Putting a Price on Value

In the course of my consulting work, I often work with clients (who are themselves consultants and service providers) to review their pricing models. The goal is to help my clients clarify what they are charging for, to ensure that both they and their own customers are comfortable with the price. What often emerges is that on its own, “time-based” pricing is becoming harder to justify, unless there is a clear understanding of the resulting value created and transferred.

adding-valueAmong some of the major consulting and professional service firms, there is a growing awareness that pricing based on billable hours alone is no longer sustainable. This in turn is forcing firms to review how they put a price on their work. They recognise the need to shift from billing clients for “time and materials”, to generating license fees and royalties for the use of proprietary IP, and to offering “XaaS” models that comprise a blend of “always on” retainer and actual service delivery, neither of which is wholly based on time or effort spent.

At the same time, many input costs are actually decreasing:

  • Reduced staff overheads via offshoring and outsourcing
  • Cheaper technology (although we consume more of it)
  • More open source tools and freeware available
  • Ubiquity of BYOD
  • Greater use of remote working, telecommuting and hot desks

What this means for the clients I work with is that they need to have a better grasp of the amount of effort applied and the level of expertise they deliver to their customers. If there are significant parts of the project costs that have to be measured by actual time spent, then it is important to make sure that the customer understands the effort required.

How else can consultants and professional service firms demonstrate value, other than by billable hours alone?

To begin with, clarify exactly what the customer thinks they are paying for. There can be nothing worse than consultants spending most of their time and effort on tasks or activities where the customer does not see a material benefit, or which the customer does not value.

Clearly, if there are measurable and quantifiable outcomes for the customer, then that is a good basis for demonstrating value. For example, direct cost savings to the customer, or reduced opportunity costs in terms of time to market or other factors. However, it may be harder to demonstrate the direct benefit of some qualitative outcomes, at least in the short term.

Some pricing models include a consultant “success fee” coupled to a share of revenue, profit or costs savings (which can be high-risk for consultants if they have no control over the implementation and execution). Other consultants are working with their clients to co-create products and services, which can generate standalone revenue streams from the shared IP. Others are adopting more collaborative approaches to consulting which build long-term value through the quality and nature of the relationships which are more like partnerships than transactions. This can remove the customer’s anxiety that the “meter is always running”, although such arrangements still require expectations to be managed through agreed boundaries and clear rules of engagement.

One model I use with clients is to figure out the nature (as well as the amount) of the value they are being asked to deliver, based on why the customer is buying, as much as what they are paying for. Some of the factors to consider include:

  • Risk mitigation – is the customer in effect buying an insurance policy, transferring their own risk, or reducing their exposure to risk?
  • Must have – is the customer having to meet a regulatory or compliance obligation?
  • Best practice – does the customer aspire to be among the best in their industry?
  • Competitive advantage – is the customer getting something unique or hard to replicate?
  • Peer pressure – does the customer need to meet a recognised standard or level of competence?
  • Situational – does the customer need to build or acquire appropriate skills and capabilities?
  • Urgency – is the customer willing to pay more for a speedier service? (This is one area where time-based pricing can still be relevant!)

It’s also important to understand how customers are funding their purchase. For example:

  • which cost centre is paying for the service?
  • what is the purchasing criteria?
  • what cost/benefit analysis has been done?
  • is there a specific budget allocation, or is it coming out of existing operating costs?

Of course, consultants are frequently hired to bring an alternative (and sometimes critical) perspective to their clients’ problems. In which case, getting an external opinion has value in itself, and the customer should accept there is a cost associated with having access to someone else’s brain – even if it is only for a few hours.

Finally, for an alternative perspective, I would refer to recent comments made by Ash Maurya (author of “Running Lean”, and creator of Lean Canvas) when he was in Melbourne. Talking about how to scale startups, he made the observation that, “selling time [as a consultant] is not scalable … There’s only 24 hours in a day.”

Next week: Food for thought at #StartupVic’s #pitch night

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