198 - Value pricing v fixed rate

Debate with Nathan Wrigley and David Waumsley

Setting up the Debate

This should be fun. Not directly related to WordPress, but many of the business courses and events for those running WordPress services focus on this.

Overwhelmingly, (or loudly) they advise a type of value pricing over fixed rate. This is where you charge according to the value to the customer and because it is about making more money it is about finding customers who see the higher value.

Nathan is going to argue the fixed rate side and David will argue the value pricing side.

Value Pricing

Apple and Starbucks are good products based examples of success with value pricing. Their costs may be similar to competitors, but they are able to charge more. The difference in quality may actually be very small but significant enough to buyers. I think a lot of the specialist shops started to do this in the 80’s, for example Dunkin Donuts, Tie Rack and more.

It's more sophisticated model as it looks at all the factors that affect the psychology of buyers. Look at Apple's “1000 songs in your pocket”, getting the value of the iPod over in opposition to a rival, cheaper mp3 player.

Most people don’t have a clue about actual costs (if there is such a thing). They have comparisons and a belief that things that cost more are of better quality. A small number of people alway buy the best. Most tend to avoid the cheapest if they can.

If you are someone who really does their research and hates to buy anything over the minimal cost, the chances are you are not consistent in all your buying.

It is a mistake to assume your customer thinks like you. If fact, if they are coming to you for what you know, it is almost certain they don’t.

With custom services fixed pricing is difficult anyway. You don’t get to control clients who you depend on to deliver the goods, so it is very easy to undercharge and go out of business.

Charge well enough and you may have enough time to make a difference to clients overall profitability. Some that value pricing implementers focus on - solving wider business problems (more time more profit- not just delivering functional software).

It can be a solution to the problems of fixed rate. A client sees a low rate and excludes you. Clients don’t understand what you can do for them so have no context for the price.

Fixed Rate

This method is far more transparent and accessible to clients, they understand this because this is how commerce usually works. You see a price in a shop and you expect to pay that.

You don’t have to hide what you have charge others. People can see what they are getting easily, you can put your rates on your website and casual browsers can made decisions without having to speak to you and get into complex negotiations in which you have to convince them of the value that you can add.

Long term relationship of trust could be easier to form if the client feels you are trying to give them the best cost. This is easy to underestimate, but we all feel good when we've received a great deal, and annoyed if we feel that we've been taken for a ride. With value pricing, if you don't knock it out of the park, you're going to open yourself to the criticism of ripping people off with empty promises.

It is not easy to show value quickly. Saying simply 'we offer this service for this fee' is easier, although I suspect that those with big budgets might not be looking for this attitude.

Promising to deliver what is beyond your control is problematic. Our industry seems to have many customers who feel they have been robbed.

Probably too many folks are trying to find “value” clients. Many competitors set up yesterday with a page builder and a script from a course and think they can charge top prices. I really think that this is an industry problem that's going to get worse and worse!

The biggest promoters of value pricing teach it but have stopped doing it. They are out of the business they are telling you how to run yours.

Final thoughts

We don’t do value pricing because we can’t be bothered with the pitching.

We like the more passive nature of the hosting and care. The price is low so people have no reason to search for cheaper during a recession, but profitable enough to feel some security.