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Stop buying hours. Everyone loses.

In modern times, most service-based industries base their pricing system on hourly rates. As with every pricing strategy, there are pros and cons, but as the product provided by service companies isn’t tangible, it makes it difficult to provide these at an amount that is fair, but still yields a decent margin to be worth the resources spent.

In general, clients pay for time and labour in addition to usage of equipment, personnel or other items required to provide a service or product. But rather than seeing the costs of services as an expense, clients need to realize that when it comes do marketing, advertising or design, these costs are an investment in their brand, their exposure or their business as a whole.

Wikipedia defines value-based pricing, or value optimized pricing, in terms of a pricing strategy:

“Value-based pricing sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices.”

It holds true that value-based-pricing is most successful when products are sold based on emotions (fashion), in niche markets, in shortages (e.g. drinks at open air festival at a hot summer day) or for indispensable add-ons (e.g. printer cartridges, headsets for cell phones), but how do does value based pricing compare to the world of marketing, advertising and graphic design?

In order to understand the implications of value-based pricing, let’s look at three pricing strategies commonly used by agencies and studios, namely time-based pricing, fixed-fee pricing and value-based pricing:

With time-based pricing, agencies/studios calculate every minute worked on a project and break that down to your hourly rate and charge whatever the formula states they should. This model can be accurate provided a client is aware each and every minute you work costs more. Therefore each revision will increase fees. Some clients are fine with this, some freak out because they didn’t understand the pricing structure.

Fixed-fee pricing or project-based pricing is where you calculate a price for each and every service you offer and essentially work off of a price sheet. This way you know a brochure costs X amount every time, a 3-page web site costs Y amoiunt every time, etc. This pricing model isn’t very flexible and as projects can become bigger than intended, with more changes and revisions needed, this becomes a problem. So it can result in those difficult conversations with clients telling them to stop with revisions or pay more.

On the other end is Value-based pricing. This model doesn’t adhere to any set pricing or per hour structure. Value based pricing prices services according to their perceived value or importance to the client. This one is a bit tricky. Essentially it’s the old “If you charge more, clients think you are worth it.” model. You can often use this model to increase revenue without increasing workload. This is why “Name Brand” items cost more than generic items – a perceived value when in reality the items or workload are / is the same. For a value-price system to work however, the value provided to the clients needs to be equal to- or exceed the costs that are charged for.

For a value-price system to work however, the value provided to the clients needs to be equal to- or exceed the costs that are charged for.

Anybody can design a logo. But a good logo requires research and understanding. In addition, a great logo often is only the result of a creative and though-driven apprach. Exploring several options, creating a harmonised and unique look and feel, a symbol with meaning, not just fancy words or colors to represent certain values of a business. Brands that look professional in gereral are seen as being professional. In general, value based pricing strategies have several advantages over fixed-fee or time-based pricing strategies. Some advantages for clients include:

  • Costs are usually close to what clients are willing to pay
  • Value-based pricing is often more affordable than time-based cost as not all time is calculated
  • The pricing is more flexible and fair as “you get what you pay for”

As mentioned above, with value based pricing, “you get what you pay for”, and this notion is true not just in the service industry. One simply can’t expect to purchase a brand new 2012 BMW M3, full of the latest technology, safety features and gadgets for the price of an old second-hand VW Beetle that isn’t made of gold. In the world of marketing, advertising and design, the same principle applies. A designer can spend hours on end creating a website full of flashy buttons, big wordings and images and animated banners. This website is then passed on to a developer that codes the site, turns the static design into a fully functional website. An axcessive amount of time goes into this. But if the site looks shoddy and cluttered, is slow, hard to use or navigate or is filled with large irrelevant photos or images, the website isnt of much value to the business and charging for every minute spent on something that is essentially not a good investment for the customer, is considered a ripp-off.

A good design that works however, with toughtful created pages and easy-to-access content, product information or simply contact details, now that is of much value to the business. In the business-to-business environment, companies must know how their offering helps customers, that is other businesses, become more profitable.

Value-based pricing is something like the holy grail of pricing as is evidenced by the expansive literature on this topic (see Amazon). The principal difficulty is that the willingness of the customer to pay a certain price differs between customers, between countries, even for the same customer in different settings (depending on his actual and present needs), so that a true value-based pricing can be tricky, and sometimes simply not possible, but in most cases, the advantages outweigh the disadvantages. However, despite being difficult in implementation, any production and any market positioning should have a consideration of the value the product brings to the customer at the very early stages of product development and is, in fact, employed by many companies.

– An extract from Stack Exchange.

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