AVOID:
- Cost Plus (costs plus profit=price)
- Time based prices or fees
- Fixed prices for “Good, better, best”
Why am I adamant about these pricing don’ts?
Because they cheat your firm and your clients of the best possible IMPACT:Price options your firm can create.
When I say “best” I don’t mean that all clients buy your IMPACT PLUS option.
I mean that these pricing practices prevent your firm from offering choices that create different IMPACTs that are priced proportionally to those impacts.
That’s the IMPACT:Price ratio.
Cost Plus
Cost Plus is a common practice in industries where Cost of Goods Sold is a large part of the eventual price. And where overhead is also a big factor.
But your firm creates IMPACTs for clients using your knowledge and expertise, not purchased goods and raw materials.
The knowledge-based company that wants to use Cost Plus contorts itself to identify costs. These firms incur overhead and personnel expenses, for sure. But it is artificial to divvy them up in order to apply them to a particular client’s work.
The effort to create “costs” often leads to inventing a cost per hour, which then leads the company to charge for time which is our second DON’T.
Time based pricing
Time based pricing is a misguided application of the time based wages paid when factories transformed the US from an agricultural economy to an industrial economy.
Factories thrived because they created fixed routines and repetitive tasks. It was easy to assign a dollar value to a task and then pay for the number of times that task was repeated in an hour or a day.
Intellectual based work does not follow a fixed routine nor is it repetitive the same way every single time.
Charging for time makes no sense, it is totally artificial.
In addition, it cheats the firm of compensation for the brilliance of its staff because every hour, no matter what is done during that time, is treated the same. And there is no way to charge for thinking and creative time, since the basis for charges is documented work.
Good, Better, Best
Fixed prices for Good, Better, Best options also cheat your firm.
You design such a plan thinking it will give clients options. which is good. Not all clients need or want the same things.
Then reality sets in:
People want a bit from this one and a bit from that one. What do you do?
People want an option that speaks to their specific needs and none of the pre-determined options do that, so then what?
Some clients believe they are unique and want a unique solution or option. Do you create it or lose them?
My Choice Framework combined with IMPACT Based Pricing resolves these issues.
Yes, you offer 3 options. And yes, they range from IMPACT PLUS to IMPACT to IMPACT Light (you may use your own nomenclature).
But the similarity ends there.
Each IBP option is designed to create the impacts the client told you they want.
You don’t guess and you don’t assume everyone wants the same things. Or even that a particular impact has the same significance to every client.
Fees reflect both the IMPACT and the significance of that IMPACT to that client.
The most important thing to keep in mind with IMPACT Based Pricing is that every option is the BEST in terms of quality and work, unlike the good or better options which are cheaper because they offer lower quality and lower effort.
Embrace IMPACT Based Pricing
Every single company that has adopted IMPACT Based Pricing has reported back to me that their clients love it.
They love customized options. Customized means you listened when they told you what they want. It means you’ve applied just the right knowledge and expertise to create their desired IMPACTs. It means they have choices, and when they choose, they don’t experience buyer’s remorse.
IBP also means your company fees increase because you’re pricing for the IMPACTs created, which are far more valuable than the costs of firm operations.
IBP is impactful to your firm long after the first engagement. As the client enjoys the IMPACTs from the first engagement, they inevitably develop some new needs, wants or desires. Your firm is well positioned to create IMPACTs for those. And so it goes, often creating a long term relationship with immense customer lifetime value.
What do you think? Are you going to avoid the pricing Don’ts and adopt IMPACT Based Pricing? Let me know.
Get a quick start with my newest book STOP Leaving Money on the Table. It takes about an hour to read. Download it here.
As a few recent readers have written “it changes your mind fast!”
