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Value-Based Pricing For Your Tech Services 1: Understanding Value

"Drake Hotline Bling" meme with an image of Drake "refusing" "Commodity priced services with more risk and responsibility on the cusomter" and Drake "smiling at" "Value-based pricing with more confidence in success"
Image courtesy Drake's "Hotline Bling" music video and for help in generation

We've been talking about the importance of the assessment in our recent articles here and here. But the assessment is the tip of the spear offering and constitutes a small part of your tech services business. The core of your revenue will be around your implementation and support services. For your tech services startup to grow, you need to deliver on the promise you made in your assessment to be a solution provider. To do that effectively, you need to understand how pricing for your tech services business works. In this article, we build an understanding of the underlying principles governing pricing. In our next article, we will build on that to discuss how these principles affect some of the most common pricing strategies you see.

To understand pricing, start with a Warren Buffett quote, "Price is what you pay, value is what you get."

Understanding Value in Tech Services:

Value is delivered by solving a problem. A tech services company uses technology to implement a solution for one of these problems:

Unlocking Revenue

Increasing a client's revenue is the most valuable benefit a client can have from your services. Good quality revenue is more valuable than the profit itself because it leads to growth and higher revenue.

Improving Customer Experience

Improving the experience of existing customers is as vital as unlocking revenue. It is how you retain customers and make the revenue sticky.

Reducing Time to Market

In a competitive and uncertain business environment, time to market is critical. It gives you an advantage over your competitors and allows you to iterate faster to find the right solution to meet your customer's needs.

Reducing Costs

Offering solutions that streamline operations or reduce overheads can be a strong selling point, particularly in poor economic times because the value of reducing costs is easily quantified. Although the maximum value of reducing costs is the money saved.

Reducing Risks

Minimizing security vulnerabilities or ensuring compliance with regulations are just as important. One of the key issues when working in risk mitigation is you do your job well when nobody is paying attention to you. So, demonstrating value is more difficult.

Price: A Reflection of Perceived Value:

The price you set for your services should reflect the balance between the value delivered and the cost. Many tech services companies provide cost-plus pricing. This cost-based model is the incorrect way of thinking about it. The correct way to think about it is how much value you create for your customer and how much value you can capture while maintaining the customer relationship. The only relevance of cost is if you can get a viable business for less than your value capture. To capture a larger share of the value, you need to address:

Reduce Time to Receiving Value

Demonstrate how your services deliver results quickly. A tech services company exists because it reduces the time to receive the value. The number one competition to a tech services company is always the internal implementation team. Your goal is to get paid a premium to solve their problem faster than they could with you.

Reduce Risk to Realizing Value

Adding a new capability is fraught with risk. There is the risk of failure leading to additional time or an incorrect implementation leading to security risk. Companies look for outside experts to bring in experts who can help them navigate this landscape smoothly.

Completeness of Solution

When offering a solution, you must be careful in defining the customer's and your responsibility. You need to work with the existing customer teams. But you will fail if you require them to add additional capabilities. Your solution needs to be comprehensive for the problem the customer brings you in for.

Provide Measurement of Value Received

Quantify the benefits of your services, whether it's an increase in sales, improvement in efficiency, or reduction in costs. Concrete metrics can justify the price and demonstrate ROI.

How This Affects Your Tech Services Pricing

In tech services with cost-plus pricing models, you can quickly enter into a race to the bottom with commodity pricing. You must break free from that constraint and deliver higher value while creating a focused and exceptional offering. This allows you to increase your gross margins that you can spend to grow your company. This article builds a base understanding of the principles you are trying to balance when creating value for your customers. You can use this understanding to evaluate your offerings. Our next article will discuss common pricing models used in tech services and their pros and cons in light of these principles.

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