How I Earned A Lot More on Projects by Changing My Pricing Strategy

Jul 19 2013 by Mike McDerment | 16 Comments

Before co-founding FreshBooks, I ran a small design agency. I felt like I was on a treadmill, billing by the hour, and not earning as much as I thought I was worth.

So I rethought everything.

The result was powerful: In 2004, I only worked 19 days, and made over $200,000.

The strategy change I’m about to talk about gave me the funds and the time to work on my startup. That startup would later become FreshBooks, which we were able to grow to over 5 million users.

So, how did I do this?

I wrote a book about how I did it (you can get the book for free) but essentially, I moved from billing by the hour, to billing based on the value I delivered to my customers.

Sounds like a simple enough change, right?

The truth is that value-based pricing did not mean slapping a bigger price tag on the services I delivered.

It meant thinking about my design business in a whole new way, and changing the way I worked with my clients.

Here are five ways I changed my thinking and the way I worked.

Don’t Present Price Up Front

Most clients want to know what your prices are up front, and a lot of service providers feel obliged to give an answer.

But I found that starting the conversation with the price leads you down a bad road.

Why? It puts my needs ahead of the client’s. It emphasizes what I want out of the relationship, not what they want.

Not a great way to build trust.

Presenting the price of your services at the start also means you aren’t able to really get to know the client and what they need help with most.

So, instead of spitting out my rates at the start, I would tell the client that I first needed to understand what they wanted.

Doing that earned their trust because it showed them that I was interested in understanding their unique problems and crafting them customized solutions based on what I learned about them and their needs, rather than trying to hawk them cookie-cutter solutions that I sold to all clients.

Find Out What the Client Really Wants

With the question of pricing off the table for the time being, the client and I would begin to explore what they wanted.

I’d probe for opportunities to improve their business with my help — specifically their biggest pain points because those would be the things they’d be most motivated to solve.

I’d try to get at their serious challenges. Are their sales trending downward? Are they facing new competitors?

My objective was to make sure we were both clear about what results they’d like to achieve.

A lot of the time, we would end up talking about a project that was more involved than what the client first had in mind.

For example, I would often redefine a project from simply a paint job for their website to transforming their site into a marketing and selling engine that could help them hit revenue targets. If we had talked about price up front, we probably wouldn’t have gotten there.

When clients have your fees at the top of their mind, they’re not likely to be as open, boundless, and creative with their thinking and vision for the project.

Position the Price as an Investment, Not an Expense

If you start the conversation by throwing out a price, you’re just an expense.

Nobody likes expenses, so clients — typically entrepreneurs and businesspeople — try to keep them as low as possible.

By following my process, I was able to position my fees as an investment rather than as an expense.

That’s because the price would be directly connected to something the client wanted to achieve — it would be a means to help them get results.

When you position your price this way, the client merely wants to know that the investment is a sound one.

As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website.

Essentially I based the price on the expected value to my client, not on how long it would take me to do the work.

That’s a great deal when you think about what a new site is going to deliver for the next several years, for most businesses.

You might be wondering now what you can do if the value of the project can’t be measured in dollars.

When that’s the case, try to connect the price to a tangible, measurable benefit.

You’ll probably get some helpful information if you ask questions like What does success look like to you? and How are you going to know you’ve achieved what you want?

I often used the question How much is a new customer worth to you? This question made sense because SEO was often part of my design services, and frequently, the value they gave was more than the cost of my services.

So if I could help the business get even one more new customer, it was a good investment to hire me.

But sometimes the client didn’t know how much a new customer was worth to their business. That then opened the door to a project to help them analyze their marketing channels and get some key metrics to measure performance in place, which in turn created more value for them. Yes, this would cost more, but it was also a fantastic investment for the business.

Present Several Options

If you give a client a single price, you’re asking them to accept or not accept your price. The discussion becomes a simple "yes/no" ordeal. Instead of just giving my client these two options, I’d present my project proposal like a menu or a pricing table — with multiple components that had distinct prices.

Some components were optional, but some were required because they were fundamental to the project.

Together, all choices would address the business needs and goals they shared with me during our initial conversations, and I’d offer different solutions at various depths.

I wouldn’t haggle on price. If a client wanted to pay less, they had to choose to have less value delivered.

That put the clients in the driver’s seat where they could make an informed decision — one where they were clear about the trade-offs.

Create a Virtuous Cycle

Following these news ways of working and thinking had a number of positively profound effects on me and my design agency.

For one, in order to help my clients solve their big issues, I would often have to learn new things and develop new skills, which increased my value in the marketplace.

For another, I was no longer competing with other service providers on price. My clients stopped seeing me as a commodity, someone with an hourly rate that they could compare to somebody else’s.

Instead, I was competing based on distinction; on the unique, customized ways I could help my clients reach their goals.

I should add that you have to be careful not to get in way over your head by over-promising and under-delivering.

If I felt my agency couldn’t deliver the full solution, I saw that as an opportunity to partner with another service provider. I would pay them for the work, developing a lasting business partnership along the way. And in the process, I’d learn about their area of expertise to get better at both selling and delivering it to my clients.

