The age old practice of billing for time is both unethical and profit robbing.
It’s unethical because it misaligns you and client. Your goal now is to bill as many hours as possible at the highest possible rate. This is the exact process that has many firms tracking things that don’t benefit the client at all and throwing senior people at things they shouldn’t be doing.
It’s profit robbing because you can’t make more hours and you probably deliver far greater value than your hourly thinking allows you to consider. Imagine if premium brands like Apple added up what it ultimately cost them to build an iPad and charged us cost plus a 100% markup. We would all own iPads for about $27. Instead Apple charges and receives much more because we value what they do. They don’t obsess over market share, they obsess over profit and value.
My guest for this week’s episode of the Duct Tape Marketing Podcast is Ron Baker, founder of VeraSage Institute and author of six best-selling books, including: Professional’s Guide to Value Pricing and Implementing Value Pricing: A Radical Business Model for Professional Firms.
Our discussion centers on the idea of building value in some as of yet still radical ways.
The idea of creating, tracking, measuring and pricing based on value rather than time is so significant that most organizations could benefit from the appointment of a Chief Value Officer on their executive team. Some accomplish this via a focus on branding, but this, I think goes even deeper.
One of my favorite moments in the interview is when we talk about scope creep in projects and how a remodeling contractor simply uses a change order to address additional requests. Change orders are now going to become a central tool in my proposal and project management kit.
Below is an overview of the Eight Steps to Implementing Value Pricing from Baker’s book- Implementing Value Pricing: A Radical Business Model for Professional Firms:
- Value Conversation with the customer, including the best opening statement to begin this conversation: “Mr. Customer, we will only undertake this engagement if we can agree, to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”
- Price the customer, not the service. Establish a Value Council, appoint a Chief Value Officer (CVO). Why do actors and authors use agents?
- Developing and Pricing Options: Offering 3 options, Goldilocks Pricing; heuristics—mental shortcuts we use to decide how to buy; the anchor and framing effects and how they influence the prices we’re willing to pay.
- Presenting the options to the customer––should you lead with your most expensive or cheapest offering?
- Codifying the option selected into a Fixed Price Agreement
- Proper Project Management: Project management is important no matter how you price.
- Dealing with scope creep and utilizing Change Orders
- Conducting a Pricing After Action Review