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How to use value-based pricing for design projects?


Question

tl;dr What is the best way to use value-based fees for design projects? What would the "value" be?

I see that a lot of designers use time-based pricing (hourly, daily, etc.) Time-based pricing is horrible, for the following reasons:

  1. There's a conflict of interest between you and the client. The longer the work takes, the more you earn and the more the client loses. So it's unethical.
  2. When you set an hourly fee, you set a limit to what you can earn, as you have limited time. Say you set 100,000$ as your goal for the year, who knows you can't earn double, or triple that?
  3. It's difficult to justify a price after you are done. What if you finish the project, and it takes you much more than you calculated, and the client refuses to pay?

Second option, putting fixed prices to specific tasks is better, but still not really good, for the following reasons:

  1. When you set a fixed price to tasks like business card design, website design, etc., it might be completely different from one client to another, and you will still be charging the same.
  2. It's difficult to justify costs to clients when you show your services as commodities.

Best way to price things, most of the time, is to use value-based pricing, because:

  1. You will be able to justify much higher fees to the client, if you show them the tangible benefits they will be getting.
  2. It's ethical, as you base your fees on the value you are offering to the client. If they are expected to earn 10$ from your services, you can charge them 1$, and they will be happy with an ROI of 1 to 10.
  3. Sky's the limit.

But I'm wondering what the best way is when you are using value-based fees for design work. For example, when you are doing consulting, you can see that a 10% improvement in "Operation A" can offer the client 1 million dollars in revenue. So you can charge the client 100,000$.

With design work, the ROI is not tangible enough. How would you justify your fees to the client, and what would be the "values" you are going to be offering?

What exactly do I mean with "value-based fees"? I think "value-based fees" have a different meaning in design community. What I mean is this: There's a school of thought saying "your fees should be based on the tangible and intangible values the client will get." A tangible value could be direct increase in revenue. An intangible value could be offering a service no one else can offer, or increasing employee morale. But I'm having a difficult time thinking of values the client will get in design projects.

For example, one thing I can think of is showing the client how much a client with professional logos earn more. Let's say there's a research saying that "companies that have professional logos earn 10% more". You can use that research to say that the client will get an average of 10% experience in revenue and you can get 10% off of that. Though the difficult thing is, design is pretty much subjective. So what is a "professional logo"? Or which logo is better? All these things make value based pricing difficult, as it's easier to use value based pricing with tangible things, which design seems not to be.

2014/07/11
1
7
7/11/2014 11:56:00 AM

Accepted Answer

Free-market theory defines the value of a product or service as the amount of money someone else is willing to pay for it. In other words, the value of your service is how much a client is willing to pay for it, and your ability to justify your fee is itself a determination of your value.

I understand your definition, that the value of your service should be based on the expected revenue increase it would generate for the client. However, the amount of research you would have to do in order to make such a quote would usually outweigh the project itself.

Instead, if you're uncomfortable with a per-hour rate, use a fee-per-service rate but offer multiple options presented in terms of their value to the client.

In other words, you'd offer a basic quote for a simple logo design, and then progressively higher quotes for extra research (an assessment of the competition's branding strategy to ensure the logo is unique, or user testing ) or extra design (multiple logo options, multiple sizes/styles e.g monochrome or simplified versions).

You then present the client with a "menu" of options, and let them decide whether they want to pay for the higher-value work. Make it clear what each option entails -- i.e., if they only pay for a basic logo design, and then don't like it, there will be fees for a re-design.

The quotes for each value level would be based on your expectation of how much time it should take, but can also be adjusted if you think you can offer a service your competition can't, regardless of whether it is time-consuming or not.

2014/04/10
3
4/10/2014 3:30:00 PM

The only justification I ever use is my experience in the field, my portfolio, and occasionally (actually rarely) past results for previous clients.

If I charge $100,000 for a project, that's my price. If the client doesn't wish to pay my price, they are free to seek other avenues.

One thing to realize, for almost everything, is that after overhead is calculated, any price point is purely subjective. Who decided that a mechanic charges $40/hr for labor? or that a landscaping company charges $30/hr for labor? The companies simply looked at market trends for similar services, their own overhead, experience, and capabilities, played with pricing a little, and then determined the price which positioned their services where they wanted to be in the market.

The same holds true for design services. If you look around and everyone is designing tri-fold brochures for $100-$1500 it's purely your choice where you want to position yourself in that market. You could complete work for $100, $400, $800 or $1000 - the only difference is the return on your efforts and the amount of clients you may acquire. At the higher rates you need less clients to get the same return, obviously. If you know that every tri-fold brochure takes you approximately 10 hours to complete and your base hourly rate is $10/hr, then you know that $1000 for a brochure is the minimum you can charge. But if you have 10 years experience as well, you should be pricing higher in the market than the minimum because there is value in your experience.

I use value-based pricing almost exclusively. I know what my minimum hourly rate is and it is used to get ballpark low-end estimates. Beyond that, my experience and proven track record can't be quantified in direct hard terms other than the success past clients have had after using my services. I know what the market will bear in terms of pricing for general services. I price where I get enough clients to keep me working but not so low I have too many clients.

With value-based pricing there is no "hard" model to follow. You simply need to know your minimum rates so you never drop below them, after that you're free to price above the minimum anywhere you feel serves you best. If any justification is needed, it's merely a track record of experience and proven abilities to handle the projects on hand in an effort to show competency at your price point.

I believe, value-based pricing is really only a workable model after you've had some time in the field and have proven yourself as competent. Someone fresh out of school or just starting out may have a more difficult time acquiring clients unless they can specifically reassure the client that the work can be completed well and on time.

The primarily difference in pricing models is the scope of reflection. With hourly-based or time-based pricing you are looking at what you, yourself, or your business. What you can do. What you want to earn. What you feels you are worth. The entire reflection is inward. With value based pricing you have to broaden the reflection to look at the field in its entirety. You need to be aware of what others in the industry are charging for similar, greater, and smaller services. You need to know what the other designers in your general market would expect to be paid for a project similar to the ones you receive. So the reflection is based upon the industry as well as upon yourself. If you value price yourself above everyone else, you may price yourself out of the market. If you go too low you may actually not get any work due a perceived "bargain basement" value. You simply can't use value-based pricing unless you aware of the current market values.

Being creative in nature, there are many in the design industry with some big insecurities regarding pricing. After all, it can be difficult to put a price on yourself and expect others to agree to it. You are asking strangers to put direct value on you and rejection can be taken personally by some. But if you get past the emotional stuff and look at the business as a business by honestly valuing your services and capabilities and honestly compare those to what others in the industry are doing it shouldn't be too difficult to position yourself via pricing.

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