Thursday, January 16, 2014

Is Value-Based Pricing A Fools Errand?

I thought this was a good representation of value-based pricing.
For starters, what is value-based pricing? Imagine pricing your services, not on what they cost you to produce, but on the value derived from the products or services. In other words, if I produce something for you, and it takes me 50 hours to complete the project, I don't charge you 50 hours x $140, I charge what the value is to you. Let's assume the value for the solution/service far surpasses the $7000 in the math above and will improve operations for the client by 110%, which equates to $100,000 in operational improvements in two months, and $150,000 later in the year. In this case, I'm helping the client save $250,000 in a year. I should charge $50,000 for the same amount of work, right? I mean, if I'm helping you achieve all of this then who wouldn't pay for the talent? Sounds great doesn't it? Yes, but...

Then reality sets in... Have you ever tried to pitch this option? For starters, get ready to build a fantastically close relationship with your client. You'll need to make sure all the stakeholders agree to your improvement math, and then you'll need to pitch, pitch and then pitch again (with spreadsheets). You can try to get paid for all of this research upfront, and in many cases you might, but what about all the deals you could be closing with the simpler model of cost-plus (where you are just quote hourly rates)? Probably not going to have time to take on all of those accounts, because you're still studying the value you're going to earn in the value-based approach.

I'm not advocating for either strategy here... I'm arguing that time is a factor. If a company can present value and charge for it, great. It takes a special type of customer relationship to do this, and it can be done if you have one of those sales types who can execute the relationship management program. However, if you need to fill the pipeline then a cost-plus model is just easier to rinse, wash and repeat - but you could be under selling your team, and your services.

What do you think? Have you tried value-based pricing? What about a hybrid where you charge for ANY hours used (including upfront consulting hours)?

No comments: