Introduction to Value Pricing
I think most designers would agree that design has a huge amount to offer businesses in terms of differentiating products, solving complex problems and delivering increased value to consumers. I think most designers would also agree that this ability is often ignored or seriously undervalued by those same businesses.
Value pricing is an attempt to redress the balance by pricing work based on the value it delivers to clients rather than the time it takes to create. The argument goes that the value of a logo, like the Coca-cola logo, is often worth more than the hours that went into its creation. So whether the final creation took a team of branding experts 6-months, or was sketched on the back of a napkin during the first meeting, the value to the client-and hence the cost-should be the same.
This can be best illustrated by the fable of the plumber, who when asked to fix a boiler, pulls out her hammer, hits the boiler in exactly the right spot to get it working, then asked for £100. When the homeowner questions how she could justify such a high charge for so little work, the plumber responds by saying "that was £10 for me hitting it with the hammer and £90 for knowing where to hit". The implication of this story is two-fold. First off the plumber wasn't charging for her time on the job, but for all the years of training that led up to that point, and ultimately the customer wasn't paying for the time either, bit for a working boiler.
It's a great story and one that makes a lot of sense. After all, there are plenty of circumstances where you care more about the output than the time it took you to get there. In fact with time being so precious, getting there quicker can often be worth more. This is one reason why Concord was always more expensive than a 747, and why some people will pay more for an abridged audio book than the full version - because they value their own time over completeness.
Designers often struggle to price projects based on the value of their work, so typically sell their time instead. As such, the only way to earn more money is to increase their day rate or sell more hours. So when you see news stories of that latest multi-million dollar rebrand, you can't help but wonder whether all that time was strictly necessary to come up with final logo, or whether it was the agency trying to justify extra revenue through unnecessary focus groups and consultation.
By contrast, value pricing takes elapsed time out of the equation and tries to focus on outcomes instead. That way it doesn't matter if it takes one month to solve the problem or six if the problem still gets solved to the clients satisfaction. If you're good at what you do (read "efficient at solving problems") you're able to generate much more profit than simply billing on time alone.
Value pricing seems to require a little more work up front as you need to spend time understanding what the client values before you can come up with a figure. For instance, are they willing to pay more for the project to start sooner, or for access to specific experts. Are they looking to hit specific revenue targets by a certain date, or are they more interested in developing out the capabilities of their team? Do they need every page designed and built, or would some kind of pattern portfolio deliver more value? Now none of the questions are exclusive to value proving, but you do need to spend more time uncovering these issues when you take this approach.
Value pricing also seems to imply fixed scope contracts, as you need to define exactly what value you're proposing to deliver to what price. So there's an interesting question as to whether value pricing can work alongside agile practices.
On the whole I think value pricing is a very interesting concept and one that I've seen come up more frequently over the past few years. Possibly because designers are feeling ever more squeezed to produce more for clients on less. So I can definitely see why people are attracted by the concept. However I also see a number of challenges with this approach, not least that fact that it's not how the majority of agencies price their work.
In my next post on the subject of pricing I'm going to flag up some of the issues I see with value pricing. Then I'm going to look at the more traditional approach of time-based pricing, paying particular attention to agile pricing. Finally I'll end things up with a short summary and a list of places you can go to find out more information on this subject.