The Benefits of a Value-based Pricing Strategy
This guest post was written by Keith Shields CEO of mobility services company, Designli. To learn more about Designli, visit their website.
Web development is huge in the freelancing world right now, and it pays. But if you’re not careful, you can easily sell yourself short. Sure, if you’re starting out and don’t have much work in your portfolio, it might be strategic to charge a little less than your competitors. However, if you have the skills to build a great website, then you need to charge what you’re worth.
Remember that freelancing is work, not a hobby. You probably enjoy freelancing much more than working a nine to five—otherwise why would you do it?—but the work you do should pay off. You don’t want to do a job for $100 that could’ve made you $1,000.
Plus, you don’t want to be severely underpaid just because you weren’t confident enough to ask for the rate that’s worth your time. Your clients know that a higher rate means a better product. A majority of the time, a website that costs $100 will look like a website that costs $100.
One way of pricing is by selling the “value” you create for your clients. But before we get into how to sell on value, i.e. value-based pricing, let’s look at the alternatives: hourly and fixed pricing.
Consider this: you’ve been working with WordPress for more than a year now. What used to take you a week you can now knock out in a few days. If you charge hourly, the amount of time you spend decreases as you get better and more efficient. If your hourly rate is, say, $30, then you’ll make $300 on a ten-hour theme implementation. But the end result of your labor might be a website worth $1200.
Charging hourly can be a slippery slope if you’re not careful, leading freelancers to undervalue their own time, worth, and the value of their product.
So what’s an alternative? One option is to use fixed prices. This means having a standard rate for your deliverables. For instance, you might have websites priced at a set rate of $800, or wireframes set at $200.
The problem with this model is that it assumes a website is going to possess the same value regardless of the company it’s built for or the purpose of the site. It has the same drawback as hourly projects—the website may take you three days or three weeks, but with the fixed price model, it assumes the workload and time requirements are going to be roughly the same across the board.
Considering the wide variety of web development projects you could be involved in, a better strategy is determining outright what the components of the project are, figuring how long each will take you, taking into account the value the product will ultimately supply the client, and then giving a rate based on the accumulation of that information.
But we can go one step further.
Charging hourly can end up punishing you for working quickly. Fixed-fee, while slightly better, can sometimes make your work feel commoditized.
Using value-based pricing as a freelance web developer is just that—charging for the value you give to your client, not just the time spent nor the code crunched. Ask yourself, what’s the difference between a $100 dinner and a $10 dinner? It’s not only the food on the plate, it’s the entire experience!
The same goes with web development. By creating a better experience, one that deeply understands the needs of your client and delivering clear ROI, you can create a proposal that truly delivers on the value you can create. And clients will respect that you charge for the value you provide, establishing trust as well as better terms for your contract. So how do you do it?
How to Effectively Negotiate a Value-based Pricing Structure
Here are a few strategies for figuring out what to charge, what you’re worth, and how to negotiate and communicate with a client to nab the right payout.
1. Know the Common Rates of Your Area
You don’t want to charge $10,000 for something that your competitors are charging $500 for, but you also don’t want to race to the bottom of the price slide just to get work. Your client will recognize that a lower rate means lower value, and a less successful or worthy end result. Instead, know the value of your time and energy, know what others will charge to compete with you to get that client, and charge accordingly. If you’re more experienced in web development than your average developer, then charge your rate above competitors. If you’re not so experienced but can successfully implement a WordPress theme, charge a little lower.
2. Determine the Client’s Expectations and What They’ll Get Out of Your Product
Figure out what the payout of your development will be for them. If your client is likely to make $50k/yr for a successful website, and they only shelled out $500, then you are severely missing out on an appropriate payout for your time. Once you determine what your client wants and expects to get out of a website, then you can better understand what to charge. If they expect to get more people signed up for a newsletter, but don’t expect higher sales, then your rate might be lower than if they ultimately wanted to sell something.
3. Break the Project up into Specific Deliverables and Tasks
It’s important to consider more than time in determining your going rate. Don’t charge just for the product they expect, but consider the extra work you’ll need to do, whether it be extensive research, time spent brainstorming or drawing up website wireframes, delivering several drafts for your client to review, the potential cost of a theme that’ll save you time, and so on.
4. Determine the Price for Each Task
Now that you’ve figured out all the different components of your work, figure out how much to charge for each. Communicate this to your client by all means—let them know that research will cost $500, providing a sample of your work will cost $100, and that the finished product will ultimately be worth $5000.
5. Establish a Timeline
If you develop a timeline, your client will respect your value and professionalism. Expressing your knowledge of not just what you need to do but how long it will take you demonstrates to them the breadth of the project and helps to keep you on top of deadlines. If you can make a website in two weeks, then that should make your rate higher, not lower—don’t punish yourself by charging hourly and get underpaid because you know what you’re doing.
6. Establish Your Rate, Negotiate With Your Client Based on Their Budget, and Communicate Your Worth
It’s okay to turn down a project that is not going to pay you what you’re worth. Don’t be afraid to ask them what their budget is. If they have $2000 ready to go, and you charge $700, then you’re missing out on having enough for your phone bill or your Creative Cloud subscription.
It’s okay to turn down a project that isn’t going to pay what you’re worth.
It’s also okay to adjust your rate a little based on what the client is willing to pay. Obviously, don’t let the client undervalue you, but don’t be afraid to make a little less if it won’t set you back too much.
A Few Reminders we Need to Knock Out:
- Do not do unpaid work.
- Don’t let yourself get taken advantage of by clients.
- If you consistently are underpaid, especially less than minimum wage, then you’re better off working at a coffee shop or in retail.
So Why do It?
Web development is hard—most clients don’t know the effort it requires, and that’s precisely why they’re paying somebody to make a website in the first place. The value of a website in today’s digitally focused world cannot be underestimated by any means.
The product you’re producing is going to be the difference between a client’s successful customer engagement and sale, or the demise of their business.
Value-based pricing allows you to figure out the accumulated worth of everything you’re creating for your client, including the potential ROI of their website.
Value-based pricing helps you earn what you’re worth while establishing yourself as an expert.
If you establish yourself as a professional, as somebody who knows the worth of their work, then your clients will recognize you as a professional as well. They don’t want somebody who undervalues their own time and energy because that establishes you as a web developer that isn’t savvy or that your product won’t be worth the payment.
In short: using value-based pricing communicates to a client that you’re a professional and that your product will be worth what they pay, plus it saves you from having to do ten projects to pay your bills and instead, allows you to focus o