May 19, 2017
Ditching Hourly 024: Value Pricing Cuts Both Ways
Back with another episode of DH:
TRANSCRIPT:
Hello! and Welcome to Ditching Hourly. I’m Jonathan Stark.
Today, I’m going to dispel the misconception that value pricing is a license to print money.
Value pricing cuts both ways. It is not a magic wand that you wave and suddenly poof! you get to charge more for projects.
value pricing - as the name indicates - is the practice of setting a price for a project based on the value that the project delivers.
In this model, the price that you set has to be lower than the perceived value in the client’s mind. Otherwise, they will have received a negative ROI.
Here’s an example:
Alice from Domino’s Pizza approaches you to design and build an event micro-site for their upcoming super bowl promotion. It’s a basically a fancy web page. You have a Why Conversation with Alice, and agree to an objective for the project, metrics to gauge progress toward the goal, and a rough value to the organization for the success of the project.
In a situation like this, it’s conceivable that value to Domino’s might be in the seven figures (or, that failure would cost them seven figures). If that’s the case, you could almost certainly sell the project - i.e., building a single web page - for $100k. Even if it took you 100 hours, you’d be making an effective hourly rate of $1000
Here’s the counter example:
Bob from Bob’s Pizza approaches you to design and build a website for his single location pizza place. He wants all the usual restaurant stuff: online menu with pictures, info about the restaurant, contact info for calling in an order over the phone, location of the restaurant with a fancy interactive map, and oh by the way, online ordering that accepts all major credit cards, apple pay, google wallet and paypal. And while you’re at it, could you also do one of those pizza trackers like dominos has that sends updates to the customer as their pizza is prepared and delivered?
You have a Why Conversation with Bob. The objective, metrics, and value of the project are hazy (“my brother in law told me we should get a website, so I called you”). Bob has no idea how much the website might increase sales, never mind other intangibles like brand or goodwill. You push him on it and has guesses that the site might increase his sales by a few hundred bucks a month. And to be honest, Bob says, if it did much more than that, he wouldn’t be able to keep up with demand because they’re already crazy busy keeping up with walk-in traffic from the local college.
Would Bob agree to $100k for the project? Heck no. He prolly would not even agree to $10k. The trouble is, Bob’s perception of the project value is very low. If he paid more than a few thousand bucks for all that work, he’d feel like he was losing money on it.
So...
For the Domino’s project - where the labor intensity is low, but the perceived value of the project is high - value pricing is a perfect fit.
For Bob’s Pizza - where the labor intensity is high, but the perceived value of the project is low - value pricing doesn’t work.
What do you do for Bob? Bill him hourly? NO!
HE DOESN’T NEED THE WEBSITE HE DESCRIBED.
You either
1) Reject the work and spend more time try to attract clients like Dominos
OR
2) Prescribe something else for Bob where the labor intensity for you and the perceived value for him are not out of whack. Maybe something like a facebook page, or a simple single page landing page for the business so at least they have some basic online presence.
Yours,
—J