business - How to use value-based pricing for design projects?

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.

Answer

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.