Language counts.
That’s been my motto for more than 24 years.
We professionals have to choose our words deliberately.
Most important is to not use words interchangeably with other words when the clear, deep meanings are different.
Why am I talking about this in a Pricing newsletter?
Because the language around pricing is horribly casual and mixed up.
I’m setting the record straight today.
Pricing Strategy
Pricing strategy is the rule you follow to determine actual prices or fees.
There are two options.
- Build prices up from your costs plus your profit margin.
The strategy would be written simply as: “We arrive at our final prices by totaling up our costs and adding a percentage of costs as our profit margin.
No matter the industry or the specifics of your costs, every price or fee is based on this straightforward rule.
- Prices reflect the IMPACT (life changing differences) the firm delivers to our clients.
The strategy would be written like this: “Our fees and prices are proportional to the life changing differences we deliver.”
The firm would certainly have a minimum fee. If you can’t deliver a life changing difference for a fee that exceeds that minimum, then the work is declined.
There is no upper limit.
Each offer is unique.
Pricing Models
Pricing models are methods for implementing your chosen rule.
Cost+Profit pricing models include:
- Cost-Plus Pricing-very straightforward.
- Dynamic Pricing-prices change as demand changes, but they are always built on cost plus profit.
- Competition-Based Pricing-the firm considers what its competitors are charging and positions a bit higher or lower. Prices always reflect costs plus profit.
- Hourly Pricing -all costs plus profit added up and divided by the number of hours available to bill
- Premium Pricing-the firm increases its costs to enable premium services, adds their required profit margin, and charges accordingly. You often see this in tiered pricing (good better best).
What do you notice?
The client or buyer is does not figure into any of these models.
Only the firm’s costs of goods, personnel, overhead, and operations.
IMPACT Based Pricing
There are a few variations for IMPACT Based Pricing because the strategy says it all.
- Value based pricing. This was a major departure from cost+profit pricing when it became known a couple of decades ago. There are many variations.
To me the biggest problem is that the word “value” has as many meanings as there are people using it.
And while it purports to put the buyer first, most firms really want to tell the buyer what value they will get.
- Fixed fees. Some professional services are so routine and repetitive that the provider chooses a fixed fee to deliver that service.
They typically begin their pricing by looking at their costs and profit, but they don’t stop there. They consider the life changing value that that service delivers and price proportionally.
- IMPACT Based Pricing. This is the only pricing model that puts the client’s needs, wants, and desires first. It is the model that gauges not only the IMPACT delivered but the significance of that IMPACT.
When fees are truly proportional to the IMPACT, both the client and the firm benefit.
As firms accumulate more expertise and successfully deliver life changing differences, their fees rise.
Costs do not rise because their existing associates are capable of delivering great IMPACT.
They attract clients with needs, wants, and desires that have greater significance.
Getting terminology straight
As regular readers know, I am wholeheartedly in favor of the pricing strategy that ensures that fees are proportional to the life changing differences delivered to clients.
That is, IMPACT Based Pricing.
When I read dozens of articles mixing up pricing strategy and pricing models or assigning value based pricing to the cost plus category, or emphasizing the importance of considering what the competition is charging before setting your own prices or fees, I shake my head.
For professional and business services firms, the cost plus pricing strategy is like a cement ceiling on the firm’s revenue and profit.
Why bind yourself to a cost based model (such as hourly billing) that retail and product industries struggle with every day?
Your professional or business services firm does not have to do that!
If it’s time for a change of pricing strategy, and if you’re thinking you might like to talk with me, don’t wait any longer! Just pick a date and time on my calendar for a virtual Coffee.
Or text COFFEE to 703-801-0345.
