Posted by Larry Cobrin on Dec 1, 2017 9:43:22 PM
Selling Based on Value Vs. Cost
Suppose that you’re considering hiring one of two accountants. The first accountant is fresh out of college and charges $25.00 per hour to prepare your taxes by the book. The second accountant has decades of experience and charges a flat rate of $1,000.00, but he or she is known for saving clients thousands of dollars on their state and federal taxes. There’s no question that the first option is cheaper, but the second option may be a better value.
Which option would you choose?
Many people would choose the second option – even if it’s more expensive – since they’re buying savings rather than paying an hourly fee. Of course, most accountants are aware of their value and charge these kinds of prices despite spending only a few hours of their time. The accountants are happy because they’re maximizing their income and the clients are happy because they’re maximizing their tax savings – it’s a win-win scenario.
These principles apply to all kinds of businesses – including MSPs – but many business owners still make the mistake of pricing based on cost rather than value. In fact, according to Kaseya’s 2016 Global MSP Pricing Survey, only about half of MSPs use value-based pricing models, despite separate research showing that these pricing models produce higher growth rates than cost-based or price-match-based pricing strategies.
Let’s take a look at how you can start selling based on value versus cost.
Why Value Beats Cost
The first accountant in our example above defines their value based on the number of hours they work and competes purely on price. If a tax return takes two hours, they will generate $50.00 in revenue and clients will be reluctant to shell out the money. The second accountant knows that they can save a client an average of $10,000 per year, charges clients based on that value, and the clients leave feeling like they’ve saved money.
There are two benefits to taking this value-based approach:
- Revenue and profit margins are higher since the price is higher for the same number of hours worked and cost of delivering the services.
- Customers are happier knowing that they maximized their tax savings rather than having just purchased a ‘necessary’ service each year.
Many MSPs take the same approach as the first accountant by pricing their services based on how many hours they think a client will take up. The problem is that clients view them as a ‘cost’ and they aren’t maximizing their revenue. By defining how much you can save clients and what sets you apart from competitors, you can make clients feel like they are receiving a great value and increase your revenue and profit margins.
As we mentioned above, there’s evidence that value-based pricing strategies tend to result in higher growth rates. Kaseya found that MSPs growing at double-digit annual growth rates predominantly adopt value-based pricing strategies, while those experiencing lower growth rates are much more likely to adopt cost-based or market-match pricing strategies.
How to Define Your Value
The first step in defining your value is focusing on who you’re selling to rather than just what you’re selling. At a minimum, you should understand the prospect’s current situation, the solutions they’re using now, what problems they’re facing, their priorities when it comes to IT management, who makes the purchasing decisions, and how these decisions are made. These are more important for pricing a contract than the number of hours or services needed.
The second step is using this information to define how your company stands out to those prospects. For example, you may target a healthcare company by offering HIPAA-compliant services and expertise. Since healthcare companies often prioritize lowering risk, an MSP that understands HIPAA compliance concerns may be a more important factor than price, which means that your services may justify a higher price.
The third step is coming up with specific language and guarantees to add to service level agreements highlighting these unique factors. Guarantees should be both realistic and defensible with testimonials and references available upon request. For example, a healthcare-focused MSP might guarantee a five-minute response time since these clients must be open 24/7/365. Client references may be provided that attest that this guarantee is consistently met.
Value Based Selling
You’re now ready to develop a value-based selling approach that puts these pieces together and helps close deals. When making sales, you should describe the process that you use, your prior experience, and how your innovative approach ensures that benefits are achieved. The goal is for the prospect to compare your capabilities and services to competitors rather than directly comparing prices, which helps justify a premium price for your services.
There are three basic steps to a value-based selling approach:
- Build Trust – You need to build rapport and credibility with prospects. Meetings, references, and testimonials are a great way to build up trust early on in the selling process before making the ‘ask’.
- Quantify Costs – You should understand the prospect’s direct and indirect costs, including the cost of lost revenue and productivity in the event of downtime or inefficient operation of their IT systems.
- Sell Cost Savings – Compare the prospect’s total costs to your (lower) price, which presents a quantifiable value and sets up a situation where the client feels they are receiving a great value and you’re positioned to exceed expectations.
In addition to these three steps, salespeople should familiarize themselves with common objections and come up with value-based responses.
Clarify pricing objections that a prospect might bring up during a meeting. For example, if a prospect says a price is out of their budget, consider asking how they arrived at that budget. You can then respond to these price objections by adding value through bundling of additional services or subtracting value by unbundling. The latter scenario is designed to show that the only way to charge less is to deliver less, rather than compromising on price.
The Bottom Line
The fastest-growing MSPs sell based on value rather than price. By doing so, they change the conversation from “how much does it cost?” to “what am I getting?” The best way to make value-based sales work is by developing an understanding of a prospect’s needs and existing costs and then building a program around it that’s focused on addressing those needs. The price of the program should reflect the benefit to the client rather than the cost to you.