Set pricing based on value

Yesterday, I had a number of different conversations all about the same topic: how do you decide what to set your pricing at? The question isn’t an easy one by any means, and there are a lot of people in the marketing world whose pricing is actually too low. Let me give you an example. Surveying and research cost a lot of money. Your typical engagement for a research firm can run in the tens, if not hundreds of thousands of dollars. However, research firms earn this money because of the value they create. If you’re facing a billion dollar music industry and paying for some research can help you access 1% more of that market, then paying $50,000 to earn $10,000,000 is a pretty good deal. For those familiar with ROI (earned-spent/spent), that’s 19,900% ROI.

Look how many digital marketers are underpricing themselves and their services. If your work doing SEO helps a client change their website conversion rate from 4% to 5%, what value does that bring the client? If you’ve done your homework, you should know what a conversion is worth. You should therefore know what a 1% increase in conversion will mean for the client financially and can bill accordingly. Here’s an example.

Let’s say you’re working for a car dealership, and the dealer’s net profit on vehicles sold is $3,000. Let’s say their website brings them 200 prospects a month, and of those, 20 buy a car. Let’s say you’re charging them $100 an hour and working for them 20 hours in the month. What would the value be if you increased their prospect conversion by 1%? Here’s what the spreadsheet might look like:

Untitled 2

You can see in the chart above that by increasing the website conversion rate by 1%, the client sells 5 more cars a month. That means they earn $15,000 more a month with your efforts. The question you have to ask is not what you cost, but what kind of ROI you want to give to the client. If you billed at $100 an hour, you’d be giving them 650% ROI. If you raised your rates to $150 an hour, you’d still be giving them a very nice 400% ROI.

That’s the secret to setting your pricing. If you know what the ROI of what you do is, you can then ask for a target ROI and sell on that, rather than sell on your cost. You’d be able to sell for more money while still creating lots of legitimate and provable value for your client.

Of course, that’s predicated on two assumptions. The first assumption is that you know what value you can create, and the second is that you can measure it. If you can’t do either, then you’re stuck with setting your pricing based on what you cost and not what value you bring to the table.

Try copying the basic model above and seeing how many different ways you can add value to your clients’ businesses, and then what share of ROI you can give them while still earning a decent amount for yourself.

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  • Whitney Hoffman

    Well, and if we take this into the non-profit sector, similarly, we need to set the value on:
    Attracting new donors
    Attracting new members
    Donor retention
    Sponsor retention/expansion
    New members, if you have a membership base
    Membership retention

    And in the end, it’s so much better if you know where you are and where you’re going- without any baseline data, it gets tricky to evaluate ROI, from s service provider or service purchaser point of view- again, going to show that you live or die by your data set.