Pricing your work by value

The word "value" has always fascinated me. I find this definition of it particularly intriguing:

the regard that something is held to deserve; the importance, worth, or usefulness of something.

As creators, contractors, or freelancers, our main goal is to provide value to our clients in various ways. So, you can imagine my surprise when I discovered that some creators charge based on the hours worked rather than the value delivered, using an hourly billing model.

What's up with hourly billing?

Hourly billing is a common method of charging clients for the time spent on their projects. It is particularly popular among service-based businesses.

I understand the idea and its origin, but I don't believe it translates well to the services that creators like you and me provide today. When I was freelancing, I used a pricing method called project-based pricing for my software development services.

Project-based Pricing

In contrast to the hourly billing model, project-based pricing allows me to determine a fixed price for each project. I find this pricing method to be fair for both myself and the client, as it provides transparency. However, I sometimes question whether I am charging what I am truly worth.

In just a minute, you'll see the flaws in project-based pricing when I introduce Value Pricing. But let me give you a hint: under this method, the only determining factor for how much I charge for my work is my perception of my own worth or what I'm willing to accept for the project.

Value Pricing

Fast forward a couple of years and I stumbled on this book The Independent Consulting Manual as I kicked off my consultation journey with Ship less JavaScript™️.

I got to the chapter titled: The Path to Value Pricing and it opened my eyes that my project-based pricing though was better than hourly billing model, was incomplete. It was missing a key ingredient which I will call the Value of the outcome to the client

As a creator, it is your job to know the value of what you are doing for your client. With Value Pricing, assigning a number to that value is at the core of this model.

By the way, if you find out that the price at which you'd be comfortable doing a project is greater than the perceived value of the outcome to the client, then perhaps you are not solving an expensive problem for them.

Value Pricing put things in a more realistic perspective. Charging your worth or cost often leads to you not getting rewarded relative to the true value of the outcome you provided for your clients.

Say your cost is $1,000 for providing an outcome that's worth $100,000 to your client. Does that mean you should price your work at $1,000? I don't think so! Let the fable of "Knowing Which Screw to Turn" guide you.

$1 for turning the screw, $9,999 for knowing which screw to turn.

Life is centered around leverage. By not considering the value an outcome holds for your client, you would be doing a disservice to them. It's essential to base your pricing on this understanding.

Of course, delivering the outcome is crucial, which is why we've emphasized focusing on outcomes rather than just the work completed.

Your client isn't hiring you to work, they're hiring you to deliver results. There is a difference.

Value Pricing Calculator

Armed with the algorithm and formula presented by the author in the book, I decided to provide a free tool to creators called Value Pricing Calculator. One of the folks I showed the Value Pricing Calculator to had this to say:

Nice! Good for both experienced and inexperienced freelancers that aren’t still sure about what to charge.

And really that's the idea, to help with the indecision of what to charge when you are charging by value.

The calculator uses this algorithm: max(cost, value / 10) and this is how you get the cost and the value when dealing with a prospect:

First have a conversion with the client about the outcome they want from your work
Decide the minimum amount of money you would accept to do the work.
After hearing the client's required outcome, estimate their perceived value and divide that by 10
Present to the client the higher of the two numbers.

For the calculator to be effective, you must have done a good enough job on steps 1, 2, and 3.

Conclusion

I really appreciate Value Pricing because it prioritizes the value of the outcome for the client, as it should.

However, the calculated price or formula can still be negotiated, especially when there is a discrepancy in either your costs or the perceived value of the outcome to the client.

I would love to hear your thoughts on this, and I hope the calculator proves useful in your future pricing discussions!