Value Pricing | Christian Brim

Specifically around value pricing, the idea is to create more value in your pricing so that you can increase your prices. So I'm not talking about inflationary increases in price because your costs have gone up. I'm talking about truly raising the top line because you delivered more value. And how you do that, and I described this in the book, is you do an in-depth analysis of your customer or your client and determine what their underlying problem is. And the value of that problem.

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Welcome to another edition of The Profitable Creative, the only place on the internet where you will learn to turn your passion into profit. I am your host, Christian Brim. Today I'm joined by nobody. I am going to talk about one of my favorite subjects, value pricing. And I'm going to record this in video format as well. So if you want to hop over to YouTube, you can watch the video and, and see the graphics that I reference. I wrote a whole chapter in my book, Profit First for Creatives, on value pricing because it is the most powerful lever in your business to increase your profit. At some point, using Profit First or not, You're going to run out of expenses to cut. There is a baseline of expenses that your business needs to survive, and there's nothing you can do to cut further. So how do you increase your profit at that point? Well, really, there's only one way to do that, and that is to increase your revenue, your top line. And, you know, there are a lot of strategies to implement. One of them is just raise your prices. I'll probably do another episode on that whole topic just because people seem to struggle with the, the concept of pricing in general. Specifically around value pricing, the idea is to create more value in your pricing so that you can increase your prices. So I'm not talking about inflationary increases in price because your costs have gone up. I'm talking about truly raising the top line because you delivered more value. And how you do that, and I described this in the book, is you do an in-depth analysis of your customer or your client and determine what their underlying problem is and the value of that problem. I was introduced to value pricing many, many years ago, read a book called The Firm of the Future. It was written by a lawyer and an accountant from Australia. And yes, that may sound dull, but it really was a good book. And one of the things that they talked about was this concept of value pricing. And they put it into the context of a legal firm. And they said, "Well, if you think about it, your best day is your client's worst day." So your client has been charged with a crime, going through a divorce, been sued, whatever their bad day. And so they walk into your office as a lawyer, and they say, "We've got a problem." And the lawyer's eyes light up because what does that mean? That means profit. I get to bill the shit out of this person. But that puts you at odds with your customer. And so, there's this tension then now between what you need and want and what the client needs and wants. And it's adversarial. The concept that they put forth was, how do you change your service such that you're on the same side of the table as your client. You're providing value and they're receiving value, and everybody's happy. So changing it from a win-lose to a win-win. And I understand I probably don't have any lawyers listening to me. If you do, I'm sorry, but law is an adversarial industry, and, and it is unique in that regard. And It reminds me of the joke that the town that was too small for one lawyer, but it had plenty of work for two. But we can take that lesson and we can apply it to any other business. And the way I talk about it in the book is determine what your client's underlying problem is and its economic value to them. Sometimes it's hard to determine an economic value. Sometimes it's a— more esoteric thing and you're providing value at an emotional level, like interior design, you can't really quantify a value on how someone feels in their home. It's not always easy to determine the economic value. I would push you to do that work and try and come up with a calculation for every situation, even though it may be difficult to come up with. Like the interior design example, you could certainly show the value of the increased property value for the— that kitchen remodel. You're going to have trouble assigning a value for how that person feels when they're hosting Thanksgiving dinner with all their family and they are, you know, are just amazed at the space and they're enjoying it. Can you quantify that? Yes. Can you put a hard dollar amount on it? Probably not. But that's the concept that you want to be thinking of when you're dealing with non-economic value. You're trying to determine what it is that they actually value, right? Why are they buying this thing from you? When you have a very clear idea of the problem you're solving and the money that's involved, you can then tailor your solution, your services, to solving that problem. And once you do that, you have the ability to extract more value, right? Let me give you an example. So let's say you are a marketing agency and you're trying to sell your, your marketing services. So that's social media management, paid ads management, SEO, design, you know, you have a whole litany of services, but you have to understand that that's not what any customer is buying, right? What they're buying from you is some result. And so in this example, I can use CORE's example. When I would hire marketing agencies in the past, the question was, what did you spend in the past? What's your budget? That's the exact wrong conversation. The conversation needs to be, what is your business intent here? And our business intent was to obtain more clients, right? Okay. And my business clients have a very real, very predictable, very measurable economic value to them. And strangely, none of the agencies that I ever talked to or hired ever asked me that question. What is the value of you getting a new client? Not just the current revenue, but what's the lifetime value of that client? Okay. Well, in our business, a client is worth about $50,000. That may sound high, but you got to understand that most of our clients on average are with us for 10 years. So you look at that lifetime value and Now, budget has a context, right? Okay. Well, if I can get you a client that is worth $50,000, how much are you willing to spend to acquire it? Well, I'm willing to spend a lot to acquire it. Historically, I've spent about 10% to acquire it. So now you understand as the marketing agency, what dollars you're working with, but you also understand the context of the services you provide, right? So do I really care if you push it with social media and you get me clients via social media, or you do direct mail, or you create this awesome web design and do great SEO on it? No, I, I could care a rat's ass how you do it. It's a question of, can you deliver the client? In that case, what you have to see is that you're pitching services, you're pitching features and benefits that I don't care about. And if you can shift your mindset from, I provide these services, and trying to drive your pricing based upon that, to solving my problem, which is I need more clients, then you can extract more value from me, right? And it may be that you personally in your firm cannot deliver all of those services, and that's totally fine.

