What is Value Billing?
It took me a lot of years to get my head wrapped around this concept. Value billing is an attempt to price a product at what the customer values that product rather than the seller’s value. Traditionally, sellers have priced their products using either their cost plus a markup, time spent at an hourly rate, or some survey of what prices their competitor’s use for the same product. All of these pricing methods have pluses and minuses in their application, but in the end, it still comes down to what value the customer places on the product.
How do you price something using the customer’s value set when you really don’t have a clue of what they think about your product? Currently, the way we apply Value Billing is to help out clients build packages with three different pricing options. The Good, Better, and Best package approach allows the customer to select which package fits their needs and pocketbook. Designing what goes in to each package is where the art is. Usually, we try to make the middle package the one that most customers select. The low-end package is typically the absolute minimum to get the job done and therefore the one that appeals to maybe 15% of the customers. The high-end package is the most interesting in that we try to make it as expensive as possible. This tends to make the middle package look even more appealing.
Converting pricing systems from the traditional approaches to Value Billing has produced an interesting phenomenon – our guesses at which package customers would select have turned out wrong most of the time. Customers who we thought would buy the cheapest package for sure, many times went for the middle or even high-end package. We have come to realize, that in spite of how well you think you know your customer, you really don’t know them very well at all when it comes to how much they are willing in spend for your product.