Fixed Fee Pricing vs. Value-Based Pricing - Which is Better?
Both pricing strategies have merits and drawbacks. But one of them carries more weight and can better position a company for growth.
The debate between fixed fee pricing versus value-based pricing is an age-old one in many industries in the B2B space. One pricing strategy is straightforward and has long been the go-to for many companies. But the other strategy takes more work to pull off but can yield superlative results.
Not sure which one would work in you and your clients’ favour? The following comparison may help in your decision-making.
Fixed Fee Pricing
When you charge a specific cost for a service, regardless of the time involvement, you use a fixed fee pricing strategy. It’s often the first pricing scheme used in B2B simply because it’s the easiest to implement. However, it often poses a couple of issues in the long run.
The primary issue is that if the cost never changes, it means that you can’t decouple your time from the money. Each project has a fixed cost for completing the task, no matter how many hours it takes to wrap up the job. For service providers, this may not always be a good deal.
This pricing strategy is completely different as it separates the time investment from the revenue. It works by leveraging the company’s experience to get better compensation. The greater the value they bring in, the higher they can charge. Businesses that often use value-based pricing are those that guide their clients’ business decisions. They are companies that play an advisory role and can help transform the businesses and lives of their clients.
The bottom line is that value-based pricing can bring considerably more revenue, with the justification of helping clients to make even more. As such, the pricing strategy can also help acquire high-value clients who prefer paying a premium for a higher quality of services and knowledge.
But keep in mind that value-based pricing needs two things to work:
● A great offer
● A great sales strategy
The Big Difference
The biggest difference between the two strategies is the ease of implementation.
You have nothing to worry about with a fixed fee pricing strategy since it’s a transparent offer that clients can understand. If you want to leverage your knowledge to get better compensation, you have to sell your offer.
Companies that attempt to implement value-based pricing, however, need a great sales model. On top of that, they require good salespeople that can find ideal clients.
It’s harder to implement without a good reputation or an attractive offer. It may also be time-consuming at first and you may have to make upfront investments in people with sales skills.
The Bottom Line
Fixed fee pricing doesn’t go hand in hand with a value-based mindset. That’s why it frequently prohibits companies from making the profits they deserve. But it’s still an attractive strategy because it’s easy to draw up and use. On the flip side, it runs the risk of wasting time on projects and getting stuck with less than ideal clients.
Value-based pricing may carry some risks, too. However, the potential reward is far greater in both profits and freedom from the business. It’s a great way to target high-value clients, hire better employees, and scale the business.
The choice may be situational for some firms. Yet, in the long run, value-based pricing makes more sense for any company offering advisory business services.
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