Biz tip of the week: What value do you bring?

Most business owners do not charge enough for their products and services. This is especially true for new business owners. Several different methods are available to determine pricing. Two common ones are the cost approach and value approach.

The cost approach considers time, labor, expenses and then adds desired profit to determine the price. Value based pricing is completely different. The fee is based on the value of the results delivered. It is the value from the client’s perspective that matters. Based on the value they receive, what would they pay?

Regardless of the option selected, the business must be profitable to be sustainable.

Consider the hypothetical case of two local business consultants. Both consultants work with similar clients in related industries. Their clients’ average $5 million in annual sales. The average rate for a business consultant is $200 per hour.

Back to homepage

Subscriber Login

Keep reading with a digital access subscription.

Subscribe now

Consultant A gives traditional business advice, and he charges the customary $200 per hour. His clients average 15% growth in both sales and profits. As a result, the consultant is retained for several years. Most of his clients improve to $7 million in sales after about five years.

Consultant B is exceptionally gifted, one of the best consultants in the industry. He sees great solutions other consultants do not. He maximizes system and process improvement, while reducing expenses at the same time. Productivity and profitability improve dramatically. Then, they leverage strategic partnerships and expansion to maximize profitability. The results are incredible. His clients often see 65% initial increases in both sales and profits. Several of his clients go from $5 million in sales to more than $20 million in just five years.

Consultant B switched to value-based pricing, and no longer charges an hourly fee. If he does not deliver results, he does not get paid. His clients love the pay for performance concept. When he does deliver results, he gets 10% of the increased net profits. He gets paid more than $200 per hour, and his clients benefit, too.