Value-based pricing: Is it right for your design studio?
Over the past few years, value-based pricing has been gaining momentum in the world of design. Prominent figures like Chris Do have championed it as a way to elevate your pricing strategy.
It's similar to what we saw with the surge in offering brand strategy services, aiming to empower you to charge more for your design projects. With this approach, your pricing hinges on the perceived value you deliver to clients, rather than mere competition or the hours you need to complete the project.
Now, you might expect me to be an advocate of value-based pricing, given my aim to help you build a sustainable and profitable design studio. After all, it promises more income for projects of the same type, enabling you to work with fewer clients while maintaining your yearly revenue.
But you might be surprised.
In this blog, we're breaking this up in to three different sections:
What is value-based pricing?
My perspective on value-based pricing
What to do instead of value-based pricing
What is value-based pricing?
Value-based pricing is a pricing strategy where the price of a product or service is determined based on the perceived value it provides to the client. So you're not considering what the market is asking for a similar project, the cost of the project or the hours you need to complete the project.
In a Nutshell: It centres on what clients expect from a new brand or website, bridging the gap between their current and desired state.
➝ Your pricing is based on a percentage of the expected increase in revenue.
This sounds logical in theory but is quite hard in practice. So let's look at an example of the value-based pricing process for a website design.
Step 1: Understanding your client's business and goals
Before you can put a price on your services, you've got to get to know your client's business inside out. That means understanding their goals, their current revenue, revenue goal and what they hope to achieve in terms of added revenue based on the new website. This deep understanding is the key to calculating the potential value.
Step 2: Identifying vital metrics
Next, you and your client need to pinpoint the key metrics that'll let you measure the project's success. These could include things like:
Increase in website traffic
Improved conversion rate
Reduced bounce rate
Higher average value per service
Increased online visibility
Step 3: Putting a value on it
Here's where the numbers come in. You'll need to attach a monetary value to each of those metrics. This means figuring out how much each metric is worth to your client in terms of extra revenue, savings, or other real, tangible benefits.
For instance:
A 10% increase in website traffic may lead to a $5,000 increase in monthly sales.
A 20% improvement in the conversion rate could result in an additional $10,000 in revenue per month.
A 15% reduction in bounce rate might save the client $2,000 per month in advertising costs.
Step 4: Adding it all up
Once you've assigned those values, you add them up. So, if the increased traffic, better conversion rate, and lower bounce rate come to $17,000 per month, that's the total value.
Step 5: What's your share?
Now, you decide what percentage of that total value you'll take as your fee. For instance, let's say you choose 30%.
Step 6: Calculating your price
Multiply your chosen percentage by the total value. In this case, that's 30% of $17,000, which is $5,100. So, that's your price for the website design project.
My perspective on value-based pricing
I'd like to share my perspective on this approach, which often stirs up a trio of critical questions for me:
1. Would you pay these prices?
Running a business isn't just about raking in maximum profits for me. It's about finding a balance between what I need, what my business needs and what my ideal client needs.
In practice, this looks like:
Aiming for sustainability and profitability. This means having time beyond work to indulge in personal pursuits and having the financial means to support those interests.
When it comes to processes I, for example, want to make sure my emails are thorough and I guide my clients through my workflow always explaining what I need from them, what is coming up next, and when they can expect a reply if I need to come back on something. Rather than just short emails so that I can get the details or documents I need.
When it comes to pricing I ask myself this question: Would I willingly pay the prices I'm proposing for my services? If the answer is no, it makes me question whether I should charge those rates.
Of course, this doesn't apply universally. For instance, I wouldn't personally pay $5,000 for a website design because I have design skills myself. However, that doesn't mean $5,000 is an unreasonable price for website design. Conversely, if I wouldn't pay $10,000 for a 3-month coaching program, I feel I also should not charge that amount.
My reservations about value-based pricing stem from personal values, but there's a practical side too. If, as a designer, you don't believe in your own pricing, securing projects at those rates becomes an uphill battle.
