“Susan, you were an Economics professor. What is elasticity of demand and how will it affect our revenue?”
This HR consultant read deep into my LinkedIn profile to find this fun fact!
It’s a great question with an easily understandable answer.
Briefly, elasticity of demand is the concept that describes buying behavior relative to price changes.
If buyers reduce their purchases when prices rise, the demand is called elastic. Demand is also elastic if buyers increase their purchases when prices drop.
Demand is inelastic if buyers do not change their buying behavior when prices change, either going up or going down.
Every expert on supply and demand concludes that if your offer has unique qualities so that there’s no real substitute, the price is inelastic.
Tax return prep is a useful example.
If you ask your clients to complete an organizer and use your technology to complete most of the return, your service has little to no unique qualities.
When you increase the price, people will look elsewhere for a lower cost option. Demand is elastic for the average tax return.
Demand is inelastic for true knowledge services.
- An experienced M&A lawyer tells me that no business sale or purchase is like any other.
- The e-commerce web design firm talks about painstakingly focusing on the exact right SEO for every client.
- An organizational development expert says no two firms out of the hundreds she’s worked with have the same situations and needs.
- The conflict resolution expert says, “different people, different circusmstances, different flavors of conflict.”
What does this mean to you?
You can charge fees that are proportional to the IMPACT you deliver.
When the differences you deliver are differentiated, the demand by your clients is inelastic.
As long as the differences or IMPACTS have unique characteristicsfor the client, a fee that’s higher than one they paid before will not cause them to leave.
What’s holding you back?
It seems ironic to me that the main reasons I hear for billing by the hour are:
- Everyone does it.
- That’s what clients expect.
- It’s straightforward. We set rates for each person, track their time on client work, and the software issues an invoice at the end of the week or the month.
Why do I see irony here?
Because these firms invest heavily in increasing their knowledge to be better than they were the day before. Then they default to the least differentiated method possible, hourly billing.
Why bother improving your knowledge and ability to deliver life changing differences if you don’t change your fees to reflect those improvements?
Demand for your IMPACTs is inelastic. You should charge fees proportional to the IMPACT you deliver.
What will you do?
Here’s what not to do:
- Flip the switch to IMPACT Based Pricing without internal preparation for the change.
- Spring it on clients without conversation and discussion.
- Set a “rate sheet” that’s disconnected to the IMPACTs actually desired by clients.
Do this instead:
- Review and analyze your recent engagements, IMPACTs, and fees. The 60 Minute Pricing Makeover Mini Course shows you how.
- Practice with colleagues so you can talk with clients about IMPACT Based Pricing. You’ll use the Issue Chart and the Continuum of IMPACT in this practice.
- Get familiar with the IMPACT Choice Framework. Using recent clients and engagements for practice, design the IMPACT offer, the IMPACT Plus offer and the IMPACT Light offer, each with proportional fees.
- Give yourself and your colleagues 30 days to meet with clients (4-5 week) about what’s on their minds. Don’t lead them with questions about “pain points” or “What keeps you up at night?”
- Then set a date to begin making offers using IMPACT Based Pricing.
Master IMPACT Based Pricing and clients will choose your firm again and again.
Text DEMAND to 703-801-0345 when you’re ready to be indispensible to your clients.