If you follow my writings here, you know that I'm a big proponent of value-based pricing. From my experience, it includes strong benefits both for you and your clients and should be the pricing structure chosen for most of your offerings.
With that said, you might find considerable resistance when pitching it to prospects. The root cause? Loss avoidance.
Before getting into it, a short reminder of what value-based pricing consists of:
- You explore and understand how your prospect's business works, and estimate how much value your offering would generate for them;
- You price your work based on a % of that figure, capturing a share of the value you would deliver;
- If you can show to the prospect the value and ROI (return on investment) of your offering, you justify the price.
This pricing structure works incredibly well when coupled with a deep discovery process. But sometimes, consultants come to me - puzzled and confused - after seeing price objections. "How on earth can they not buy when I'm demonstrating a ten-fold return on their investment?!"
Loss Aversion: The Main Challenge When Selling Value
Let’s say your $40k project will generate $400k in additional revenue for your prospect. Rationally, investing those $40k is a no-brainer. But buyers are humans, and humans are not rational.
Psychologically, humans fear losing things and getting hurt. To ensure survival, our biological instincts overreact to avoid the pain of deprivation. This phenomenon is better known as loss aversion.
Loss aversion is why you would rather avoid a loss than receive any sort of gain, even if it’s the same exact outcome. Losing $10 hurts more than the satisfaction you get from making $10. This cognitive bias becomes more powerful the bigger your investment is.
To your prospect, the $400k gain may only be perceived as $200k, whereas the loss of $40k to consulting fees would feel ten times bigger. Keep doing what they're doing is the right decision when you considered the emotional impacts.
That's why you shouldn't avoid the cost discussion. In fact, you should embrace it.
How To Talk About Costs
Due to loss aversion, cost is a major consideration. When selling consulting services, there are two ways in which you can (and should) talk about cost:
- To discover your prospects' initial budget.
- To highlight RONI - the return on not investing.
Discover the budget beforehand is obvious, but worth mentioning because knowing doing so makes determining your fees much easier. The budget doesn't necessarily create a ceiling - you can always argue for a higher investment as you talk about value. What it does, however, is to put you in the right ballpark.
But the best weapon to fight loss aversion is to highlight the opportunity costs, or the so-called RONI - the return on not investing.
"What do you lose by not doing this project? What are the costs of entering the wrong market? What are the costs of suffering a cyber attack and having private and sensitive information leaked?"
Posing those questions is like practicing Aikido - you are using your prospect's own objections against them. You can't fight loss aversion, so you might as well compare costs with costs.
This doesn't mean your sales conversations should be governed by scarcity and fear. You should lead with value and paint a beautiful picture of how your prospect's life will be after your engagement. But don't forget to make them aware of the hidden costs of inaction.
Do this, and you will see most of your pricing objections magically disappear.