Sure, raising prices can feel nerve-wracking, and that's okay. It's a sign of growth and acknowledgement of the value you bring. However, there's a difference between increasing prices due to expertise, work quality, and business profitability versus charging $10,000 for a project that typically costs $3,000 purely because of perceived potential value.
I understand that value-based pricing isn't about arbitrary price inflation. It's a strategic approach aligning service price with the value delivered. While it may lead to higher prices compared to traditional methods, it's justified by substantial and quantifiable benefits for the client.
So, I'm not advocating against this pricing method; rather, I encourage thoughtful consideration.
Can offer this type of pricing and be in alignment with what you believe in and be in integrity?
Can you confidently explain to a client why their website costs $10,000 when you've previously delivered a similar one for $5,000?
2. How do you determine the value for small businesses?
Value-based pricing is based on measurable outcomes and results. As part of the pricing justification, as a designer, you would need to demonstrate how your design work will directly contribute to achieving the client's objectives, most of the time more or higher paying clients which will lead to increased revenue.
But from my experience, for many small business owners understanding their finances can be a challenge. They might not know their annual revenue, the contribution of each service to total revenue, or how various channels impact earnings.
If your clients fall into this category, calculating the value of your design work becomes a complex task. It requires substantial research into their business, sales figures, and website conversion data before even reaching step 3 of the value-based pricing process.
Another factor is that a well-designed website that considers the client journey with quality written copy and imagery that speaks to the ideal client can significantly benefit a business. But often the imagery is not made by a professional photographer and the copy is DIY-ed. This is directly impacting the potential results of the website.
This pricing method not only necessitates upfront value determination but also ongoing measurement post-design. This data validates your provided value and justifies your pricing or, conversely, can pose challenges if the client's DIY imagery and copy affect the results. While this is not your responsibility as a designer, it's how it will be perceived.
I'm not saying value-based pricing is impossible, but it requires consideration of whether it aligns with your target audience.
3. Are you really contributing that much to the total value increase?
Let's stick with website design as an example. A well-designed website can indeed benefit a business, particularly if the previous version was DIY. It's likely to reduce bounce rates and increase time spent on the site.
But does the website alone drive more traffic, leads, and conversions, or is the client responsible for having a solid business plan, a brand strategy that resonates with their ideal client, and executing a marketing plan to reach that client?
Isn't it a combination of all these factors AND your website design that helps them move closer to their revenue goals? Your website assists them in bridging the gap between their current and desired state, but it's not the sole solution. After the website is live, the client must take action to close the remaining gap.
If this responsibility lies with the client, and you're not involved in creating the business plan, brand strategy, or executing their marketing, why can you charge a percentage of the increased revenue the client aims to achieve? You can't charge for something you're not responsible for.
Value-based pricing isn't inherently flawed, but it does warrant thoughtful reflection. Your pricing strategy should align with your values, make sense for your target audience, and need to be based on the actual value that you bring, not the value clients need to add (and are responsible for) after the website launch.
What to do instead of value-based pricing
As a design studio owner, your ultimate goal is to boost your revenue and leverage your business as a means to achieve the freedom and lifestyle you desire.
When it comes to achieving this, you essentially have two primary options:
Working with more clients simultaneously: However, the challenge here is that design projects demand a significant amount of time and attention. Managing multiple projects at once can be quite a juggling act and there are only so many you can take on at the same time.
Increasing your prices
So here’s the thing. I’m not against making more money — in fact quite the opposite. My struggle with value-based pricing is based on the 3 questions I mentioned above. So let's look at an alternative pricing approach that I hope you can confidently stand behind.
For this approach, you need the following elements
1 - A yearly income goal
For everything I do in my business, I want to understand what I need to do and why, how this is part of a bigger picture and how this will help me to come closer to achieving my business and personal goals.
This is where setting a yearly income goal, or what I like to call a revenue budget, plays a vital role. Think of it as your business's anchor, providing a clear direction and helping you remain focused on the precise actions and strategies required to achieve your objectives.
