Pricing 4: How to Price based on Value and Perception.

So far in the series, I've focused on your internal cost side of the prices you charge.

[Read back here: part 1 (revenue vs income), part 2 (internal budgeting of time), and part 3 (freelance fees vs costs of an employee)]

In this part, I'll switch the tables and talk about the client-side of the exchange.

  • What is the value to the client?
  • How can you translate this value to a price?
  • What is the client's perception of you?
  • What stories of money does the client tell itself?

Value > Market > Price > Cost

Basics first. It may seem comically simple. But it's seriously true.

The price you charge should be higher than the costs of delivering the product. Now, maybe you subsidize parts of your business by other higher margin parts. But if you don't want to run yourself out of business, you should adhere to this basic rule.

A product should make a profit. Even if you feel you yourself get so much value out of helping others. By depriving your business of one of its most important nutrients - cash flow - you're making it impossible to help next clients.

Then, the value you deliver should always be higher than the price.

And not that you'd want to. But you can only fool a client once. When you don't deliver, it'll be a short game for you.

And, a product needs to be priced in between its value to the client and the cost for you to deliver it.

There might be other players on the market, who offer something similar. Preferably, you add more value by being better, unique or faster. Or, alternatively, you can offer it cheaper than them.

Simple enough right? Let's get into it.

Value that your product brings

What is the client getting in value?

Every business works because people think the product it offers is worth more than what it asks for it.

The way to think about this is to ask what problem you are solving for your client. How big is the problem? How urgent is it? Obviously, the bigger or more urgent, the more someone is willing to pay for the solution.

What values?

So what is it that you change by serving these people? There are loads of different types of value. In purely economic terms, it's either by increasing their revenue (or income for individuals) or by reducing their costs.

  • Increase their sales. Help with marketing by good design, a convincing video or effective website.
  • Will it increase the effectivity of their work? Training their sales team. Hosting their important meetings.
  • Do you share your wisdom of having done it before? Saving clients time and costly mistakes in figuring it out themselves.
  • A reduction in expenditures. Can you provide something cheaper or help them figure out how to save costs?
  • A reduction in time spend. Can you do something more efficiently or help them figure out how to do it more efficiently?

And, naturally, there are a lot of non-economic reasons to buy a product. These emotional reasons are often way more important.

  • A happier outlook on life.
  • Will it relief their stress if you take care of their work/worries? "My administration is just a mess to me."
  • Does it buy them security because it pleases their boss? "We've had the experts have a look at it."
  • Are you at the right place when they need it? Coffee at the station.
  • Is it a joy to work with you?
  • Do you have the emotional advantage of having the relationship with the client?
  • Continuing is less hassle than switching. Plus - maybe even more important - you don't have to admit that you made a mistake the first time.
  • Is the competitor doing this too?

Pick 2-3 of these that you can ánd become extremely good at, ánd that you can find clients for that value these and that you want to help.

Pricing the Value

Not to equate the value you bring to something entirely economical. But because you need to capture your value in a price, you'll need to put a number on it.

So, how can you gauge your value? Here are a few examples.

Say you produce videos to showcase a client's skill set. How many new clients will that help them get? How many more visitors need to convert into clients because of it? How much traffic does this client need to have in order to justify the costs?

How much more efficient will a client get by having a shared company vision that works? What are the added sales, increase in quality of their work and higher effectivity of teamwork, compared to the costs (of their time and of your help)?

How much does having pictures of a wedding afterward increase the value of the experience? 10%? 20%?

It may sound complicated or impossible. But making a rough estimate in the back of an envelope already helps.

When calculating, is your price in the same ballpark as what you come up with for the value? Or, does the price you need to ask for require crazy returns? And perhaps, your price only gives the right return for larger clients than you now focus on.

And of course, you'll want to follow up with your clients to measure - or at least know - the effect you've had on their life/business. This way, you'll learn over time what price matches the effect you create.

One thing to remember, something you consider rudimentary, can be completely revolutionary for someone else. And can provide more value than you can imagine.

How Prices Influence Perception

A client might know it has a need and be convinced and able to buy your type of product to solve it. But even then, that client needs to a) know about you, and b) trust you that will actually deliver something valuable.

