Always use value based pricing

by Dan Swanson

Pricing by the hour or trying to be low cost provider is an common trap entrepreneurs fall into. Especially if they don’t have a rosey outlook for clients. Fight the urge to do so. Instead price by value.

A couple of good examples will explain what I mean. One of my early jobs was working for a small firm automating factories and industrial processes. We convinced a local utility that we were the right company to help them save money on their fuel costs at their power plant. So we spent quite a few months developing a system that measured the cooling lake temperature, the real-time BTU content of the natural gas fuel, the temperatures of each of the three boilers, the ambient air temperature and the weather forecast. By predicting the electrical load and combining that with the rest of the parameters we were able to tell them the optimized combination of three generators to have online for the day. This saved them 5% of their annual fuel costs. So our $300,000 system saved them $2.2 million per year in operating expenses. We should have charged 50% of the savings or some other value based proposition.

Another time I was able to save a company $10 million in annual operating costs after just three days of analysis. I got paid three days times at my daily rate and didn’t get a single bit of the recurring savings. Now I frequently go in for a low initial fee and a percentage of what I create for them. This incentivizes both parties much better and lets you share in your successes and bear part of the losses as well.

Dan Swanson, entrepreneur and business coach. Dan has started 12 of his own companies and helped another 25 startups. He has helped raise over $200 million in debt and equity capital and helped create over 275 products and services. He has had over 18 different coaches in his life and has coached over 200 business men and women. He can be contacted by phone at 972-675-1413 or by email at mailto:dan@iq2.com.