I’ve been working on a better understanding of value pricing for almost a year. It’s a pretty popular pricing concept currently for independent professionals wanting to break out of the hourly billing trap. Jonathan Stark is the lead authority on value pricing. He and Rouchell Moulton host a regular podcast called The Business of Authority which I highly recommend. In a recent episode, they covered the topic of positioning and value pricing in depth. It was excellent to the point that I went back and took copious notes with podcast annotated times. I’ve shared this with Jonathan, but I thought might notes on their podcast might be helpful to others as well.
Podcast Link: Positioning + Pricing = Profits
MY NOTES ON THE PODCAST
1. The importance of the link between positioning and value pricing and visa versa that you mention (@1:48) cannot be understated. It’s fundamental to both concepts functioning effectively, and a foundational understanding for anyone introduced to either concept (value pricing or positioning). If a “newbie” misses this relationship, then both concepts will break down for them later in their journey.
2. I liked the distinction you made between an estimate and pricing, and how that impacts the client…they end up viewing your hourly estimate as a price because they have no other choice (@2min:26sec). What I don’t understand is why with an estimate, clients have to make a buying decision. Couldn’t clients evaluate an estimate just like a price? I.e. This project is $500 price vs this project estimate is 5 hours @ $100/hr. Sort of the same evaluation for the client, correct?
3. Hourly billing focuses the client on the project inputs (hours, effort, materials) whereas value pricing focuses on the outputs (how the product/service will impact the customer, what is produced, etc.) (3:47)
4. Hourly billing gives clients a point of improper/false comparison with other service providers. (4:31)
5. Value Pricing is most effective for longer projects (3-6 months), collaborative with client, milestones, end defined, success criteria (5:35)
6. Your value price should be less than total value (worth) of the project to the client for your value price to be acceptable to the client (8:20).
7. If your value price offering is perceived as the same thing as a lower-priced competitor, then the client will pick the lower-priced competitor. This is where positioning and differentiation of your services make your value price more compelling than a lower-priced offering of the same service by a competitor. (9:13)
8. Determining your meaningful differentiation to the client is key to positioning and making your value price effective. (12:20, 12:54)
9. Your expertise should allow you to guarantee certain things to the client in your value proposal because you’ve delivered those outcomes over and over (18:22).
10. Attracting people that want you, no just the thing that you do (19:05). That’s a client paradigm shift for individual experts that they should be aware of if they decide to become more than themselves or farm out/collaborate some of their work. For example, we have a friend who is an excellent tax accountant who worked solo, saving a family member $20K one year in taxes. I recommended her to everyone I knew. Then she got busy (obviously) and instead of realizing her value and pricing accordingly, she expanded her business and brought on additional, less expert help. Now I have less confidence in her service. I don’t know who exactly is looking at my taxes and I don’t know how much time she has to devote to mine. Her positioning and pricing leverage was diluted even though her expertise hadn’t changed. You cover this at (20:45).
11. Productized services for a short duration, repeatable engagements (20:00). This will commoditize your expertise by nature of creating productized services. The only way to keep your expertise from becoming commoditized when productize a specific service is to: ? emphasize your uniqueness (if you have it). Also, there is a danger of clients cherry-picking your productized services to create the “whole” of your custom, higher-value service. I am guessing that you want to make sure this summing-up-your-productized-services-to-equal-a-whole-custom-service can’t happen. So, you leave out of your productized offering key services that make up your custom offering.
12. Hourly billing punishes experience (and expertise and efficiency) (24:14). Mic drop!
13. The “why” of value pricing: When you focus on flushing out the value to the client, then you link yourself and the client together on a shared outcome. Your goals are now aligned and you are in a stronger position for the future as well (25:40). Then you both want to finish fast and well. The hourly biller will only want to finish fast, but not necessarily well and the client relationship then becomes transactional and commoditized vs collaborative and unique (value-based).
14. Can you value price the creation/construction of something like a home or building? Maybe to some extent a unique building (like a football stadium for an NFL team), but it would be harder to value price a home unless your positioning was strong as a unique builder/architect. (27:00)
15. An interesting observation by Rochelle about agencies who sell “activities” on retainer, but because their “machine” is still built around hours, neither they nor the client are completely happy. I think this same dynamic can happen when the independent professional makes the switch with a long transition from hourly billing to value pricing.
16. (41:10) “The path forward is bigger and better clients.” I think the end goal of positioning and value pricing must be defined by each independent professional. For me, bigger clients are not an end goal because I don’t want to deal with all the politics, bureaucracy, coordination. I do want better clients but must evaluate what better means to me. So maybe if I’m an orthopedic surgeon I want to move up from the senior citizen to a professional athlete (“better”), but I don’t want to be the team surgeon for the entire team or league (“bigger”). Defining the end goal of value pricing and positioning together for your professional career isn’t something I hear talked often.
17. (36:15) Radical vs focused positioning. Need more exploration on this topic.
18. (37:14) “Leap of Faith” to move to value pricing or better positioning is a process that involves both revelation of a true (say, seeing that hourly billing is nuts) and an act of courage or risk transfer to do it.
19. (38:30) Productized expertise has its benefits as you mention, but it also leads to commoditization of that expertise by nature.