How might a consultant transition from hourly rates to a value pricing model?
I have typically used hourly rates, quarterly/annual and project rates for customers. Generally, I estimate the number of hours that will be needed for a piece of work and then calculate the price based on that, plus expenses. I am interested in trying out a value pricing model. Can you explain how to develop value pricing for a service?
Depends on what reason is primary for such a transition, profitability increasing or business processes simplification, in the case 1 I would elaborate the method to proof that clients expenses are less than benefits they get ( some kind of ROI statement ) , in case 2 I would simply discuss with clients my opex ( this will additionally show to them your competence ) and explain them that new price basis doesn't increase their fee.
Hi Rosanna - I've always been on the value pricing model, or as I call it, *Fee for Access*
Fast answer - you just do it. Eliminate the hourly fee and implement your FFA solution. Create a menu of good, better best & premium.
Most people are giving you solutions that work best for them. But you're not them. You're you. You'll just have to do it and fit it out along the way ;-)
A client's business is the result of credibility and trust earned over time. Do you have the credibility and trust? I just viewed your LinkedIn profile... only 2 recommendations... and your website link doesn't work. This hurts your credibility. You have a lot of education, recent education, this helps your credibility.
Maybe I'm full of BS, maybe I'm not. The reality is, I'm doing it, you're not. [That sounded condescending and jerk-face-ish - believe my, not my intention.]
If you want more specific advice, you can find my number on my LinkedIn profile and/or website (also on my LinkedIn profile). Call me.
My mother is American, my father Canadian. I speak both languages.
Do or do not. There is not try - Yoda
You need to understand how people go about thinking about problems:
1. Something's going on and I need to address it.
2. What are all the possible ways to address it?
3. Select the best alternative.
As an hourly person you are operating at level 3, the lowest level. That level gets the lowest rates and sits and waits for someone to have a problem and then reach out to you for a quote/proposal.
You need to operate at levels one or two.
Here's an example. You have a problem with your car. You bring it in and the guy tells you that he thinks it's the X and it will cost $200 for him to fix the X. You say okay and come back the next day, pick up your car and you still have the same problem. You see, you paid him to fix X, not to solve your problem. That's what project people do, they perform projects, not solve business problems. If the client was accurate in determining that successful execution of your project will solve the business problem, then you will be perceived as helping to fix the problem, but not perceived as the person who came up with how to fix the problem.
As a consultant you need to figure out how to actually help your customers solve problems, not do a project. Positioning yourself at this higher level is difficult if your clients think of you as a project person.
So, figure out how to position yourself as the fixer of business problems, not a project person.
This is a good question. But before I explain value based pricing one should understand value based buying (VBB). VBB is how your customers or clients make their decision about which product or service to purchase. To the buyer is one particular brand worth more than the other as far as price and quality. VBB's also ask themselves how much is your competitor's service. What are all the differences? How do they value these differences? Without this 'homework' the value based pricing that you derive will be faulty.
Value bases pricing is about setting a price to derive the value that a customer will receive:
1. Identify the customer's second best option. If customer won't buy your product, then what would they choose?
2. Determine price of second option.
3. List all ways your product is better than the second best option and determine this value to your customer.
4. List all the ways that the second best option is better than than yours.
5. To calculate the price....Price = step 2 + step 3 - step 4
Without going into too much detail:
- Alan Weiss' book : Value Based Pricing
- Alternative method:
- When have a handle on the engagement, ask: Assume we meet again in 1 year and the engagement exceeds your wildest expectations. What specifically has happened (observable) that has you say that? Wirte them down
- Say to client - I'm going to take this list and match the desired outcomes next to the themes of the engagement. Then I am going to send it to you. Next to each theme (affinity grouping) there will a blank line. I'm going to ask you to put in the value in dollars of that outcome. I realize that this is highly subjective and I won't argue with anything you write down (although I might ask how you arrived at the values you did). The numbers you write down will have nothing to do with what I charge you for producing that result, but are more for you to keep in mind the value that can be produced as we get into the hard work of the engagement. In any case, our fee should not exceed 1/10 or 1/15 (10X or 15X ROI) or shouldn't do the engagement.
- You do the above, ending up with their value estimates. Then you figure if you can produce the result with a 10X or 15X ROI, and don't set every chargeable amount to these limits, but it will give you an idea of the value the client puts on that outcome compared to what it will cost you (in time, etc.) to produce that result. I have found that in general the 10X or 15X ROI and better is very easy to achieve. When the client compares a $70K expense to an estimated $1M benefit, the only question remains is whether they can affort the $70K, not whether it is worth it.
I agree with Murray that I suggest a strong mission & vision statement for both you individually and your company.... The other suggestions are also worth thinking about, especially since going from hourly to a project price by value added takes a different culture and approach requiring you to move toward value added activity based costing ABC...
Exactly the right question!
Do you receive the recompense that you deserve? I have exactly the same challenge - fairly regularly - and it's based upon people attempting to equate the time I spend with the results.
And herein is the answer.
What is it worth to your client? And how does that compare to others?
I am judged on results. And the results I get are often exponentially higher than the time I spend.
