F53-061: Pricing Models - Price Based on Value, Not Time or Cost

This show is about pricing models and to make it simple, this is a podcast so we're not going to have a bunch of Gantt charts and spreadsheets and all sorts of funny business. We are going to talk about value-based pricing. For this, we're going to focus on service-based businesses as well, just to keep it nice, simple, and clean. There are basically a couple of pricing models: Value-based pricing model This is the way you value your service that you deliver to your customer based on value. That, in and of itself, is tricky and this is certainly the model I like. Hourly-based pricing model You’re trading your time for a set dollar amount. Project-based pricing model You have a certain amount of time or a certain deliverable and you deliver a project. There are benefits to all of these but I believe there are less benefits to the hourly model for the position in life I am. For someone that needs a predictable income and they need a guaranteed linear rate of what cost me $2 an hour to provide this and I know I'm making $15 an hour, therefore, for every hour I provide my service, I'm making $13. This works for some people. Looking Into Value-Based Pricing My position or argument today is that if you haven't, I hope you can or look at or consider a value-based pricing model. I don't have rose-colored glasses on. I realized that this just doesn't work for a lot of businesses. You can't just value something or price something based on value. However, there are circumstances and the businesses that do justify it, I really believe that it should be considered. I also caution you to think outside of the box a little bit. For example: The first car that rolls-off where it's sold costs way more than $40,000. You're paying way less than the first value of that car as a rolls-off. However, for the 5 millionth car that you bought, you're paying $40,000 but its cost went significantly down. In a little form or fashion, you're paying for the value-based pricing of that vehicle. If you're a service-based business, I challenge you to look at what you deliver and how you deliver it. If you're really in tune or in touch with what you provide to the customer, see if there is a way that you can base your services on value. So if you're a house painter (something that's commoditized) or someone that does roofing, it's hard to do value-based pricing. The person simply gets a roof in the house. However, if you're a disaster recovery service, the value of what you provide to them in the event of a disaster is far more than just if you were there cleaning carpets. There are opportunities for many different types of businesses to be value-based.   I look at VALUE in two separate categories: You're leaving a pain. Let's use disaster recovery service as an example. So the house floods or the basement has isolated fire, that's a negative thing that happens and you come in to fix it. I don't like to have those types of business models where I'm making money when things go bad in someone's life. It's not my style. There's nothing wrong with it but it's just not something I can deal with. So this type is the "victim," if you will. People get tremendous gain from what you provide them. You see this a lot in the consulting industry or in the architectural realm or even in the artists. You pay a ton of money to have a speaker, performer, or an artist, or an elite coach. They deliver the same message but the value they provide is much higher or perceived higher. Therefore, they demand and get a much higher premium for their time or services. So I challenge you to look at your business in that way. Another way to think about this is not to take this big, giant leap from charging, say, $20 an hour to $10,000 for you to do your thing. But what if you created a premium product or service that was only marketed to very select people who are the top of the end and was value-based? It wouldn't hurt your business but you may catch someone that's great. For example: You're a personal trainer and you have standard personal training rates. You teach people fitness and exercise and you have your standard rate card. What if you had a value-based one that is really, scare-the-crap-out-of-you expensive? Bottom line: This pushes you to be okay with a higher price but also, you're providing value to them. Think about what is it worth to this person to lose 40 pounds and be in the best shape of their life? What in their head would make them think that this is the best spend of $7,000 in their entire life? If you asked people that can afford it and probably people that couldn't, “What's it worth to you to lose 40 pounds and be in the best shape of your life? Would you pay $7,000 right now to trade a body and physique that are 40 pounds less and you're in the best shape in your life?” People would say, "Hell yeah, I would!" So I challenge you to have that same type of mentality with your businesses. Is there something that you can do that would have the same effect both for your customer and for you to challenge how you deliver your service, how you think about your service, and the value you associate it with your service? To me, one of the biggest traps is exchanging time for money because at some point in life, you're going to realize your time is so much valuable than whatever money you're exchanging and the value model works much better. Books, People, & Resources: I'm researching former professional athletes and how they transition from being an athlete or a new lead athlete into the "real world." I'm interested in hearing about their struggles, their challenges, roadblocks, successes, and everything in between. Sports has always been a big part of my life. I love them. I have a special interest in athletes and specifically the ones that have competed at the highest levels. Do you know anyone like that? If so, I'd love to hear from them. Have them email me [email protected].