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?
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.
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.
Review other operators in your space and see how they package their service. Transition from an hourly approach to a value added packaged service. It could then be a monthly or quarterly charge for example which includes 'X' amount of sessions, plus a whole lot of other special inclusions. Then it is no longer about your hourly rate, but the benefits & value you bring to the table. For the profit margins work on the law of averages so your hourly rate isn't compromised and you are equal or better off to now.
This approach can also help you scale you're business as it's less about you, and more about your products.
Thank you, Steven. Do you have suggestions, other than talking with other consultants, to determine the real worth of services to a client? It seems easy to identify general benefits, but calculating the actual dollar value would seem to require some detailed, confidential financial and operating information.
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.
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!
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.
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