Price Your Services Based On The Value You Provide Your Clients

(This is a guest post by Jonathan Stark, a speaker at the upcoming Double Your Freelancing Conference. Don’t have your ticket yet? Buy your ticket while they’re still available and join Jonathan and 13 other speakers in Norfolk, Virginia, this September 16th – 18th)

In 2005, I was making a little over $90,000 USD annually as the VP of a boutique software development firm. It was a good company and I loved my fellow employees, but I was miserable. I spent most of my time arguing about invoices with clients, hounding developers to log their hours, and responding to RFPs with estimates that almost always turned out to be low.

Then one day everything changed. In a flash, I saw with total clarity that billing clients by the hour was hurting me, my company, and our clients. It was the source of just about every problem that we faced as a company.

Best of all, I saw an alternative: value-based pricing. I left the hourly firm, set up my own consultancy, and in the first year I doubled my income using value-based pricing. This year, I’m on track to do triple what I made by the hour. All while working with better clients, on more interesting problems, with lower labor intensity, and almost zero administrative overhead.

Value-based pricing is all the rage. “Ditch hourly!” and “Sell on value!” are stock responses on just about any Q&A thread on freelancer pricing — and these are themes I’ve written about here for the last 3 years.

But longtime students of mine are quick to point out that I don’t personally always value-price my consulting. In my pricing course, I encourage many freelancers not to practice value-based pricing.

What’s the deal, Brennan?

The other day, there was a thread in the Double Your Freelancing Clients community that centered around this confusion. I briefly commented in the thread with my position, but promised that I’d write a lengthier response here on DoubleYourFreelancing. Well, this article is that.

Whenever I tell people about how I stopped caring about what other people were charging, and am now charging my clients 10x what I was charging just a few years ago, I’m almost always asked the same question:

“How do you find clients who will pay that?”

The right response really should be, “What are you doing differently now that lets you find clients who will pay you that?”, but that’s beside the point. The prevalence of this gut response from just about every fellow freelancer I’ve talked to signals that there’s still a lot of confusion around why we’re all hired in the first place. From the perspective of a technical project, like an app that needs to be designed or a sales letter that must be written, we tend to reason that there are “doers” — people who can complete the project — and these doers are graded on a scale bound to some mixture of experience and competency. And from this scale, a person’s “worth” (and ultimately, rate) is divined.

“Everything is negotiable. Whether or not the negotiation is easy is another thing.”

The problem with selling time is that the buyer knows margins are high.

When I ran my consultancy, I was constantly pressured to negotiate down our rates. Our formula was pretty simple: We had a client rate, and then we had what I paid my staff. The difference is what paid me, our non-billable staff, outfitted our office, and whatever was left was profit.

So savvy clients, almost all of which were business owners, knew that it can’t hurt to ask for a discount. And I totally get it. Let’s say you’re hiring someone to work on a 3-month project (480 hours) at $100 an hour. A $10 an hour discount saves $4,800 — not a bad return for taking a minute or so to ask a question.

But what I’ve come to discover (which I’m guilty of myself) is that almost all of us cave and lower our rates when asked.

A few days ago, I got an email from a new student of the January Masterclass. He’s been talking with a prospective client and after applying a lot of what we covered in some private coaching sessions, he was able to figure out that this client stands to make at least $100k a year after this project goes live.

So, understandably, he was trying to figure out what he could charge the client. However, I think my answer might have surprised him, and might even surprise you.

I don’t think that value-based pricing means figuring out the potential financial upside for the client and working backwards from there. Determining the upside isn’t about setting the project budget as much as it is justifying it.