Too many professional and Business services firms struggle with Value Based Pricing: they fear losing money; they struggle with how to set value based fees for individual clients; and they don’t know how to make it clear to their clients that Value Based Pricing benefits the client.
They do know, however, that hourly billing is causing them all kinds of pain.
So, they look for alternatives to hourly billing and often settle on one or more of these:
- Firm Fixed Price
- Specify number of sessions, meetings, or calls
- The Therapy model
These are all time-based models in disguise.
All of these actually represent the belief that time is money. They actually disguise the fact that time (hours) is a major component of the fee.
Firm fixed Price offers a price to the buyer that covers a specific range of inputs and materials where there are materials. The provider calculates the inputs for the FFP on hourly rates!
Cost Plus is intended to cover all costs to the provider. The “plus” is a predetermined profit factor. Here again, the costs include the hourly billing rate for the professionals involved in the project.
Retainers are lump sums paid by the buyer in advance of the work. The money is held by the provider and as services are provided, the retainer balance is reduced. The retainer is reduced by the hours worked: the hourly rate.
Packages of sessions, meetings, or calls. The sessions, meetings, or calls are measured by time. Whatever the cost per session, meeting, or call, that is the effective hourly rate of the service. This model still relies on time spent by the provider to determine the fee to the buyer.
The Therapy model is an ongoing advisory relationship where the provider charges $X per session that lasts Y minutes. This is clearly time based, even if it is not articulated that way.
Do you notice that in all these cases there’s no mention of the value delivered to the client? The whole focus of these fee approaches is the provider’s time.
Value Based Pricing is Client Centered Pricing
The client is front and center in the Value Based Pricing Model. Specifically, a value based fee promises that the firm will deliver specific value to the client or buyer, no matter how long it takes. (Materials costs, if any, are included as well.)
Replace the fear that you’re going to lose money with the expectation that your firm will generate revenue commensurate to the value your knowledge and expertise delivers to the client. I wrote last week about tossing deliverables and embracing value delivered–they are two different things.
To get started phasing in Value Based Pricing, look at your firm’s most successful client engagements for the past 12 months. Study the scope of every project, the final charges, and the value delivered to the client.
It’s from this last element, the value delivered to the client, that you’ll begin to understand Value Based Pricing. What is the ratio of the value delivered to the fee charged? Is that ratio low, medium, or high?
At first, all of these are intuitive or “gut” assessments. They are your starting point. Once you understand the ratio of fee to value delivered, you’ll start to see Value Based Pricing opportunities everywhere.
You’ll no longer need to disguise hourly pricing in some other model. You’ll gain confidence your fees are commensurate with the value delivered.
Client relationships will get stronger, profits will increase, higher value projects will become the norm, and you’ll never again need to charge based on time.