June 13, 2017
Tired of Competing on Price? How to Use Value-Based Pricing to Boost Your Bottom Line
Losing a potential new deal because someone else offered a lower price is painful. Sadly, this is a common casualty in agencies where clients sometimes view things like a website build as a commodity rather than a service. Value-based pricing can help you transcend the unwinnable price war and scale your business.
FACT: If you’re a small business that’s selling services on the low end of the market, it’s going to be almost impossible to scale your business.
You’re also likely to be pretty stressed out since you constantly need to scramble to get new clients, complete their projects at lightening speed to be profitable, and deal with the looming threat of being squeezed out by a competitor who offers an even lower price.
Most things naturally drop in price over time, and there’s not much you can do to control that. Disruptive technology, for example, is making things like web design, legal services, marketing, and electronics cheaper by the day.
If your only value proposition is a claim to offer the lowest price, that’s a crumbling cliff’s edge to build your business on. Someone will always be able to do it cheaper (or say they can).
So there are two ways you can go:
You can stay cheap, but to do that you’ll need to become a true volume-based business, meaning you have to find a way to reduce your costs and sell on a massive scale, like Wix, Walmart, or Squarespace.
But as Brent Weaver of uGurus recently pointed out in a Proposify Biz Chat interview, service businesses like agencies should never be volume based because then they’re not leveraging their greatest assets: personalized strategy and service. That’s your differentiator, and you can’t offer that at a volume level.
What you need to do is to employ value-based pricing to increase your fees and position yourself as a premium product or service, like Versace, Porsche, or MetaLab.
To get out of the lowest price race to the bottom, you must change the conversation from price to value (and make sure you live up to it!)
Here are six steps to use value-based pricing to grow your business, and get out of the rat race.
1. Raise your prices. Period.
At Proposify, we sell to SMB’s, not enterprise. We don’t sell $100,000-$1M/year subscriptions. Depending on who we talk to, some people find our prices high because XYZ proposal company offers their lowest tier plan for $5 cheaper, or because they see us as a commodity product.
We rarely-to-never price match with our competitors, and we’ve stopped using coupon codes, as those customers are less likely to stay with us long-term. Customers who begin their relationship with Proposify based on the idea of the lowest price don’t place a high value on the service we offer. We’re disposable when they find a cheaper deal.
We track metrics by plan group, so we know the churn, LTV (lifetime value) etc. by small, medium and large-sized plans. It provides massive insight.
As you can see from this chart, the more a customer pays for their plan, the less likely they are to churn. If a healthy churn rate for a SaaS business is in the neighbourhood of 3% or less, our $10 plans had net MRR churn that was 8x higher than healthy.
The LTV (lifetime value) of a customer on a large plan is disproportionately large. People who pay more turn out to be better customers in the long term and the amount of handholding/support they need decreases over time.
Every time we’ve raised our prices our revenue per customer increased, as did our overall MRR growth, and we experienced little to no negative feedback from customers. You’d be amazed that people are willing to pay what you ask.
Try this experiment in your own business:
For your next proposal, double, triple, or quadruple your price and see how your sales lead reacts. They may say no, but that’s ok. You need to get used to talking bigger numbers and being OK with being seen as ‘too expensive’.
Don’t be afraid to lose your lead - if you want your business to grow, the size of your leads needs to grow. And if everyone accepts your price without pushback, that’s a sure sign that you’re charging too little.
“If your mindset is that no one pays more than $10k for a website, then you’re not going to ask yourself where the people who buy million dollar websites hang out. The mindset needs to be that there’s enough opportunity out there for what your agency needs.”
- Brent Weaver, uGurus.
2. Deliver 10x value in return
OK, so while I said you should raise your prices, you also need to raise your quality. It’s called value-based pricing for a reason. You need to provide value; real, results-based value.
You can’t just say you’re premium if you aren’t because those higher tier customers will notice. If you’re a web designer and you actually are high quality, you can start selling premium. If you can’t provide that level of service or deliverable, then hire a creative director who is talented and more experienced than you, and they will make you your money.
Take Andrew Wilkinson from MetaLab as an example. Andrew started as a freelancer and then grew into a premium agency selling to major brands like Apple, Disney, Walmart, Slack, and TED.
How do agencies like MetaLab do it?
- Delivering great work. Not just saying it, actually delivering it.
- Hiring top talent who can execute world class work.
- Having tight, refined processes to ensure they can deliver high-value work consistently and repeatedly.
- Investing in business development to close deals with high-end clients.
If you price by the hour you’re always going to be undercharging. Too often service businesses like agencies base their fees on the hours they estimate it will take they to do the project when they should be able to put a real dollar value on how much money they made/can make the client.