In other words, the client needs to be convinced that you'll make their investment of time and money worthwhile.

Trust is a complex topic. Bigger than this piece. But I'll talk about how prices play a role in how you are perceived.

Mitigating risk

The more you can give certainty that their investment will be more than worth it the better.

This is one of the reasons clients sometimes ask you to do work (or part of it) for free first.

You could also break up the project into smaller chunks. With a few 'go-no go' moments build in.

Or, you could structure your pricing in such a way that they are based on the outcome or effect you've had on the client. No cure, no pay. For example, making the price a percentage of the extra revenue the client makes after delivery.

Pay-as-you-feel is a way of pricing where the client/customer decides what to pay for the product - after receiving it! It doesn't always work well. But I've had good experiences with it. The ins and outs are a story for another time.

Lastly, because a client wants to minimize risk, switching providers is never really an attractive option. That means, once you're in, you've got a good chance of staying in.

The Others or the absence of them

It matters what someone is used to paying for it or what other prices they see when scouting the market. Their other options will determine whether your prices are perceived as cheap or expensive. And thus how they gauge the quality of your work.

And, as I've written about in Part 3, a client might compare giving you the project to hiring someone internally. Even when you don't sell in hours but sell a product (say a table), a client could potentially have one of his employees produce it. What kind of premium is he or she willing to pay for the specialization and flexibility you offer?

Even better is to offer something unique. Something that you're the only one who can do that (Srinivas Rao - "Why Only is Better than Best"). This way, price gets dropped from the equation. It's about whether or not they need you.

Prices lead to quality

The more value you deliver, the more you can charge. But paradoxically, the reverse can also be true: Asking for more money, actually makes you deliver more value.

For some projects, it's necessary to charge a high fee. Simply to be taken seriously and as an equal to the client.

An added benefit of this, is that the more they spend on the project, the more they'll work to get value out of the exchange.

Which ones work depends on who your clients are and what convinces them (or their boss) about your quality and whether or not the investment will be worth their money and time.

Leveling up

Chase Jarvis says: "A €500 client doesn't become a €5.000 client, doesn't become a €50.000 client."

What he is talking about is that it's very hard to after - a first project - level up to a higher price class with the same client. Once you agree to a certain price, you're pegged at that level. And when they have more budget to spend next time, they'll again try to get the best deal possible.

You might believe differently. But, I advise you to - when you agree to lower your prices/fees for this time, at least be extremely explicit about that. And, even negotiate what they can do for you to justify the discount. That way, even when they've indeed spent less money, you haven't been cheaper.

Stories around money

Circumstances matter

It's hard for people to accept parting ways with their money. But how hard it depends on a lot of factors.

It's easier to ask money for a physical product than for a digital one.

It's easier to sell in real life than online.

And convincing someone to go from paying nothing to a little is just as hard as convincing someone to go from paying a little to a lot.

And, it matters whether or not someone has purchased something like this or in this way before. As Seth Godin says, it's harder to market to virgins.

How much is €1.000?

What is the perception of the amount you charge?

In other words, a €1.000 is something else for a student, a small business or a high-end lawyer. Businesses generally have a different perception of the amount something is than individuals (due to VAT and spending before Income Tax).

This can mean that when you feel you are offering something for cheap, it's actually perceived as expensive. The reverse is also true. So, your prices need to match your clients.


Some companies have already budgeted money for your type of services. That makes it easier to sell to them. That's because they already have decided to spend it. And because they already have the ok from their superiors.

Whether your product is perceived as cheap or expensive, also gets influenced by the total size of the budget. They're not really related. B in the perception of the client, they will be.

How to go further

I hope this has helped give you new ways to think about the prices you charge for your work. And that you even have found a few ways to start finding out prices you need to charge.

The best advice I have is to simply try and test what works. Every time someone hires you, it proves there is someone for whom your work is worth more than that. See what you can get away with.

And once you're (almost) fully booked for the coming few months, you can increase your price. Filling in the gap between the value you deliver and the value you receive back.

And every time you do work, you get better and increase the value you bring. Justifying even higher prices.