forgoing those golden clients for a larger piece of the pie to serve many more efficiently. It brings transparency, and clients can see the value you are providing.
This is why Bean Ninjas decided to go with fixed-fee vs value-based pricing.Value-based does decouple time from money. But it’s tied up in selling. Click To Tweet
A Final Word
Fixed-fee pricing saves you time and brings transparency but may dent your profits (especially without the “value-based” mindset).
Value-based pricing offers higher profit per client, but if not executed well could leave clients feeling like they have not achieved value for money.
It’s Down to a Matter of Choice. What’s Yours?
Would you be willing to try a new pricing strategy? Which has worked best for your business? Let us know in the comments below.
Frequently Asked Questions
Still have questions about fixed-fee versus value-based pricing and which is best for your business? Read on to find the answers to some of the more commonly asked questions about the two pricing methods.
Hourly versus value based pricing – which is better?
No matter what pricing model you use, you really need to understand how time is invested in a project, as well as the basic rate that needs to be charged per hour in order to make a profit. Value-based pricing allows a client to budget properly because they know in advance what the total cost will be.
Creative service providers can also systematise their work and remove time from the conversion. When you choose hourly, schedule issues may arise, clients may request time estimates, and discussing your hourly rate with clients can ultimately cause problems.
What types of fee structures and price metrics are used in value-based pricing?
What is cost-based pricing?
Cost-based pricing is just one of the pricing methods of determining the selling price. The price is determined by adding the profit element or percentage to the cost of making the product.
Does deferred revenue go on the cash flow statement?
Most cash flow statements will use the net income of a company as the starting point. It is the revenue minus the expenses. Deferred revenue, however, doesn’t show up on the income statement, so it needs to be added back in.
How is value-based pricing calculated?
For value-based pricing, you need to determine what it is your customers truly value. To do this, you have to communicate with your customers by asking open-ended questions that require long answers. It is also a good way to gauge just how much they may be willing to pay for your products.
What does a fixed fee pricing model actually look like?
This model guarantees a fixed budget without much regard to the time and expense of the project. The advantage of this model is allowing the client to plan and set a more exact budget. This model is best for smaller projects that have clearly outlined requirements.
What price system is best for a creative business?
When you own a creative business, the biggest variable in pricing is the client. Many people debate between value-based pricing and hourly pricing. Hourly pricing is generally easy to understand and is a simple pricing model. However, it can be a challenge to discuss hourly pricing and scheduling with clients.
No matter what you choose, keep things as simple as possible, and be confident in the pricing model you are going to use. Some creative businesses even choose to do a little of both pricing models.
What is competition-based pricing?
A competition-based pricing method is one that uses competitors’ prices for the same product or a similar product as the basis for setting the price. It is often a benchmark used when pricing out products. The business can choose to sell at a price that is either above or below that benchmark number when they are using competition-based pricing.
What are the two types of value-based pricing?
The two types of value-based pricing are good-value pricing and value-added pricing. Good value pricing offers the right value of quality and good service at a fair price.
What is the key to customer value based pricing?
You have to use the buyers’ perception of value as the key to pricing under this particular pricing model.
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