Thoughts on Value Pricing
Had a call with my friend K. just now, and it helped me clarify some principles of value pricing. If you are not familiar with the idea, it’s that you don’t price your offering on the labor of materials costs, you price it on the value to the individual purchasing. (Which can be many muiltiples of the labor and materials costs).
Factors making me more willing to pay based on value, not a going rate:
- Confidence strongly do I believe you will be able to make the result I am paying for, happen?
- Scarcity rare do I believe your ability to make this thing happen is (how many alternatives do I perceive there to be)?
For example, let’s say I stand to make $10M, and all I have to do is give you $1M, to get the $10M. That sounds good, doesn’t it? Of course—if it were an absolute sure thing (confidence), I will be likely to pay. On the other hand, let’s say the service is web hosting, to keep our website up. We make all our money from our site—about $10M a year. Well, I’m still not going to pay you $1M for web hosting, beause I know I can get web hosting anywhere—it’s a commodity (no scarcity).
On ther other hand, if you say you can perform SEO services for me that get me ranked #1 for my keyword, and I am confident you can, and I don’t believe most anyone else can (scarcity), I might be happy to pay for it!
Comparison
The big factor here is comparison. How many different points of reference do I have? How much can I “itemize” this thing? Can I break it down into components of labor? Because if I can, I am unliikely to want to pay more for that labor.
This is why you want to be seen as a member of a priesthood, or an anointed class, and not seen as a laboror of some kind. To be seen as a laborer is not desirable.
Feeling smart
I believe that one of the main things people want in terms of money is to feel smart—that they made a smart decision, and everyting is right in the world. Did they make a smart decision? That is a little bit of a secondary consideration, isn’t it? How can you know, it a world of great uncertainty?
Fairness goes both ways
Sometimes we are so worried about wanting to keep prices low, so that it is not “cheating” the client. “I could charge $10,000. Sure, they stand to make $500,000, but my labor is only worth $10,000, if I broke it down like a technician, so it’s ‘wrong’ to charge more for it.'” —But is it? Isn’t it equally wrong to be on the losing end, of deal after deal, where (a) you are creating that value for the customer, and (b) it would be very hard for them to create it some other way?
In contrast, it is disonest the way some people work—black hat SEOs, for example. They often charge people a high fee in promise of results, without any real promise of getting them the results. To the extent that someone is trading on the promise of having success, without any realistic assumption of having success, that is dishonest. And “reasonable assumption” has to be transparent, honest.