Week 39, 2019

Value-Based Pricing: Estimate Cost, Justify Margins, and Discover Value.

Andreas Holmer
Nov 8 · 3 min read

Each week I share three ideas for how to make work better. And this week, the topic is pricing; specifically, value pricing.

Why am I writing about this? Previous issues have dealt with estimation and the pros and cons thereof (see issues w37 2019 and w382019). From there, it’s only a short leap to pricing. Because estimates are, for better or worse, a critically important consideration. So how then does our inability to estimate accurately affect our ability to accurately price?

Let’s dig in.


How do you price goods and services? There are several methods. But they all involve an estimated cost of delivery. Because whatever the final price might be, we need to ensure it covers costs incurred — preferably with a comfortable margin.

Cost+ is the by far most common pricing method. But it’s not the only one. For more, check out HubSpot’s Ultimate Guide to Pricing Strategy.


Speaking of which: how do you decide what constitutes a reasonable margin? While most people rely on a process of trial and error, a select few look to so-called “extraordinary guarantees” to justify a price premium. How much extra would your customers pay for, say, a guaranteed delivery date?

Extraordinary guarantees. There’s a book about them! And an HBR article. I even found a 4-min video introduction.


Guarantees are great because they put wiggle room between cost and price. But to maximize that space, we to break the cost-price tradeoff all together. We need to stop pricing deliverables and start pricing customers or, specifically, customers’ perception of value.

Value conversations are where value pricing goes to die. They’re hard. But fear not! There’s a hack to get you started.


How we price our work affects our experience of delivering it. And if the future of work is about fulfillment and creative expression, it makes sense that we price accordingly.

Cost+ and other cost-based pricing methods are designed for a bygone era. One in which work and route labor were one of the same. But that’s not the case anymore.

This is the knowledge economy. And knowledge work — creative work — abide by different rules. And one of those rules is that knowledge work is all but impossible to estimate

Given our tendency to get estimates wrong (again, see previous issues here and here), it behooves us to leverage value to put milage between cost and price.

Value-based pricing is the holy grail in this regard. It offers us the opportunity to substantially widen the gap and maximize customer value at the same time.

It’s a laudable goal. The day we stop pricing deliverables is the day we start delivering value. It’s a win-win. And who doesn’t want that?


That’s all for this week. But if you want to learn more about value pricing, check out Blair Enns’ Pricing Creativity. And if you want more still, you can’t go wrong with one of Ron Baker’s many books.

WorkMatters

Each week, three ideas on the future of work.

Andreas Holmer

Written by

WorkMatters

Each week, three ideas on the future of work.

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