Marisa Fong and Galia BarHava-Monteith raise the (dreaded) pricing conversation. Is it time to move your business from the hourly rate or cost-plus pricing model to value pricing?
Pricing seems to be the conversation de jour with many professional services firms and for our clients.
Many clients are in professional services related businesses and when we first start working with them, their approach to pricing reflects what they’ve been taught. It’s either based on an industry hourly rate standard, or based on a ‘cost-plus’ model.
We see this as an old-fashioned, transactional model that, at best, reflects industry conventions and, at worst, demonstrates a lack of understanding of clients’ needs and the value the service or product could bring.
Before you read on, we’d like to ask you the following questions:
- Can you quickly articulate the pain point you are addressing for your clients?
- Can you quickly tell someone the unique value you bring to clients in your industry?
- Does your client know the cost to her/him of not using your services or products? Do you?
Here’s an example.
Everybody has used a lawyer at one point or another in their personal and professional lives.
Don’t get us wrong, we like lawyers, some of our best friends are lawyers and Galia is even married to one.
But no one likes lawyer bills.
Why not? After all, they solved us a problem; usually it’s a very big and potentially very costly one.
But the bill is always about them, about their hourly rate. And from our experience, it usually comes as a nasty surprise.
So what are the issues here?
Firstly, in our experience, there never seems to be a setting of expectations at the outset of the legal process. In our experience, and the experience of our clients, the lawyer doesn’t sit down and discuss what the costs associated with the legal action might look like.
How great could a conversation about that be at the outset of any given legal action?
Something that sounds like: “Well, judging from my previous experience looking at this matter, you are looking at a ballpark figure of $X, or a range of $X-Y”.
Secondly, there is usually no easy-to-follow breakout of costs on the bill and how they were made up.
Thirdly, for some clients, there is a sense that some of the work wasn’t necessary and they were not consulted about it being carried out, but still charged for it.
If you look at your own invoicing, could the same be said of yours?
Moving to value pricing
The question for you is: “How do we move away from the hourly rate model or a cost-plus pricing model and into value pricing?”
The answer is that you do so thoughtfully.
Firstly you do need to understand the real cost of delivering your services. To do so you need to understand your business. You need to understand what happens in delivering any of your offerings.
Adding up the cost of your salaries, your overheads, and adding some margin and than dividing it all up to a flat hourly rate across all your offerings won’t cut it. Some of the work you do will be more complicated and therefore more costly, but potentially adding more value for your clients.
Some of the work is transactional with a low cost of delivery, but open to more competition with less of a barrier-to-entry for competitors.
This type of work might be better to ‘offshore’ or to use contractors for.
Constructing an in-depth understanding of each of your service/product lines seems obvious but is not always the case. So knowing the various segments of your business and the costs associated with delivering them is a good start.
Next comes the most crucial element of getting your pricing right: understanding the value you deliver for your clients.
This requires you to think like a client, and understand from their perspective, what is the pain you are addressing for them.
And most importantly, it is about constructing an understanding of what that pain might cost them. For that you’ll need to work closely with your clients and gain a perspective beyond the services you deliver for them. That’s how you get to see how the work you do fits within the big picture for your client.
Most importantly, you need to start having conversations with your clients on an ongoing basis regarding the value you are bringing. In a sense, you will be educating them to understand the problem you are solving and the value that you bring.
Producing a price schedule
So you may now be asking: “How can I produce a price schedule based on this?”
That is what we work with our clients on. We are thoughtful about what they can standardise their pricing for, and where they can develop pricing for high value services/products.
It isn’t easy to do, but it can be done. It is a change to how we have always done things, but the market is changing. Disruption is here, and doing what you’ve always done may not maximise your value proposition.
Given this is has been such a hot topic for us, we are considering delivering a workshop on the topic. If you are interested please email [email protected] with your details and put ‘pricing workshop enquiry’ in the heading.
Galia Barhava-Monteith and Marisa Fong are co-owners of TBC Partners
(www.tbc.partners) – a business consultancy focused on what it believes are the genuine challenges facing entrepreneurial,
founder-based organisations in New Zealand.