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Justifying Higher Rates With Value-Based Pricing


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.

Allow me to explain:

It’s easy to think that if you want to price according to value you need to come up with the amount of value you’re delivering for a client, subtract a few dollars, and — voila! — you have a project budget.

You might reason: “This client will probably make $50k if I do X, Y and Z for them. Ergo, I’ll charge them $40k.” But this lends itself to putting a price tag of $40k on X, Y and Z… which I’m generally not a fan of this unless X, Y and Z are very well defined and there’s little risk that other requirements might creep in.

If you’re like me, you tend to work on big projects with variable scope, and getting to a solution will likely evolve over time… So you can’t lock both the price and the scope of the project. But you still want to price based on the value you’ll produce, because the alternative is a race-to-the-bottom commodity rate.

So rather than having your client’s potential financial upside set your budget and set the scope, instead you’ll use this info to justify your rate, which should be measurably north of whatever “market rate” is standard for your occupation.

You’ve probably heard of Patrick McKenzie before — and if you joined the Recurring Revenue for Consultants Bootcamp, you’ve met him. As a consultant, his rates were upward of $30,000 a week. Technically, he did a little SEO, copywriting and Ruby work for his clients — but $750 an hour is a bit more than the average SEO, copywriter, or Ruby developer, right?

Patrick used the value he routinely produced to justify his rate. He isn’t some whiz-bang Ruby core contributor or “rockstar”, but he’s extremely savvy when it comes to figuring out the amount of value he brings to his clients businesses, and puts that — and not lines of code or “best practices” or whatever else — at the forefront of his proposals.

Here’s the system we dive into in my class, which I’ll cover ever-so-briefly here:

  • Figure out the key performance indicators, or KPIs, that matter most to your clients. Often this relate to revenue. Examples include e-commerce conversion rates, lead form submissions, or trial signups.
  • Come up with some realistic KPI projections based on a successful completion of the project on the table. If you can put together a smart marketing and goal tracking strategy that could provide a lift in website conversions, what might that be worth to the client?
  • Propose an engagement, and anchor the estimated time multiplied by your hourly/daily/weekly rate by that potential upside. This makes you less likely to be reduced to a commodity — “Why should I pay you $200 an hour when this other developer only wants $20 an hour?”

I know quite a few people who have successfully made the jump from providing just code, design, or copy to focusing on making businesses better off, and many of them brought in over six-figures in additional revenue last year.

  • I am not sure I see the distinction between letting the financial upside I deliver to the client *set* the project budget and *justify* the budget.

    You say in the post:

    “So rather than having your client’s potential financial upside set your budget and set the scope, instead you’ll use this info to justify your rate, which should be measurably north of whatever “market rate” is standard for your occupation.”

    If what I do creates $100k to the client (either by bringing in extra revenue or saving costs) then that justifies a budget of $30-50k, does not it? Does not a proposal of say, $40k, set the project budget to that sum?

    • Yes, when that’s doable. For some projects, it’s not always easy to come up with a particular budget with an attached scope of work. e.g. a lot of my gigs are 6+ months long, so I need to bill for time (it’s too risky otherwise.) But if you can create a well-defined solution, and you know what the risks are in delivering that solution and you know how long it’ll take to implement, then go for it.

  • Matthew Heath

    Some pretty sound advice here, Brennan. One thing I also try and do to add value is state basic things like “Yes, I’m expensive but I’m based in the UK, I will respond to your phone calls/emails at a given time (or whenever, depending on your personal preferences) and you will receive regular updates from me, you have peace of mind doing this because you’re contacting a REAL person, as opposed to an anonymous outsourcing company or freelancer in X country. To me, you’re a priority.”

    I find that things like that a) help calm customer objections to pricing, and b) make them eager to work with me because they realise they’re not going to get that from the developer charging £20 an hour.

  • Troy

    I agree with you and I think this is a great way to quantify your value to the potential client.
    But I feel that some or most clients are not reading the proposal but just looking at the final price and just think it’s an unreasonable amount to charge and that they just need something really simple which the client feels should be easy to build. Which I don’t now why majority of clients think there projects are always simple but yet they always end up being complex. And I add KPI into the proposals to quantify my value to the project. Now maybe the client and I are not a good fit to work with each other, but on the flip side I always wonder if they really read the proposal and see the value I can bring to the project.

    Have you felt this way or do you run into this issue often?

    Thank you for any feedback and I really appreciate all the knowledge you share on here.

    • Hi Troy, I know this article is rather old and you’ve probably already found a solution. I’m posting for the benefit of others looking for this information.

      I actually include the projected value right alongside my pricing. For example:

      Investment: $5,000
      Expected Return: $50,000
      Rate of Return: 10x

      It’s a pretty easy concept for clients to understand. In the first paragraph of the agreement I lay the frame work… I work in something like this:

      To be profitable, Client X must make $10 dollars for every $1 dollar invested.

      I also charge based on the client’s target rate of return so that there’s enough profit and return for their growth (and so I can deliver a ton of value).

      For example if they need a minimum ROI of 4x and the proposed value delivered or estimated return is say $100,000, then the most they can invest ALL IN is $25k. That becomes the price I charge, then I have to consider whether or not I can deliver the results they need for that price (including all expenses). If I can’t, I work with the client to find a reasonable solution that they can afford or I decline the job.

      Regarding clients not reading the proposal. The proposal is a formality. I don’t even provide one until after I’ve closed the deal verbally.

  • I know this article is rather old, but this may be useful to some. I actually include the projected value right alongside my pricing. For example:

    Investment: $5,000
    Expected Return: $50,000
    Rate of Return: 10x

    It’s a pretty easy concept for clients to understand. In the first paragraph of the agreement I lay the frame work… I work in something like this:

    To be profitable, Client X must make $10 dollars for every $1 dollar invested.

    I also charge based on the client’s target rate of return so that there’s enough profit and return for their growth (and so I can deliver a ton of value).

    For example if they need a minimum ROI of 4x and the proposed value delivered or estimated return is say $100,000, then the most they can invest ALL IN is $25k. That becomes the price I charge, then I have to consider whether or not I can deliver the results they need for that price (including all expenses). If I can’t, I work with the client to find a reasonable solution that they can afford or I decline the job.

    Regarding clients not reading the proposal. The proposal is a formality. I don’t even provide one until after I’ve closed the deal verbally.

  • mike stewart

    Great Article!

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