Now, setting this goal isn't something you can do arbitrarily. It's not about comparing yourself to others or aiming for some arbitrary six-figure milestone. Instead, it's about aligning your revenue target with your financial realities.
Ask yourself this: What's the amount, in your currency of choice, that you (and your family) need to live comfortably? How much of this annual figure must your business contribute to your household expenses?
This starting point, rooted in your unique financial situation, is where your revenue budget begins.
2 - Ensure your budget is realistic
While you might aspire to a substantial income increase, it's essential to set realistic targets. A sudden leap from your current earnings to your desired income can create immense pressure and potentially overwhelm you.
That's where my phased approach comes into play. Instead of jumping straight from your current earnings to your ultimate income goal, consider setting an interim target.
There is a large chance there's quite a bit that you need to change, improve or develop within your business to get to this number. You might want to launch website templates, brand strategy-related services like clarity calls or brand audits or maybe even full brand strategy sessions. All of these options mean that you have to develop these new services/products which takes a lot of time (and often even more than expected), especially when client work takes up all of your time. Add in additional education, like a program about brand strategy, and you can add in a couple more months.
So, if for example, you're currently earning £30,000 and aiming for £50,000 to live comfortably, you might set an attainable interim target of £40,000. This approach reduces the pressure and allows you to make gradual adjustments to your business.
All the steps you take to reach the interim goal are also essential for reaching the ultimate goal of £50,000.
3 - Consider your time
Now that you have your yearly revenue target in mind, it's crucial to understand how much time you have available to achieve it. Here are some factors to consider:
How many weeks per year do you want to work? Do you want to take August off to spend time with your family over the summer? Or do you want to go on holiday 2x a year for 2 weeks? It doesn't matter what this looks like, but you need to have the number of weeks that you want to work in a year.
How many hours do you want to work each week? You need to have a clear picture of how many hours per week you can work, and what needs to happen within this week in terms of client work and business back-end-related tasks (don't forget to dedicate time to this). I won't go into detail on how to set this up or why this is so important but you can read all about it in the blog about your ideal week and the blog about using theme days and time blocking
How many hours does it take you to complete a project? If you're not tracking your time be sure to read this blog about how to get started
This information will allow you to determine how many projects you need to take on each month at which price to reach your target revenue. While also considering if you physically have the time to take on this number of projects.
4 - Include a profit margin
While your business may be profitable overall, you also need to ensure that your individual packages are profitable. Your pricing shouldn't merely cover your business expenses or the hours spent on a project. It should also account for the time you invest in tasks like content creation to acquire new clients.
Let's look at an example.
Let's say your website design package takes approximately 40 hours to complete, and your hourly rate is £40 (note that you don't have to charge per hour, but it's essential to know this figure). To cover the project hours, you should charge at least £1600 (£40*40 hours).
Now, add a profit margin of 30%: £1600 x 1.3 = £2080. So, instead of charging £1600, you'll charge £2080. This means your hourly rate becomes £52 (2080/40 hours) instead of £40.
In addition to these steps, consider factors like competitive pricing and market research to ensure that what you offer aligns with your target audience's needs.
Incorporating these elements into your pricing strategy can lead to sustainable growth while giving you the financial freedom you seek.
I know this was a short explanation so for more in-depth guidance on setting prices be sure to check out the below articles:
Your pricing will always be an ongoing journey as your business is growing. There's no one-size-fits-all approach. What matters most is aligning your pricing strategy with your unique business goals and personal aspirations.
Setting realistic revenue targets, managing your time wisely, and including a profit margin are fundamental steps to pricing your services effectively.
Here's to your continued growth and the financial freedom you're working hard to achieve.
You've got this!
Stephanie
If you thought this post you might also like:
LOOKING FOR ANYTHING?
Popular items in the shop
FOLLOW ON INSTAGRAM
FAVOURITE RESOURCES
