Do you ever ask yourself “Are we leaving money on the table?” Many firms successfully cover their costs and make a profit. And yet—they wonder “are we leaving money and profit on the table?”
The answer is too often “yes,” and the cause is their choice of pricing model. While a solid strategy, brand and target market are necessary to generate revenue, it’s the pricing model that makes the difference between so-so profit and profit growth that excites you.
Time based models are built on the premise that there is an intrinsic value to time. Whether quoted as an hourly rate or as a specific fee per a specific unit of time, these models put the passing of time above what happens in that time.
Value Based models are built on the premise that the firm’s knowledge and expertise deliver life-changing value to the client or customers, and that the firm’s compensation should be commensurate with that value.
Both of these models intend to cover costs and generate a profit for the firm.
They are not nearly the same, however, and they aren’t interchangeable.
Time Based Pricing is Based on an Irrelevant Past
More than 100 years ago, when industrialization moved into the factory stage, it made sense to pay workers an hourly wage. The point of an assembly line was to delineate specific activities done by one person over and over. The revenue generated by the total work force could be divided by the hours worked and the number of people working and produce a cost per labor hour which then became the foundation of the hourly wage.
There isn’t a knowledgeable expert these days who does the same thing again and again as a tiny part of the whole.
The time based or hourly rate makes no sense in our knowledge economy.
Value Based Pricing is Based on a Life-Changing Future
What’s the point of knowledge and expertise if not to help its recipients have a better future than they would have otherwise?
Which of these professions or industries doesn’t help clients live a better life?
- Creatives of all types: interior and exterior design, graphic design, training or curriculum design, architectural design, and other?
- Expert services: accountants, attorneys, executive coaches, technology innovators, IT support, engineers, sales training, financial advisors, exit planners, and other?
- Specialty consultants: business growth advisors, compliance experts, conflict resolution experts, marketing, public relations, SEO and social media experts, communication expert, and other?
Warm Up to Value Based Pricing
Old habits are hard to break, and time-based pricing is pretty habitual. How often is your first thought, as either seller or buyer, “What’s the hourly rate?”
The good news is that giving up hourly pricing ‘cold-turkey’ won’t work for your firm or for your clients. The best way to break the time-based pricing model habit is by phasing it in. Warming up to it, so to speak.
COMMIT is the first of our 5-STEP phase in approach. The whole company dives deep into Vale Based Pricing and how it will work for your firm and your clients. In essence this is the firm’s internal mental work. When everyone is COMMITED, you’ll be on the way to fully adopting Value Based Pricing.
Each step, as you can see, builds on the previous one. The PREPARE Step requires an analysis of your recent past work and the outcomes you deliver.
Every firm that conducts the steps in PREPARE concludes with pride that they have more to offer than they realized! And they’re excited to start getting compensated for that value.
The ESTABLISH Step ensures that your firm’s systems are ready for Value Based Pricing.
When you TRAIN, you get everyone from the chief executive to each account rep, product designer, and customer service rep ready to speak about Value Based Pricing with confidence and comfort. When I first adopted VBP I was a bit shaky. I want to be sure my client firms do it speedily and with confidence.
The GROW Step is ongoing. As you build your business on Value Based Pricing, you gain insight into what new value you could offer to your clients. Your existing, delighted clients introduce you to their peers who want the same higher value. Over time some clients are no longer a good fit, and you leave them behind.
If you think it’s time to stop wondering if you’re leaving money on the table, let me know. Text MONEY to 703-801-0345 and we’ll set up a call.