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The
Guerrilla Consultant –
a newsletter dedicated to applying the principles
of Guerrilla Marketing to the work and lives of
consultants.
Are You Ready for Value Pricing?
Some years ago, I owned a home with a nasty construction
defect. When a strong wind pushed rain against
the front door, the water flooded inside and under
the front entry, damaging the floor and leaking
into the basement.
My
search for help turned up four contractors. Three
of them quoted an hourly rate without specifying
how long or what it would take to complete the
job—too many unknowns with water damage,
they said.
The
fourth contractor told me that the damage and
cause could be repaired in one week or less at
a specified price. He presented a stack of references
from other clients with similar problems and he
promised something his competitors didn’t:
to fix the problem.
That
contractor’s price was based on results,
or value, not time applied to the project. He
made good on the result he promised, and it was
worth every penny.
Pricing
on value makes sense for consultants too. It can
be trickier than it sounds, though, and that’s
the focus of this month’s article.
Enjoy
the article, and let
me know what you think.
Mike
McLaughlin
Co-Author, Guerrilla Marketing for Consultants
Four Realities of Value-Based Pricing
The
logic of value-based pricing for consulting work
is sound. Why shouldn’t consultants be paid
based on the results of projects, rather
than the number of hours they log on them? And
to take the logic another step, if a consultant’s
work generates big savings for a client, shouldn’t
the consultant share in that windfall?
I
think value-based pricing will take hold in the
consulting business, so facing the realities of
this approach now will prepare you for the changes
ahead.
Reality
#1: Clients care about the performance of their
businesses—not yours.
|
“Clients are interested in their results,
not your profit margin or how much time you
put into a proposal or a project.” |
Most
clients are looking for tangible results, at the
best price, when they hire a consultant. Of course,
clients will pay a premium if they believe they
can achieve faster, better, or more permanent
results with a higher-priced consulting firm.
But
never lose sight of the fact that clients are
interested in their results, not your profit margin
or how much time you put into a proposal or a
project.
Some
clients will express enthusiasm for and negotiate
a value-based fee with a consultant, only to get
cold feet at the last minute and ask for a time
and materials or fixed-fee proposal. Clients sometimes
perceive less risk and lower cost with the hourly
rate option, even when that does not reflect reality.
Keep
your pricing options flexible even if a client
shows a strong interest in value-based pricing.
You’ll avoid scrambling at the last minute
to create a price for services.
Reality
#2: Clients are reluctant to leave their comfort
zone.
For
decades clients have used the simplicity of the
hourly rate to help make decisions on choosing
consultants. The hourly or fixed rate gives clients
an apples-to-apples comparison—at least
on price—of their alternatives.
Sure,
the firm with the lowest hourly rate isn’t
always the winner, but clients like having a standard
measuring stick. Consultants know that old habits
die hard, and that the hourly rate or fixed-fee
pricing won’t go away quietly.
Many
clients need a powerful incentive to budge them
from old habits. After all, if a client can hire
a consultant on a fixed-fee basis to help reduce
manufacturing costs, for example, what would motivate
that client to pay a value-based fee, which is
likely to be higher?
|
“You have to demonstrate a dramatic
difference in measurable results as compared
to the rest of the pack...” |
The
answer is reflected in just about everything you
do, from marketing and selling to delivery. You
need to rethink your marketing communication,
sales approach, and your value proposition to
effectively convert clients to a value-based billing
approach.
You
have to demonstrate a dramatic difference
in measurable results as compared to the
rest of the pack or your clients will head right
back to their comfort zone—the hourly rate.
Let’s
say you believe a client’s $10,000 investment
in the customer service improvements you are proposing
will result in an annual reduction of $3,600 in
merchandise returns. Is that 36% return on investment
(ROI) enough to justify a value-based price to
the client? Maybe, but you’ll have to test
that ROI with the client as you’re developing
your proposal.
If
you’ve come up with the right ROI, your
sales cycle should be shortened immediately, plus
you’ll bypass the dreaded hourly rate. Expect
substantial give and take, though, as you work
with clients outside their comfort zone through
the mechanics of value-based pricing.
Reality
#3: You need to answer “yes” to six
questions.
Is
the anticipated result (ROI) of the project substantial
enough for the client to clearly understand the
advantages of a results-based fee arrangement?
In
competitive situations, your value-based fee may
be compared to lower priced, hourly proposals.
Make sure there is a logical link between your
fees and specific results, and emphasize your
track record of achieving the ROI you are proposing.
Given
the client’s environment, is there at least
a 75% certainty that the project team will achieve
the proposed results?
Carefully
consider how probable it is to achieve the results
you’re proposing. Often, success depends
on team composition and organizational support,
so be sure you have the right consultants and
client team members, and the executive support
you need to hit your target.
Are
you willing to put part of your proposed fee at
risk?
For
most value-based billing arrangements, your fee
will be based on a sliding scale, based on results.
If your team exceeds expectations, your fees will
be generous. If your team fails to meet the pre-determined
performance benchmarks, part of your fee is at
risk. The potential for sharing in the client’s
windfall carries risks.
Can
you wait for expected results to materialize before
you ask for full payment?
Clarify
all payment details before you begin work. Focus
on levels of payment, including timing of payments,
and the potential impact of uncontrollable events.
Executive shake-ups, mergers, and labor strife
are just a few events that can derail the best
planned payment schedule.
Does
the client have the will to make the tough choices
that a value-based project can demand?
In
many value-based billing projects, organizations
must make substantial changes to achieve the desired
results within the proposed timeframe. You’ll
need to trust that your client has the will and
the ability to make hard choices. That assurance
is best known with existing clients. You’ll
need to perform extra due diligence on this issue
regarding clients you have not worked with before.
Have
you considered the project’s best and worst
case scenarios for you?
Before
agreeing to a value-based billing arrangement,
assess what impact the agreement could have on
the short and long-term financial health of your
business and on your relationship with the client.
Reality
#4: Value is in the eye of the beholder.
Some
consultants complain that the industry is beset
with commodity pricing, stingy, clients, and endless
price negotiations. It’s true that many
consultants in today’s market are peddling
the same services that do nothing to inspire clients
to pay for results.
Don’t
expect clients to automatically see and understand
the value you could provide to their businesses.
Some will be focused only on the need to install
a new system or solve a narrow problem.
You
have to dig deep to change clients’ mindset
about projects and put the real value right in
front of their eyes. Once you do that, and assuming
your offering is better than that of your competitors,
your value-based pricing proposal will find a
receptive audience.
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