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 â€˜value billing.â€™
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. Thereâ€™s an old, traditional song in my music collection, sung by Paul Robeson, called â€œThe Cobblerâ€™s Songâ€. One verse goes like this:
The stouter I cobble, the less I earn
For the soles neâ€™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 Bakerâ€™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 doesnâ€™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 â€œHow do I make myself special, in ways that clients value?â€ Itâ€™s not primarily a pricing problem, but a combination of ensuring that I DO become more valuable in my clientsâ€™ eyes, and then have a method of pricing which captures that.
For over ten years, I have practiced a particularly â€œcleanâ€ 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: â€œIf you are anything less than completely satisfied, then pay me only what you think the work was worth.â€
Note that it doesnâ€™t say â€œcall me to discuss payment.â€ It says â€œPay me what you think I was worth.â€ 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.
Thereâ€™s no secret trick to value billing — just figure out a way to be more valuable. If you are, youâ€™ll get paid more.