I also learned that it was okay to say no to clients who don’t see the value I presented. Clients who want to grind you down on price only lead you to other low-quality clients. It’s a vicious cycle that lots of web professionals get trapped in.

One way out is by focusing on clients who are willing to pay for the value you deliver, because they’ll lead you to other clients who have other exciting projects, thus creating a virtuous cycle for your design business that will take you upmarket.

Parting Words

The five key concepts I discussed helped me earn more as a designer, and ultimately they enabled me to focus on FreshBooks and get it off the ground.

If you’re interested in learning more about value-based pricing, the book I mentioned earlier is called Breaking the Time Barrier: How to Unlock Your True Earning Potential, which saw 87,031 downloads in the first month.

You can read the book for free here.

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About the Author

Mike McDerment is the co-founder and CEO of FreshBooks, a simple-to-use, cloud-based accounting solution designed exclusively for small business owners. Since launching in May 2004 from his parents’ basement, FreshBooks has helped more than 5 million people send and receive, print and pay invoices.

16 Comments

@AndreLimaBH

July 19th, 2013

simply PERFECT. Congrats.

Clemente Gomez

July 19th, 2013

Read this book when it launched. Great book

Patternhead

July 19th, 2013

Hey Mike,

“In 2004, I only worked 19 days, and made over $200,000.”

Now that sounds like my kind of job :)

Nice article.

Hori

July 19th, 2013

Good article Mike, no doubt, … but what do you think about giving something like “price starts in…” , I mean give them the minimun price, … I think it helps you because you are talking to someane who is willing to pay that amount (at least!) , so you are no talking to a looney who was expecting you to charge 5$ for his/her website…

P.S: sorry for my English, I speak spanish.

Daniel Heywood

July 19th, 2013

Mike, great advice. I often find that clients want to know the price off the bat which doesn’t leave anywhere to go. I try to keep price of the table too, until I find out what the client really wants. Offering 3 price options works for me, and I explain the benefits of each. It gives people more to think about what you can really offer and of course what they will get from it. Almost always, clients will not just go for the cheapest option if you do a great job of selling what you do.

Christopher Gunn

July 19th, 2013

This is a great article. I like the idea of presenting prices as a menu, giving them many options to meet their needs and keep it within budget. It’s ironic that as designers, we pride ourselves in coming up with several solutions, and yet often present only one solution for price.

I think the most profound point you make is that you need to change your mindset – shift your services into being an investment and focus on quality services and quality clients. Value based pricing is certainly something I will incorporate more into my business.

Randy

July 19th, 2013

Fantastic article! Finally, someone I agree with 100%! I have argued on other blogs where people say “start your bid high, then come down!” That is horrible advice IMO. That makes the client wonder why you gave them a higher price than what you would have expected. They will then continue to haggle “price” rather than focus on content, design, etc.

There are tons of products out there on store shelves that are manufactured for very little money, however, the value is in the time they save you. Why not us developers too?

Your last section hit the nail on the head. My motto has always been “bad clients will lead to more bad clients!”
So start weeding your gardens developers!

Gabriel Neuman

July 19th, 2013

Grate info, for sure I will implement some of the tips in this article to get better resoults for my business.

Simon Wardley

July 19th, 2013

Oh, I’ve used the same mechanism before and there are pitfalls – its not all rosy.

You have to be prepared for some pretty clueless businesses out there.

http://blog.gardeviance.org/2007/08/competitive-advantage-worth-part-ii.html

James Rigley

July 20th, 2013

Definitely an eye opener. And the book is written amazingly well in a conversation style, it just sucks you into it :)

Lauri J

July 20th, 2013

Great article!
I’d still like to ask, how does the process goes along? I mean, first you get in touch with the client and set up a meeting. Then start finding out the pain points and the requirements, right? And finally give on offer.
Do you prefer just estimating the hours and using the hourly rate to calculate the total, or does the value based pricing mean that the project is fixed price?

Henrique

July 21st, 2013

What do you do when the client asks you to explain your price? For hourly rate projects it is trivial, but in this case it seems hard… would you say “ah, it is because I take 40% of your gain”?

chris

July 21st, 2013

Thanks for the great and inspiring story. It’s what I’ve been trying to use in my business, but it gets hard for client to compare, when everyone is just offering hourly rates / price per project.

I was wondering how Mike was estimating the expected value of the investment…

Lakhyajyoti

July 23rd, 2013

Great post. Changing price strategy always help us to earn more.

Downloaded your free ebook. Thanks for the share.

Toni

July 24th, 2013

This is an excellent article and the first time I’ve ready something like this. I will definitely be looking into your book and keep on hand for those conversations. Price is really the main determining factor for clients who don’t understand that a website is an investment. Skimping on this key component to generating revenue is the first bad decision a business owner will make. I try to stress to my clients the importance and difference between a professional website and a “free” website. Turning the questions around and motivating the client to look at the future of their business and to think about their potential customers is a great selling point. Thanks for this info!

groovy

July 28th, 2013

This is really very difficult to execute. You need self discipline not to be too eager in getting projects.

But in my place, most clients are so stingy. Sometimes charging my hourly rate at work for freelance jobs is too much for my clients.

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