When “value pricing” goes out of whack

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Yesterday I posted a reference to Brian Hill’s powerful — and provocative — posting where he questions consultants’ practice in pricing their services on an hourly basis, rather than a true value-for-services model. His well-taken point is that the client really wants genuine value for the money spent; and when you bill on an hourly schedule, you often lose touch with that — and fail to realize your own value, as a result.

However, there are some unusual and challenging complexities to this attitude especially for businesses seeking some degree of revenue sustainability and security.  In many cases, especially for consulting services, the “value” is at the front end of the relationship.  You bring a fresh perspective, new ideas, and insights to your client and can suggest fundamental operating changes and solutions which truly change your clients’ circumstances.  Your “value” is truly high — if only you can get your (new) client to pay for your services.

Then, you deliver the value; perhaps far more so, at loss-leading prices to win the business.  Your client is impressed.  He has more work, and trusts you.  You can command a higher price and (maybe) a regular gig where you can “count on” recurring revenue.  You seem to be doing well.

But what is happening to your value?  The client has absorbed your ideas, and now they are embedded in business processes.  But your ideas cannot keep pace and (let’s admit it) some of your ideas just weren’t that good.  Your value is diminishing.  Then, one day, seemingly out of the blue, your client wakes up to this disturbing fact and cuts you loose.  You are gone.

I realize things don’t need to be so bad.  You can develop capacities, expertise and relevance and maintain relationships for years, even decades.  We enjoy this kind of relationship with our designer, Raymond Leveille, who has evolved his business to serve several other successful clients.  He constantly refreshes his understanding of “best practices” within his field, retains competitive prices and never stops improving his technologies and methodologies.

Compare this effective application of value pricing, however, to a highly successful lawyer (now a judge) whose office provided some business data services for us for several years.

He priced these services with (for him) an adequate mark-up; we certainly were willing to pay, he had achieved “value pricing”.  Then, one day, I decided to question the costs, figuring out the rough hourly time it would take to actually provide the data from the courthouse.  Could I obtain the information for a lower cost?  I put out RFP requests to a few people qualified to do the work and, shockingly, discovered that I had been paying far too much for the service.

This resulted in a truly awkward call when I expressed dismay about the high costs I had been paying (even allowing for reasonable mark-up).

The lawyer saved the relationship.  After hanging up, he called me back and said:  “Cancel (the last) call.  I will make good.”  We then worked out a reasonable rebate based about a year’s overcharging.  I received several months free service and we retained our friendship.  (The business relationship has now ended, of course, and after he received his judicial appointment,  he told me:  “If you ever come before me in court, I will have to recuse myself.’)

The point here is that you should always be respectful of the value in value pricing.  Generally, unless you are truly introducing new services, resources and concepts, your ongoing service prices should evolve towards a fair commodity level with a reasonable margin.  This isn’t starvation income — it is simply remembering that, unless you evolve, your value will diminish over time.

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