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Are you value pricing?
A frequent topic of discussion among groups with whom I talk is whether or not a company is really value pricing. A few months ago, I had an idea to create a quiz that would allow an organization to determine if it was, in fact, truly value pricing.
I jotted down a few questions and submitted them to my VeraSage colleagues asking for refinement and any additional questions. Once we had the list down to a manageable number, I then again called on their brilliant minds to rate the questions using two scales:
1. An importance scale of 1 to 4.
2. A ranking from top to bottom.
Based on this input, I then created a weight system that gave more emphasis to those questions that Team VeraSage felt were of greater importance. The result was the spreadsheet referenced below.
To use it, simply download and answer the questions. Once you have answered them all, hit PageDown (PgDn) and a pithy comment is displayed as the result.
I hope this tool helps to spur some dialogue on the concepts surrounding value pricing. Please post any comments or questions. I will be happy to incorporate any suggested changes into a future version of the tool.
Download the file
You are what you charge for. A business is defined by little else.
We seem to believe that we are defined by our “hourly rates.” It is as if we took our (and our firms’) collective intelligence, experience, judgment, training, wisdom and knowledge, and commoditized them into a one-dimensional hourly rate. From a marketing standpoint, this is a mistake. Once you understand that customers emphatically, do not buy hours, it becomes self-evident that pricing by the hour is precisely the wrong measurement to use to ascertain the value created for the customer.
One of the main reasons professionals undervalue their services is because they are operating under the wrong theory of value. Value, like beauty, is in the eye of the beholder. What counts is what your customer is willing and able to pay for your services. The subjective theory of value explains how transactions occur in the marketplace. No customer buys hours, and time is not money. Hourly billing measures the wrong things.
Customers only buy one thing: expectations. In today’s world, it is not enough to meet the customer’s expectations; you must exceed them. No two customers are alike, nor do customers want to be treated equally; they want to be treated individually. Always ask what the customer expects up front.
Successful professional firms of today are pricing their services according to external value created—as perceived and determined by the customer—rather than internal costs incurred in generating those services.
Changing the pricing culture in your firm will not be easy. It takes work, commitment and a dedication of resources to training, education, and constantly confronting the inherent challenges involved with pricing. But it’s worth it.
It’s time to bury the billable hour.
by Ronald J. Baker, Founder VeraSage Institute
Pricing is the moment of truth––all of marketing comes to focus in the pricing decision.
–Raymond Corey, Industrial Marketing: Cases and Concepts, 1962
In the last article we explained why hourly billing is the incorrect theory of value, and why The Firm of the Future will price its services based upon external value provided, not internal efforts generated. One of the most successful methods adopted to implement Value ricing is the Fixed Price Agreement (FPA). Essentially, this requires meeting with each of your customers to determine the services they need and want over a given time period.
It is important to keep in mind any FPA drafted between your firm and a customer is the result of a conversation. This is your chance to provide the customer with a customized list of services to meet their specific needs and wants, to offer a fixed price for those services, pecify the payment terms, the scope of services to be provided, and any other level of agreement reached. Thus, no two FPAs should look alike––they should be as unique and individual as your customers. The more customized it is, the higher will be its perceived value.
by Ronald J. Baker, Founder VeraSage Institute
We arrive, therefore, at this conclusion. A commodity has a value, because it is a crystallisation of social labour. The greatness of its value, or its relative value, depends upon the greater or less amount of that social substance contained in it; that is to say, on the relative mass of labour necessary for its production. The relative values of commodities are, therefore, determined by the respective quantities or amounts of labour, worked up, realised, fixed in them. The correlative quantities of commodities which can be produced in the same time of labour are equal. Or the value of one commodity is to the value of another commodity as the quantity of labour fixed in the one is to the quantity of labour fixed in the other
–Karl Marx, Value, Price and Profit, 1865
Workers of the world...forgive me
Karl Marx
–Graffiti on a statute, Moscow 1991
The only place where Marxism has not been discredited––outside of American niversities––is the professional service firm
–Ronald J. Baker
Ideas have consequences. Indeed, man is ruled by little else. Some individuals recently celebrated the 150th anniversary of an idea that changed the history of civilization––and affected the lives of billions of people––in the nineteenth and twentieth centuries. For decades, it was the leading intellectual paradigm on several continents and commanded an enormous amount of
influence on the destiny of nations. The Communist Manifesto, the famous revolutionary treatise, published in 1848, by Karl Marx and Frederick Engels, still wields considerable power over the world’s political systems, American universities, and yes, even professional’s pricing strategies.
Who’s in Charge of Value in Your Firm?
by Ron Baker, Founder VeraSage Institute
The final question needed in order to come to grips with business purpose and business mission is: “What is value to the customer?” It may be the most important question. Yet it is the one least often asked. One reason is that managers are quite sure that they know the answer. Value is what they, in their business, define as quality. But this is almost always the wrong definition. The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.
––Peter Drucker, Management: Tasks, Responsibilities, Practices, 1993
My VeraSage Institute colleagues and I have had the privilege of posing this question–– Who’s in charge of value in your firm?––to thousands of accountants around the world.
We are usually met with a momentary staring ovation, and then someone will inevitably shout out, “Everyone!”