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I don't need to know how the sausage is made. If you outsource X, Y, and Z to somebody else because you don't have in-house capacity to do it or expertise, I don't care, but it puts you in the driver's seat. You're the one extracting the value and you can determine what you're going to pay, what you negotiate to pay whoever it is that's else is involved in that process. It shifts the mindset from, okay, these are my costs to provide a service and this is the profit margin that I want to make, and so this is how much I'm going to charge. It shifts it from that mindset, that mentality, that, that's really the old-school accountant way of thinking about it if you want, to a value pricing model where you're determining the value to the client and working backwards from that. They're never going to pay you more than the economic value of the solution, but they're willing to pay you a lot larger percentage of it than you're currently billing them for, right? I use, have used, and recommend that our— my clients use a tool called Lean Canvas. Lean Startup was a book written many years ago centered around the tech industry, and there's this whole ecosystem that's built up around it, and Lean Canvas is one of those things. But it's basically a one-page business plan. And I recommend that existing businesses do it because it will force you to relook at what you're doing. I'm showing an image here of a sample Lean Canvas. If you just put in your browser Lean Canvas, you're going to find all kinds of places where you can download it for free. This is on leanfoundry.com. The layout is super simple and it's supposed to be, but remember, to get something super simple takes a lot of work. Just because it is simple does not mean it's easy. I start with the problem, which is the problem as your customer or client perceives it. So many times in existing businesses, because we've been doing things and we've been in the industry for so long, we start to think in terms of ourselves in the industry, right? So in the accounting business, it's payroll, bookkeeping, tax preparation. Okay, well, the reality is, uh, well, you know, you could, you could throw other terms in there. You can say tax planning or advisory or wealth management, whatever it is, it doesn't really matter. The thing is, is those are our terms, and those are terms that the customer probably isn't thinking in, right? You have to define the problem as your client describes it, not as you describe it. Because as soon as you start trying to describe the problem in your terms, you're going to be on the wrong track. When we did this for our clients, we went back and we re-listened to interviews with our clients. And we listened for things about why they Bought our services? What were they trying to solve? What pain points did they have? And you can do that data gathering a lot of different ways. We used our marketing agency to actually do them, do the interviews. So it was, I would say, you had that cushion of a third party that they were probably willing to say things to them that they weren't going to say to us, potentially. But that's not to say that you can't just pick up the phone and have these conversations or hop on a Zoom call and ask these questions. You absolutely can, and it costs you nothing, and you're gonna be amazed what you find out and what you hear. What problem do we solve for you? What problem were you looking to solve when you hired us? What is your biggest challenge in business right now? So not as it has to do with accounting or marketing or anything else. What is your biggest business problem? Because that's where the most pain is and that's where the most value is. Now, you may not be able to help at all with that, but asking that question puts you on the right track because you have to understand the pain so that you can understand the problem so that you can understand the solution. Think of yourself as a physician. The, the patient comes in and they say, well, my back hurts. Okay, well The doctor does not say, okay, well, uh, we're going to wheel you into the OR and we're going to fuse your spine, right? That would be malpractice. Yet how many of us, somebody comes to us and says, we need X, Y, and Z from you, and we say, oh sure, we do that, right? Well, that's malpractice because you don't really know just them describing their symptoms what their problem is. You have to dig in and understand the underlying cause before you can provide a solution. Once you have the problem well-defined, then ask questions around money. Okay, what would it mean to your bottom line? How much money would it save you? How much money would it bring you in if we solved this problem for you? Now, here's where you run into some problems sometimes because a lot of business owners are not competent with finances. And they may not really know the answer to that question. And you may have to ask a lot of follow-up questions to help them come to that answer. You may have to bring in some other expert or, or even an accountant to say, can you help me quantify this? Like they're having employee turnover. Okay. What does that cost them? What is the cost of having to replace half your workforce every year? Okay. Once you have the