But sometimes it takes me longer. And I lose out - that;s because I give a fixed fee for the job based upon what I think it is worth for the client. And to be frank, if I don't believe I can do it, I say so. It aint just about the money - it;s about achieving something with your client so both parties know they got a great deal.
So if it's an area I am not comfortable with, I can't charge a fixed fee without knowing I can deliver value.
And that underpins your decision and how you engage with your client. It has to be a win-win, not a battle about hourly rates which in many respects mean nothing when compared with the expected results.
Being frank, I couldn't care less about time or what other people quote for the same work. They are in the same mindset as the client and therefore unable to apply simple logic - if the net result after costs is higher for the client, why worry about how much time they spend doing it?
So I have to make an assessment. And I do this based upon my value. I know that I can achieve 10 times the results in a fraction of the time. Somebody can spend 5 days on something I can solve in 10 minutes. And they charge by the hour.
But I cost more. Why? Because I get better results. Who would prefer to pay based upon duration as compared to the financial results minus the costs?
Especially when time and again, my results generate more profit for my client.
If they want some sort of ethical beauty parade based upon effort and time expended, then great for them. The smart clients want to earn more money from their investment in me.
I help them not just get enquiries but close deals with the clients they want. And granted, on occasion, I can spend 10 minutes doing something which would take an hour-based consultant a full week to do - except my results are exponentially higher.
Even after you factor in that my 10 minutes costs significantly more for disproportionately less time.
So the answer to the question has to be framed from the results that you deliver.
Just my view! Let me know if it resonates!
I actually learned how to do this from a financial planning expert and I see that's your field (it's not mine). I went from charging $1000 for one of my services to charging $10,000 for the exact same thing, then I used the same method to up my prices to include $80k packages. So I hope this helps.
The biggest thing you can do with existing clients is honor your existing practices and make the change slowly. You can have a conversation with your client about metrics that show how their finances have changed, how you've helped them, and what that looks like in terms of real dollars for them. You can do this by letting them know you're working on some case studies that feature the results of your work. When you consider that an average ROI for a consultant who helps companies increase sales/revenue is expected to get somewhere between 5 to ten times the amount they invested, that means you should be able to divide the money you've saved/made for them by 5 (or ten if you want to be uber conservative) to come up with what your services were really "worth" to them. Sometimes for the numbers to come out really true, you have to consider both hard and soft values - the speed with which they were able to pursue other projects, time/value of money, and things like that. You'll know what's best for your industry. If not, Google it. I always find industry numbers on this kind of thing when I'm helping clients decide what to charge.
For prospects who haven't worked with you yet, just stop offering hourly rates or calculating it that way alltogether. I have what I call a "Needs Discovery Conversation" with prospects, and I get commitments at the end of these conversations in about 80% of my conversations. It's basically talking to them about their biggest goals, biggest obstacles to obtaining those goals, what's going to happen if they don't meet those goals, and what's going to happen if they do. Then when they start talking about what will happen if they do, I get into the numbers with them. I actually walk through an ROI conversation (assuming that I can solve 10 or 20 or 25% of the problem). Then I pivot to the sale, and when I say what my services are "worth" to them (it's often hundreds of thousands) versus what I'm actually going to charge them (say $80k), they can see the value, and they can see that I'm giving them a fair price.
The first time I did this, I said, "so, for an entire strategic communications plan, including X, Y, and Z, which will keep A, B, and C from happening, you're looking at an investment of $30,000." And I forced myself to shut up. It was super scary, but after a few seconds, the prospect said, "That sounds reasonable. How do we get the ball moving?"
My biggest experience with helping clients price themselves is that they are scared to price things too high, and as a result they seriously undercut their pricing. My best advice to you is to have confidence and go for the price that will help establish you as someone who is worth the price.
Others will tell you how to transition. I'll give you a simple tip on pricing - The Blink Test. I'm serious and it goes like this:
1. ALWAYS discuss pricing in person with the client, and ALWAYS watch his/her eyes.
2. Start with a fee $x in discussion, basing it on preliminary discussions. Did client blink? No, continue.
3. Add a statement, like "we may have to do xxx, which means the price will be $X+y
4. Did he blink? No, go back to 3 and add more. Yes, go to 5.
5. Once (s)he blinked you know you have hit a point that is too high, so back it down to the price before the blink, but don't tell him. Go back to you office, write up a proposal based on what you indicated before the blink, include that price, deliver the proposal, ask if it solves his problems, when he says yes, ask for the check!
I've been using it for decades and it works. Good luck.
It's important to break the nexus in people's minds between time and money. I would consider adding in additional services, particularly valuable information that you can produce or provide to those willing to pay for it. Perhaps tiers of service level that receive greater value through these value-adding products or services.
However, to be successful with this, you would need to be clear about your vision for your business, and what makes it uniquely valuable to those who would buy into your vision and be ideal clients.
Then I'd get some help realigning your subconscious programming from this "pay by the hour" mindset to allowing yourself to succeed with value-based pricing. This is the most important element as our subconscious programming generates our results, and in this case this will involve recognizing and resolving and subconscious patterns relating to not feeing valued which are common among women entrepreneurs in particular.