Value-based pricing helps you change the conversation from hourly rates to deliverable results. You can charge $100K because, based on case studies of work with previous clients, you can make them $1 million.
As a SaaS company, we use value-based pricing here at Proposify by structuring our prices based on our value metric — how people get more value from using our product. For us, that’s the amount of proposals you write.
If someone asks about our prices, we change the conversation to be about how long it takes them now to write proposals, and what their time is worth.
What if Proposify could help them create proposals faster, close deals sooner, and make a better impression on new leads?
What would increasing their close rate by 10-20% be worth based on what they charge clients? What’s that worth to them?
Often our customers realize that by using Proposify, we’re helping to deliver thousands of dollars of value for only tens to hundreds of dollars per month.
3. Nail your positioning
Whatever service you offer, you need to double down on a niche. No more generalizing. Look at what problem your company is really good at solving (and one that you also enjoy doing.)
How can you do something innovative that most of your competition doesn't talk about? They may be doing it, but if they don’t talk about it, if they don’t promote themselves doing it, then you still have the competitive edge.
Agencies are often wary about defining a unique position or niche because they’re afraid they’ll alienate leads. But you need to filter out people who aren’t your best clients and attract those who are. If you don’t define who you are and what you do, you’ll end up with customers who aren’t a good fit.
You can’t be premium AND capture the whole market. Versace isn’t going to attract low-income families. And if they tried, they’d fail.
At Proposify, we have competitors who offer similar features. But we have a focus: we work to provide the best user experience, and we’re the best proposal software for companies that care about good design and want their proposals to stand out.
It means inevitably we’re going lose people who don’t prioritize design and just want a tool that’s going to spit out a proposal quick and dirty. But that’s OK because that allows us to focus all of our time making the people who want to spend money on us, happy.
4. Brand always wins out
Brand is the deciding factor for most people, even if they don’t realize it. Brand can be the tipping point when all else seems equal.
Strong branding helps create an emotional connection with your target audience, so you need to start developing your brand right from the beginning of your business, and constantly monitor it. The right brand strategy can help you win the unwinnable price war.
You may not be a household name (yet), but for anyone who interacts with you, you should be making an impression of value and expertise, which will help you escape being pigeon-holed as a commodity.
It’s not enough to just buy Facebook ads; the design and the messaging is what will make an impression and convert customers.
You can’t charge premium fees if your branding looks like the Dollar Store. If you look high quality and have a strong positioning, this will start to build your brand as a premium service. Then you can charge premium prices.
5. Target (and retarget) your high-value customers
A strong business is one that can repeatedly attract their high-value customers at a relatively low cost.
There are two ways of doing that:
- Be super specific about who you want to target.
- Filter out the people who won’t make a good customer.
By pixeling people who sign up for your lead magnets or fill out an inquiry form on your site, you can create a custom audience in Facebook to later retarget them with specific offers based on their behaviour.
For example, here at Proposify, we retarget people who started free trials with Facebook ads promoting our free iPhone app. We do this because we found that people who download our mobile app are more likely to upgrade to a paid account at the end of their trial.
If you don't get a lot of traffic to retarget, you can also create lookalike audiences. Facebook can use the information they know about users in your funnel, website visitors, existing customers, etc., to identify and reach similar users at greater scale.
If you’re selling premium services, online ads or content that addresses an entire general market probably won’t deliver the specific kind of customer you want. You may need to create more personalized content that targets certain roles within certain types of companies.
By using account-based marketing techniques such as targeting specific roles at specific companies with customized content, your conversions rate will be higher, making your ad costs lower. This will allow you to charge more because you know exactly who is consuming your marketing and that they can afford your services.
LinkedIn Navigator lets you search to find the particular people you want to target within an organization, like the CMO, or the IT director.
I wrote a post a few months ago about how to use customized lead magnets to generate sales.
6. Have the guts to turn away bad leads
Don’t be afraid to say no to bad leads.
This is a mindset thing. People are afraid to turn away business, but it’s the mark of being good at sales and good at business to know who your customer is and who isn’t.
We had a $10 plan but got rid of it because the customers just weren’t good; they required too much support time, rarely upgraded, and didn’t stay.
It was easy for us to get rid of the plan because we saw it didn’t offer any value to them OR us. We recognized that we weren’t a good fit for each other. They would be better served and happier with another supplier, which meant we would be free to focus on keeping our high-value customers happy.
Conclusion
For most businesses, pricing is probably the trickiest aspect of the proposal. Price it too low and your business could lose money. Price it too high and you risk losing the whole project.
But by employing value-based pricing, you can get off the pricing teeter-totter. Define the value you’ll deliver to the client, don’t just leave it up to them to figure out. Explain how you can help them achieve their goals, solve their problem, or improve their business.
This will stop you from chasing the lowest price provider, and set you on your own track to success.