quantified dollars, You know what you can move into for pricing. You may determine in asking a lot of your clients that the value that they perceive to solve this problem isn't worth your trouble. And that's a good— because now you know that you need to pivot and switch what your solution is. Because if the dollar amount they're willing to pay you is not worth it to you, you can't make a profit on the solution, then there's no reason to go down that road. But how many times do we end up trying to pitch the value of the solution when they don't even understand what the dollars are? They don't know how much it costs them that they have to replace 50% of their employees every year. From a marketing standpoint, they may not know what their lifetime value of a customer is. They probably don't know what their cost of acquisition for a new customer or client is. All of these things you're going to have to work through with them to help them understand so that you can quantify the answer for the solution and the pricing. When it comes to determining the solution, again, you have to use terms that they understand. You have to describe the solution in a way that it's easily understood by the buyer, not highlighting what it is that you, you do. So much traditional marketing is, well, features and benefits. We do this and the benefit is to you. Great. Simplify it to say, your problem is X, we— it costs you Y, we can solve it for Z. I mean, that's when you get people lining up and throwing money at you because it's very clear. You may have to do some education in your marketing around the costs. That could be a very compelling thought leadership way to market your product or service because you're educating them on the true cost of what them not buying your service is. So essentially, I'll sum this up. Use the Lean Canvas to help you determine the problem that you're solving in terms that the client or prospect or customer describes it, determine a solution, again, in terms that they understand, and set your pricing as close to the value that they receive as possible. Now, you're not going to get 100%. You're probably not even going to get 70%, but how about 50%? If— I'm not saying this is the case because I know I can do it for cheaper, but if somebody came to me and said, "Well, I can give you a $50,000 client for only $20,000." Is that a good business deal? Yes, I'd buy that all day long. If someone told you, "I'll sell you a house that's worth $100,000 for $50,000," would you buy it? "Yes, and show me where I can buy more." I'm not going to spend that much because I know historically it's only cost me, you know, say $4,000 or $5,000 to do that. But if you come in and you ask the question correctly and you understand my problem and solution, my problem is that I have to spend $4,000 and that represents all the money that I'm going to make off that client. That's the, that's the total dollars. That's not even the gross margin of the profit that I'm going to make in a client in a year. So I don't cash flow positive for a year. All right. So my problem is I've got to have cash to grow. But if you came in and said, well, what if I could do that for you for $2,000? Sign me up. I'm going to ask intelligent questions to make sure that you can deliver. "But I'd buy that all day long." Right? So in that case, you're using this concept that also talk about in the book, this concept of BATNA, best alternative to a negotiated agreement. It's a term that comes out of contract negotiations and people that teach that use that term, but it applies in every business situation because essentially what you're saying is, what is their alternative solution? My alternative solution is what I'm doing and it costs me $4,000. So you can charge anything up to $4,000 and I'll buy it, right? So that's the upper limit of what you can charge. It's not the 100% of value. The 100% of value gives you context because maybe there is no alternative solution. Maybe no one solved it. And if no one solved it, you can push very high towards that upper limit of the whole value, assuming that there's somebody else in the market or they're doing something currently that is solving their problem. That's their alternative. So you have to have a clear understanding of what their options are to solving this problem to set your pricing. But at the end of the day, if someone comes to me and my best alternative is $4,000 and they tell me $2,000, is there any discussion on pricing? No. Do I need to know your features and benefits? No. Do I need to know how much profit you're making on it? No. You could be making 90% profit on that $2,000. I do not care. So I want you to take away from this, really just open your mind to pricing, be more intentional about your pricing. Don't be set in what you have charged in the past, what a customer has paid in the past, what your competitors charge, the marketplace charge, what your margins are. Get rid of all of that and refocus your thoughts on what is the value that you're delivering, and then you can unlock the pricing and unlock your profits. Until later. Tata for now.

And that's a wrap for today's episode of The Profitable Creative. Until next time, you money lovers. And don't forget, Profit First for Creatives is live via Amazon. Link below.