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tl;dr What is the best way to use value-based fees for design projects? What would the "value" be?

I see that a lot of designers use time-based pricing (hourly, daily, etc.) Time-based pricing is horrible, for the following reasons:

  1. There's a conflict of interest between you and the client. The longer the work takes, the more you earn and the more the client loses. So it's unethical.
  2. When you set an hourly fee, you set a limit to what you can earn, as you have limited time. Say you set 100,000$ as your goal for the year, who knows you can't earn double, or triple that?
  3. It's difficult to justify a price after you are done. What if you finish the project, and it takes you much more than you calculated, and the client refuses to pay?

Second option, putting fixed prices to specific tasks is better, but still not really good, for the following reasons:

  1. When you set a fixed price to tasks like business card design, website design, etc., it might be completely different from one client to another, and you will still be charging the same.
  2. It's difficult to justify costs to clients when you show your services as commodities.

Best way to price things, most of the time, is to use value-based pricing, because:

  1. You will be able to justify much higher fees to the client, if you show them the tangible benefits they will be getting.
  2. It's ethical, as you base your fees on the value you are offering to the client. If they are expected to earn 10$ from your services, you can charge them 1$, and they will be happy with an ROI of 1 to 10.
  3. Sky's the limit.

But I'm wondering what the best way is when you are using value-based fees for design work. For example, when you are doing consulting, you can see that a 10% improvement in "Operation A" can offer the client 1 million dollars in revenue. So you can charge the client 100,000$.

With design work, the ROI is not tangible enough. How would you justify your fees to the client, and what would be the "values" you are going to be offering?

What exactly do I mean with "value-based fees"? I think "value-based fees" have a different meaning in design community. What I mean is this: There's a school of thought saying "your fees should be based on the tangible and intangible values the client will get." A tangible value could be direct increase in revenue. An intangible value could be offering a service no one else can offer, or increasing employee morale. But I'm having a difficult time thinking of values the client will get in design projects.

For example, one thing I can think of is showing the client how much a client with professional logos earn more. Let's say there's a research saying that "companies that have professional logos earn 10% more". You can use that research to say that the client will get an average of 10% experience in revenue and you can get 10% off of that. Though the difficult thing is, design is pretty much subjective. So what is a "professional logo"? Or which logo is better? All these things make value based pricing difficult, as it's easier to use value based pricing with tangible things, which design seems not to be.

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Value-based is tricky as you often won't have access to the finance data to calculate the possible value. Many designers who do time-based have hourly rates that vary by client and nature of work, and agree a rate and number of hours for the project beforehand, charging for those hours whether it actually takes them an hour or a month - so the incentives are still to work quickly. –  user568458 Apr 10 at 12:42
    
    
To use value-based pricing, you first need to establish yourself as a vendor that provides value. (ie, with experience comes the ability to charge more 'value based' fees.) –  DA01 Jul 11 at 17:00
    
@DA01, even though I agree with what you're saying, it's also the other way around. What you can do with your value, is how others perceive your value. So it's always good to make sure that your value is perceived correctly. Part of that is advertising and your behavior. I would even go so far as to say that your real value in a market is how others perceive you. –  hattenn Jul 11 at 17:38
    
@hattenn I think we're saying the same thing. You 'establish' yourself as being value-added by through either direct value provided or the perception that you provide value (which you usually need to follow-through with direct value if you want repeat customers) –  DA01 Jul 11 at 17:41

3 Answers 3

up vote 1 down vote accepted

Free-market theory defines the value of a product or service as the amount of money someone else is willing to pay for it. In other words, the value of your service is how much a client is willing to pay for it, and your ability to justify your fee is itself a determination of your value.

I understand your definition, that the value of your service should be based on the expected revenue increase it would generate for the client. However, the amount of research you would have to do in order to make such a quote would usually outweigh the project itself.

Instead, if you're uncomfortable with a per-hour rate, use a fee-per-service rate but offer multiple options presented in terms of their value to the client.

In other words, you'd offer a basic quote for a simple logo design, and then progressively higher quotes for extra research (an assessment of the competition's branding strategy to ensure the logo is unique, or user testing ) or extra design (multiple logo options, multiple sizes/styles e.g monochrome or simplified versions).

You then present the client with a "menu" of options, and let them decide whether they want to pay for the higher-value work. Make it clear what each option entails -- i.e., if they only pay for a basic logo design, and then don't like it, there will be fees for a re-design.

The quotes for each value level would be based on your expectation of how much time it should take, but can also be adjusted if you think you can offer a service your competition can't, regardless of whether it is time-consuming or not.

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I should add: You're of course welcome to increase the price of a particular "menu-item" if you think the client will see it as high value, regardless of how much work or skill it really requires. But then you risk them going to another designer who says "oh, that's really easy, I could do that for half that price!" –  AmeliaBR Apr 10 at 16:08

The only justification I ever use is my experience in the field, my portfolio, and occasionally (actually rarely) past results for previous clients.

If I charge $100,000 for a project, that's my price. If the client doesn't wish to pay my price, they are free to seek other avenues.

