Value Pricing
post # 213 — October 13, 2006 — a Client Relations post
One of the most frequent questions I get at seminars and speeches is whether or not I support ‘value billing.’
Usually, the questioner is asking whether services can and should be priced on some basis other than the hourly rate cost that it took to produce the service.
We are all familiar with the perverse incentives that hourly or daily pricing systems create: if the provider gets more efficient and finds a way to do the work with less time, then the provider gets paid less for the job.
This is an ancient problem. There’s an old, traditional song in my music collection, sung by Paul Robeson, called “The Cobbler’s Songâ€. One verse goes like this:
The stouter I cobble, the less I earn
For the soles ne’er crack , not the uppers turn.
The stouter I cobble, the less my pay.
But work can only be done one way.
The best source on value pricing is Ron Baker’s book The Professionals Guide to Value Pricing.
However, I think many people who analyze this situation get it completely wrong. They want to call it value pricing because they think that if they create more value for the client, they should be paid more.
Wrong! We like in a capitalist, free exchange society. In such an economy price is not set by what things cost to make, nor the scale of the benefits delivered to the client.
Instead, prices are set by scarcity — the relative supply and demand for the service provided. Water has more inherent benefit than diamonds, but diamonds cost more because of an artificially managed supply and demand imbalance.
If you save your client a million dollars through your tax advice (for example), that doesn’t mean you deserve a high percent of those savings — IF MANY OTHER TAX ADVISORS WOULD ALSO HAVE ACHIEVED THAT BENEFIT.
You get paid a lot when your client believes you deliver a level of value that cannot be (or is not being) delivered by other possible providers.
For each of thus, then, whether we are individuals or large firms, our challenge is “How do I make myself special, in ways that clients value?†It’s not primarily a pricing problem, but a combination of ensuring that I DO become more valuable in my clients’ eyes, and then have a method of pricing which captures that.
For over ten years, I have practiced a particularly “clean†form of this. I set my fee by the number of days I work for the client (at particularly high daily rate) but I give every client an unconditional satisfaction guarantee.
Every bill I send out, without exception, has these precise words: “If you are anything less than completely satisfied, then pay me only what you think the work was worth.â€
Note that it doesn’t say “call me to discuss payment.†It says “Pay me what you think I was worth.†The obligation is now on me to serve the client in such as a way that he or she can really see the value provided.
The amount they pay is now based not on my cost to deliver, not the amount of the benefit they received, but whether or not THEY believe I was sufficiently special to deserve a premium fee.
There’s no secret trick to value billing — just figure out a way to be more valuable. If you are, you’ll get paid more.
Carl Singer said:
David,
I love the (Cobbler’s) verse. My father was a tailor and I remember the pride he took in his work — fortunately, with people gaining (or losing) weight — he had repeat business.
What is the customer measuring — the solution and its value to their business or the amount of effort (usually equivalent only to “face time” — time we are with the customer.) whether that time is spent hand holding, gathering information or framing / presenting a solution. Perhaps this is the starting point for the value billing discussion.
Perhaps an orthogonal view to the value billing for services in certain domains is hourly rate vs. fixed cost. In my consulting domain there are issues between fixed cost and hourly billing rate — not identical to “value billing” but similar.
The question is who owns the risk for hours (resources.) With fixed cost, if my team can provide / complete a solution in less time then planned is it gravy? What if we lose time because, for example, the client is a few days late in reviewing / approving something. Or if, with limited knowledge going in, I underestimate the level of effort needed. If I go hourly, then the risk (obviously) is on my customer.
Another partially related issue is “giving away the store.” A specific example, in the mid-1970’s when I was doing foreign exchange forcasting my billable rate was a heady $2,000 per day. The reason – primarily to keep someone from, in effect, getting our forecasts via consulting rather than purchasing our subscription services. NO — I seldom got per diem work (the rate was good for my ego) — and then only with existing forecast clients.
This speaks to setting some minimums – should you offer straight per diem consulting — or only a minimum 3-day or 1-week package (of well defined services.) …. another topic, “solution packages.”
posted on October 13, 2006