Pros and Cons of Value-Based Pricing: What You Need To Know
A hot topic in professional services, creative development agencies and freelance work is “fixed rate” vs “hourly”
In this article, we’ll cover some of the advantages and disadvantages of value-based pricing.
Charging an hourly rate can feel less scary than asking for a higher priced fixed rate package because you know you’ll be compensated for every hour you spend on a project.
But there are drawbacks to trading time for money – not the least of which is that it limits your earning potential.
Focus on results, not time
Here’s the thing about billing by the hour: your clients will focus on how you’re spending your time rather than the results you’re achieving.
At the same time, hourly billing opens you up to comparisons with your competitors, who may charge a higher or lower hourly rate.
What you always want your clients to focus on is the value you bring to a project – which is why another term for fixed rate packages is “value-based pricing”.
Relieve your clients of invoice anxiety
Your clients will, without exception, want to know what your services cost up front – especially if you’ll be working on a large project and the investment will be significant.
Offering a fixed rate package makes it easier for a client to say yes to your pitch. Knowing the final cost in advance allows them to more comfortably and confidently plan, budget, and invest in your services.
Ultimately, value-based pricing will also free you up to do your best work knowing you’ll earn a fair rate for your services with the potential to increase your earnings.
Why fixed rate pricing = higher profits
In some cases, freelancers charging by the hour don’t feel as motivated to work quickly and/or efficiently. With a limited number of working hours in a day, charging by the hour – even if you’re billing for more hours – limits your earning potential.
Not surprisingly, many service providers who trade hours for dollars eventually end up burning out trying to earn more money.
When you switch to fixed rate packages, it’s in your best interest to find ways to work more efficiently so you can earn more for your time – at the same time, you make your clients happy by getting the job done expediently.
All pricing strategies have risks
The downside to fixed-rate pricing is that some projects will be more profitable than others – and others less so – depending on how much time is required to get the job done.
One way to reduce risk is to ensure you and your client are very clear on the deliverables included in the project at the outset and to always have your agreement in writing.
Inevitably some clients will try to expand the scope of the project and may forget the outcomes originally agreed to – particularly if the project takes half a year or longer to complete.
With a value-based pricing model, you’ll win some and lose some – but you’ll lose less with time and experience, and in the bigger scheme of things, it will likely be worth it.
If you’re ready to switch to offering fixed rate packages, the first step is to understand the value you already offer your clients.
Think broadly about your expertise, training, professional qualifications, and years of experience. Then create your first draft of your fixed rate package offerings.
Being able to communicate exactly how you can solve your clients’ problems will make it easy for them to see how valuable your work is and help you establish value-based pricing.
Get this part right and your clients may even feel they’re getting a deal when they see the price tag for all you have to offer.