One thing to realize, for almost everything, is that after overhead is calculated, any price point is purely subjective. Who decided that a mechanic charges $40/hr for labor? or that a landscaping company charges $30/hr for labor? The companies simply looked at market trends for similar services, their own overhead, experience, and capabilities, played with pricing a little, and then determined the price which positioned their services where they wanted to be in the market.

The same holds true for design services. If you look around and everyone is designing tri-fold brochures for $100-$1500 it's purely your choice where you want to position yourself in that market. You could complete work for $100, $400, $800 or $1000 - the only difference is the return on your efforts and the amount of clients you may acquire. At the higher rates you need less clients to get the same return, obviously. If you know that every tri-fold brochure takes you approximately 10 hours to complete and your base hourly rate is $10/hr, then you know that $100 for a brochure is the minimum you can charge. But if you have 10 years experience as well, you should be pricing higher in the market than the minimum because there is value in your experience.

I use value-based pricing almost exclusively. I know what my minimum hourly rate is and it is used to get ballpark low-end estimates. Beyond that, my experience and proven track record can't be quantified in direct hard terms other than the success past clients have had after using my services. I know what the market will bear in terms of pricing for general services. I price where I get enough clients to keep me working but not so low I have too many clients.

With value-based pricing there is no "hard" model to follow. You simply need to know your minimum rates so you never drop below them, after that you're free to price above the minimum anywhere you feel serves you best. If any justification is needed, it's merely a track record of experience and proven abilities to handle the projects on hand in an effort to show competency at your price point.

I believe, value-based pricing is really only a workable model after you've had some time in the field and have proven yourself as competent. Someone fresh out of school or just starting out may have a more difficult time acquiring clients unless they can specifically reassure the client that the work can be completed well and on time.

The primarily difference in pricing models is the scope of reflection. With hourly-based or time-based pricing you are looking at what you, yourself, or your business. What you can do. What you want to earn. What you feels you are worth. The entire reflection is inward. With value based pricing you have to broaden the reflection to look at the field in its entirety. You need to be aware of what others in the industry are charging for similar, greater, and smaller services. You need to know what the other designers in your general market would expect to be paid for a project similar to the ones you receive. So the reflection is based upon the industry as well as upon yourself. If you value price yourself above everyone else, you may price yourself out of the market. If you go too low you may actually not get any work due a perceived "bargain basement" value. You simply can't use value-based pricing unless you aware of the current market values.

Being creative in nature, there are many in the design industry with some big insecurities regarding pricing. After all, it can be difficult to put a price on yourself and expect others to agree to it. You are asking strangers to put direct value on you and rejection can be taken personally by some. But if you get past the emotional stuff and look at the business as a business by honestly valuing your services and capabilities and honestly compare those to what others in the industry are doing it shouldn't be too difficult to position yourself via pricing.

Related questions:

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What I really want to know is, what you base your value-based fees on. Maybe what I meant with value-based fees was not clear. What I meant was charging a client based on the value they will get. What you explain seems more like "fixed-fee pricing" to me, as you base it on "your experience, your minimum needs, etc." If you do base your fees on value that the client is receiving, what do you take as the value? In other words, why would you charge one client 10$ and another one 100$ (I'm not talking about the economic situation of the client, but the value they will get)? –  hattenn Apr 10 at 15:41
    
You're looking at it backwards. "Value" refers to the value of the designer, not what the client values. You can't guess at what clients may find value in. You can only value what you bring to the table. And no, fix-fee pricing is different entirely -- see the related questions I posted. –  Scott Apr 10 at 15:44
    
"What I meant was charging a client based on the value they will get." if you have the time to quantify returns and guarantee those to any client, then you would be the only designer ever to do so as far as I'm aware. The best I could ever offer would be to share returns which were seen on past projects, which generally may be similar but could never be seen as the same. –  Scott Apr 10 at 15:49
    
I'm not looking at it backwards, only thing is my definition is different (check out Alan Weiss' books on this subject, he also mentions that designers are mostly unaware of this kind of pricing, thus not optimizing their fees). There's a school of thought saying "your fees should be based on the tangible and intangible values the client will get." A tangible value could be direct increase in revenue. An intangible value could be offering a service no one else can offer, or increasing employee morale. But I'm having a difficult time thinking of values the client will get in design projects. –  hattenn Apr 10 at 15:50
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There are few tangible values one could cite in design. You can't quantify aesthetics in general, they are entirely subjective. That's why testing is done so extensively for both design and writing in an ever increasing effort to improve returns. If everyone knew what worked out of the gate, then we'd all be designing perfect pieces from the start. –  Scott Apr 10 at 15:58

In my experience I can say that all above options are good if you can mix them. The time-based pricing is adequate to the low budget tasks. Value-based pricing is better for bigger and more complex projects. For example if you create a business card calculate your time. If you create whole identification, count the price using value method.

To avoid unwanted conflicts with your client, prepare very detailed agreement. Show and calculate all elements which you will have to prepare. In case of complex project, split your work into a smaller parts and calculate their price. And the very important thing, the penalties. Your client should know in what time they are obligated to give you any feedback or acceptance. How much time they've got to give you all necessary materials and what will happen if they fail. All these things have a very big impact for the final price of your project.

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