Value Based Pricing Strategies for Digital Agencies
Value based pricing is one of the more difficult strategies to pull off. To be successful, you need to do market research, check competitors, and understand your customers.
A perfectly thought-through pricing structure will help you scale your digital agency in a matter of months.
Developing a value based pricing strategy
Why are experts charging too little for their services these days? Because
a) they’re trying to compete on price and
b) they use cost based pricing.
There’s no point trying to compete on price, unless you are the cheapest provider in the niche, bar none.
If you decide to go down this route, know that there will always be someone who’s willing to work for less. Globalization has made it very hard for experts to offer cheap services these days.
Cost based pricing means you set the price based on labor costs and materials. It works for Ryanair and Walmart, but certainly not for a small agency. Selling services this way is about as effective as a cat door in an elephant house.
On the other end of the spectrum are premium companies, such as Apple. Let’s discuss why they’ve chosen their pricing based on value.
The 5 advantages of value based pricing
While value based pricing is hard to set up, the long term advantages outweigh the disadvantages:
Thanks to a detailed competitor analysis, you’ll enjoy higher profit margins.
The competitor research can help you focus on more lucrative products/services.
You learn new things about your target audience, competitors, and the overall market.
Value based pricing is more strategic than the cost based alternative. This allows you to better plan your marketing strategies.
You’ll be able to accurately estimate the demand for your product/service which helps you create a proper supply channel, price and market it accordingly.
Naturally, there are also disadvantages to the value based pricing method:
Depending on your niche, the demand might be very low for your product or service. If new competition arrives, you’ll have to position yourself even better.
You’ll need to put a lot of time, effort, and resources into your value based pricing strategy. This is often an issue for those who are getting started.
This business method works well for small businesses who focus on a specific service or product. It’s very hard to scale for larger companies.
Value based pricing vs. cost based pricing
The value of a service depends entirely on the client, the size of their business, their niche and their unique situation.
To determine how valuable your expertise is, you need to check what kind of clients are you working with:
Business owners who want to get noticed, but don’t know how
Marketers who know SEO basics, but can’t do it themselves
SEO resellers who work with the first category above
A small business owner will benefit more from your experience than a reseller who’s looking for somebody to do the manual work. A reseller can buy a service for pennies on the dollar and sell it to the right client for a lot more.
Competition based pricing is a bad idea
There’s nothing wrong with checking out the competition. A competitor analysis is a good way of finding your way around a niche. However, you shouldn’t try jumping right into a highly competitive market without offering anything worthwhile.
While this might work in the gasoline industry, how are you going to set yourself apart with your content marketing offer? Unless you can outsell the competition with a good value proposition, your chances will be slim.
And that’s the reason why a bit of smart marketing combined with value based pricing can help.
Packages or custom quotes?
Our research has shown that the top ranked SEO agencies do not display their pricing online. We looked at agencies ranking for terms “seo agency” and ignored a few agency comparison sites.
These general search terms are bringing in a wide range of prospects: from individuals to big businesses. Naturally, they want to be quoting each client based on the size of their business and the value the client will be getting.
If you’re selling through a single medium (like forums), you can attract a lot of similar clients. In this case package pricing makes sense, because you can predict how much value your average client will receive.
Creating a sales funnel
Expensive services are often sold over the phone or in person. It makes sense to close them this way if the value is large. Clients need that extra attention, and at that price point you can afford to give it.
This is what we are doing at SPP as you can see on our pricing page:
We offer three different plans with a discount for yearly payments. Our enterprise plans are custom tailored, so we ask potential leads to either email us, or schedule a call.
This allows us to capture potential leads, research them, and create a valuable proposition. You can also use the opportunity to put leads into a sales funnel, and target them with automated emails.
Offering discounts to old & new clients
If you’re known for giving discounts left and right, people will always expect you to do so. These clients typically need excessive hand holding and are more trouble than they are worth.
Sometimes they even promise to bring you a lot of business if only you do this one gig for free. In clients’ eyes a free service is not as valuable as one they’ve paid full price for. This introduces a whole set of problems in the client-professional relationship.
One way around this scenario is to offer a free trial period (for recurring services) instead. Or, a cheaper one-time service that serves as a preview. It should be convincing enough that anyone interested in your service becomes a long-term client.
On the other hand, nothing prevents you from creating coupons for specific events that you can focus your marketing efforts on. Be it Black Friday, Christmas, or any other holiday–coupons remain a good marketing opportunity for any agency.
Instead, think about setting up a referral system through SPP.co. Those who bring in new clients will be rewarded. Depending on your setup, you can offer commissions on all sales, or restrict it to a certain period of time.
Create service bundles
As a digital agency, you know both your company and target audience very well. Analyze your current services, and think about a way to bundle them together.
Here’s an example:
Assuming you are selling monthly content marketing plans, why not offer blog writing and social media posts too? SPP.co allows you to design your order forms any way you like.
In the above example, a client can add extra services to their subscription if they are interested. Use the flexibility of order forms to also ask your clients a question. Identifying crucial pain points helps you offer better services.
3 psychological pricing methods worth trying
These are some pricing gimmicks you can test to give your conversion rates a quick boost. Here are some of my favorites.
1. Magic number pricing
The reason “marketing gurus” price things ending with 7 is because everybody else is doing it. It’s the industry norm and if you want to be associated with that industry, go ahead and price your services at $7.
If we look at the retail industry, the prices often end with nines or fives. At least there are studies supporting it (here’s one from MIT).
2. Round prices
According to this study, 42.9% of respondents believe round prices are more honest and communicate higher quality. This stands true for high ticket services, which are often priced at round numbers like $500 or $5,000.
3. Price Anchoring
When making decisions, humans have a tendency to rely too heavily on the first piece of information offered.
Most service focused companies seem to use the 3-option pricing strategy quite often–we use it too! The reason is simple, humans are wired to think in threes:
We order drinks in small, medium, or large sizes, and
Focus on jewelry made of gold, silver, and bronze.
In pricing we can use a first, higher price as an “anchor” indicating the actual value of a service. We can then show a lower price, which seems smaller in comparison.
Add one more higher level tier to your pricing grid. Even if nobody buys it, it’ll make other tiers seem cheaper in comparison.
Ahrefs shows on their yearly pricing page that the Standard plan is the most popular.
Once you start looking at the comparison table on the ahrefs.com pricing page, you’ll notice how good a deal the standard plan is.
The main takeaway – charge what your service is worth to the client not how much labor it requires on your part. Learn who is buying your services and how much value they’re getting out of them.
If catering to a broad market, price projects individually. Use package pricing in narrow markets. Avoid pointless discounts and try to work with people who value your expertise.
Pricing things with sevens can make you seem like one of those fake “gurus”. Nines are a safer bet, while zeros communicate high quality and fair pricing.
Ultimately, don’t do things just because everybody else is doing it. Do your tests and blaze your own path.