Right, this one needs to be said.
It especially needs to be said for those in the “consultant-o-sphere”, who see value-based pricing as some sort of holy sacrament (despite very few of them actually managing to pull it off).
In case you’re not familiar, the idea is simply that price should be set based on something’s value to the buyer, rather than the cost of the thing being delivered.
This is especially beguiling to advisory businesses, because it enables them (in principle) to charge $50,000 for 10 minutes work – on the assumption that their advice in those 10 minutes might be worth $5,000,000 to their client.
Now you might think that I’d be in favour of value-based pricing.
For one thing, I’m a consultant.
And for another, I’m always saying that the thing you’re selling is the value you give to customers – not just the raw product or service. And if that’s so, then surely it is the value that sets the price, right?
Well yes – but within reason.
The value you produce can for sure justify premium pricing. I’ve no issue with that. But this isn’t what people mean when they talk about “value-based pricing”. What they mean is putting a dollar amount on the value being produced for the customer – and then setting price as proportion of that figure.
Makes perfect sense on paper.
We all wish it was true.
But it just…isn’t.
What value-based pricing fails to take into account is that pricing is an emotional exercise – not a rational one. The right price isn’t the number people “should” pay for the thing. Instead it’s the number people “feel like” paying for the thing – and this is influenced by many things besides value.
Imagine for example you were selling an online video course about investing.
You might reason that with your method, a customer could stand to make $1,000 000 over the next 5 years. Not a totally crazy proposition. So, in turn, you figure that it would be totally fair to charge people just ONE PERCENT of that figure. Heck, you’re basically giving it away! Truly an irresistible offer.
That means your video course costs $10,000.
Do you think people would buy this course?
Hell no! That number is completely insane.
Why?
Not because your value calculation is wrong, but simply because that’s not the sort of price people sell online courses for.
Rightly or wrongly, we all have an idea that an online recorded course costs, say, $50-$500, and the likelihood of getting people to step outside of that Overton Window is extremely slim.
I learned this the hard way. When I first launched my low-ticket course on the Strategy Shortcut System, I did some research which determined that the reasonable price for it in the eyes of buyers was $300. However, many people told me “Alex, that’s way too low, think of the value!”. So, I got greedy, and priced it at like $750.
I sold 2.
A couple of days later I thought “screw this”, swallowed my humble pie, and dropped the price to $369…
…and sold 250.
Value schmalue.
The same thing applies to consultants of course.
Could an expert consultant walk into a business, have a quick look, notice their issue, and then give them 10 minutes of advice which saves them $10,000,000?
Absolutely.
But will you find somebody willing to pay a (very reasonable) 10% fee for those 10 minutes?
No way! Because you just don’t pay people $1,000,000 for 10 minutes work, regardless of value.
This just ain’t gonna happen.
(I will concede there are some edge cases where the value can be very precisely quantified, and the supplier can agree to be paid on a pure commission basis – but these are exceptionally unusual, and besides, there aren’t many consultants willing to be paid on results – for obvious reasons!)
Ultimately the truth is that there is a “reasonable” price for every good and service, which is only partially tied to value, and which ultimately will set the true price.
I always intuitively felt this was true, but was afraid to say it because hey, I’m not a pricing expert.
However the other day I went on Marcos Rivera’s podcast, and he is a pricing expert, so I put it to him. And luckily he agreed, and described it as “context based pricing”.
In other words it is the context that sets the pricing (e.g. knowing how much “stuff like this” usually costs), rather than the value.
I love that.
It’s funny, proponents of value-based pricing will often say stuff like “a Hermes bag only costs $100 to produce, and sells for $10,000 – that’s value!”.
No, that’s context – because we all “get” that there is a luxury handbag market where things cost that much. If every handbag on the planet cost under $100, and then you tried to sell one for $10,000 it wouldn’t work – because it would just seem ludicrous.
Anyway, I’ll get off my soapbox now.
Sufficed to say for myself, I don’t think about value-based pricing any more. Instead I think “what is a premium price within the Overton Window that I would be happy to work for, and a client would be happy to pay” – and then I charge that.
Perhaps I’m leaving money on the table.
But if everyone’s happy with the deal, then in my book, that’s a good price.
