“Every month I keep my fingers crossed when I look at the profits on our Profit & Loss statement” the Owner of a web design agency told me. “Why?” I asked.
“Because it’s always disappointing. Our team has amazing creativity and skills and profits never seems to keep up with that. The more they know, the better their work is, and yet profit never shows that we are better than we were last year and the year before that.”
Do a quick assessment right now to see if your profits are depressed:
- Has your firm accumulated more knowledge, expertise, and insight in the past twelve months?
- Are your clients the beneficiaries of this additional expertise?
- Do your fees reflect the extent to which this new expertise delivers life-changing value to them?
- If you answered “yes” to the first two questions and “NO” to the last, surely your profits could be higher.
The Impact of Time Based Pricing on Profits
We took a close look at the agency’s pricing model—HOW they charge. They used a time based pricing model, as is all too common in creative firms and many others that are built on intellectual capital.
Time based pricing models mean that the firm assigns a dollar figure to every hour their associates work for clients. The hourly rate doesn’t change no matter how challenging, complicated, or complex the project is, and no matter how valuable the outcome is to the client.
An hour is an hour is an hour.
The creatives draw on their years of experience and their ability to understand and relate to the client. When a client says “Wow, that’s exactly what I wanted!” the hourly rate and total fee don’t reflect the extraordinary fulfillment of the client’s vision.
In many product industries, the higher the value, the higher the fee or price.
But in creative services, legal and accounting firms, and subject matter expertise, hourly rates typically cover costs and a profit, and don’t reflect the value delivered to the client.
If a firm receives compensation commensurate with the higher value it delivers it would see profits grow accordingly.
Real Life Stories
This talented firm used to charge day and half day rates. They always struggled to project how much time a specific project would need, keep track of it, and bill accordingly. Clients often challenged their rates by protesting “the guy down the block is cheaper.”
The CEO/Creative Director and I discovered that about 70% of the projects required more time than originally estimated, mostly due to changes by the clients. Then the clients would be unhappy about the final (higher) charges.
Everyone was focusing on the inputs, and the beautiful and amazing outcomes were ignored.
We worked to create a meaningful fee-to-value ratio. The firm began to have outcome-focused conversations with prospective clients before putting any offer in front of them. Clients started to see, in the written offer, that their vision or goal was front and center, and that the firm would deliver life-changing value.
Six months after phasing in value based pricing, clients are thrilled with the value delivered and the firm sees higher profits that reflect the talent and deep expertise of the creatives.
This firm has spent two decades helping businesses comply with a complex set of safety regulations required in high-risk environments. Pretty much everything has changed—and gotten more dangerous–over twenty years: building codes, road safety, and equipment to name a few. The businesses that work in these environments focus on getting their work done and they rely on this firm to be their eyes and ears as regulations change. Mistakes are costly.
The firm charged hourly rates for its services, such as inspections, reports, recommendations, and training. Invariably when on-site, the experts would find things the client didn’t know about, and they’d spend more time than estimated. Clients would complain and often accuse the firm of bait and switch. “You told us it would cost X and now you’ve sent an invoice for Y.”
We worked with the firm to understand the fee-to-value ratio for their specific work. The higher the risk environment, the greater the value of their expertise to the client.
With the fee-to-value ratio in hand, the firm began conversations with its best clients. Within 12 months, these clients were mostly on board with value based pricing. They could connect the risks and consequences to the fee the firm charged. There were no surprises on invoices.
The firm’s Owners have included the phrase “We deliver life-changing value” in all their conversations and marketing and their clientele has embraced them even more than before.
How Will You Release New Profits?
If you use your knowledge, expertise, or intellectual capital to deliver life-changing value to your clients, you should see more profits on your P & L.
Phase in value based pricing. There are a couple of simple steps to get started. You can learn my top 25 Tips here.
Getting Started is Key
You can book a Starter Call and take away one or two first steps to begin the change. No chit chat, no selling, no twenty questions—just a conversation about your first couple of steps. Appointments are open in December and can be booked here.
For the fastest reply, text PROFITS to 703-801-0345.
Thanks for reading! Don’t delay, your clients need your life-changing value.