Could Value-Based Pricing Be the Key to Higher Revenues?
Our recent survey of design and development firms revealed a tantalizing statistic: Freelancers who use value-based pricing were more likely to report annual income over $50,000 per year than freelancers who weren’t. Could it raise revenues for your practice?
Value-based pricing is charging a percentage of the additional revenue your project will generate for the client, rather than charging a fixed hourly rate. Here’s an excellent summary of how value-based pricing works and some hypothetical examples. But we’re going to show what value-based pricing has done for real-world web design and dev businesses.
Our WordPress Design and Development Pricing, Structure, and Services Survey was completed by 90 freelance web developers/designers. By cross-referencing reported revenue with those freelancers who use value-based pricing, we can show how value-based pricing worked in 2017.
Solo practitioners were far more likely to break the $50,000/year barrier if they used value-based pricing. The majority of firms who didn’t use value-based pricing generated less than $50,000/year.
Looking at all firms, not just solo freelancers, smaller firms were much more likely to use value-based pricing. For now, value-based pricing appears to be a grassroots movement.
So, what’s going on here? As someone who works with WordPress designers and developers on a daily basis, I’m hearing a few different reasons why value-based pricing is succeeding.
A Price That Tracks to ROI is Simply Higher
For most small businesses, a website is their front window. It’s where potential clients go to assess a business either before reaching out or upon first contact.
An attractive, fast, responsive website is critical for all businesses. And for businesses that drive conversions online, the performance of their website is the difference between growth and bankruptcy.
Just because you can get a website built for $100 doesn’t mean you should. Web designers and developers who demonstrate the value of a well-designed site are successfully making their pitch to receive a percentage of that value.
In the pay-per-hour world, web designers and developers are service providers. They’re hired to execute the customer’s vision.
If you come across a plug-in or design tweak that could improve conversions, you’re disincentivized from adding it, or even suggesting it, because the customer may feel they’re being overbilled. You’re judged on your level of service—how fast you complete the project, how responsive you are to the client’s changes, and how close you get to what they envisioned.
If you please a client like this, they will refer you—to customers with exactly the same expectations.
With value-based pricing, your fee is integrated into your customer’s business model. The goal isn’t spending the correct amount of time, it’s doing the project right and building their business. If you please a client like this, they will refer you—to customers interested in growth and innovation.
If your referrals come from clients who value cost certainty, yeah, you’re only going to make so much. But if referrals come from clients who value growth, you can grow your business alongside them.
No “Efficiency Penalty”
You’re a per-hour freelancer who just figured out a faster way to do a core task. In any other business, this would be cause for celebration. But in your world, you’ve cost yourself money.
For designers and developers who use value-based pricing, it’s the opposite. That time savings can go to additional marketing efforts, additional training to make future efficiency breakthroughs possible, or taking on new clients.
Why are value-pricing freelancers making more? It may simply be that their effective billing rate is higher. And it also could be a function of motivation. If you’re incentivized to work more efficiently, you will. If you aren’t incentivized to work more efficiently, you won’t. And, worst of all, you’ll find yourself falling behind those who are.
Flat-rate pricing is disappearing, industry by industry. One of the longest holdouts, movie theaters, are finally starting to embrace a value-based model. Among WordPress design and development firms, it’s mostly small firms who are using value-based pricing. But what happens when the big firms realize they could make more money that way?
Featured image via Depositphotos.