Professional Documents
Culture Documents
Module: Pricing
Technology Trends:
With new technology helping automate processes, owners are now using
tools to help them take on more client work (and remove the repetitive
admin work). As such, the industry becomes more ecient, their billable
time will go down.
Client Expectations:
Clients are now focused on value and outcomes, and resist hourly billing.
At best, they work with the firm but restrict the activities that firm can take
on, for fear they will receive a surprise bill. As other industries move into
fixed fee subscription based models, clients have begun to expect a
similar approach to their professional service providers.
Foundation of Value:
Hourly billing was introduced in 1919.
Hourly billing business model is:
Revenue = people power (capacity) * eciency (realization, utilization, billable
hours) * hourly rate.
Problem is denominated in time, but not a customer alive that buys time
Example:
When we visit a Doctor, we don't go there to buy an hour
so what customers are buying is an outcome
Another way to think about, friend or loved on has baby, you want to see the baby,
not hear about labor pains.
But in accounting we focus on labor pains in 6 minute contractions and bill for
them, but we ignore the baby, which is what the customer focuses on.
Related Interview: Ron Baker on Value Pricing
Foundation of Value:
Hourly billing doesnt fit the knowledge economy, but
instead factory model - Ron Baker
Structural capital (only thing that firm actually owns) : Stay in firm after people go home,
systems, workflows, strategy, information products (courses, webinars, books, etc)
Professional services have few assets, but human capital is the leverage point of the
professional firms, and whats interesting is that human capital is a non rival asset.
Rival asset is like a bottle of water, more I drink of it, less you have
But knowledge is non rival, but if I give you ideas today, you can tweak and make it better, but
the source still has it. So now both parties have it, and instead of diminish, it grows.
Billable hour is limited because it is a rival asset and you can only do one thing at a time, which
makes it very limited by definition.
Billable hour puts artificial ceiling over the wealth that can be created.
Bill gates has the same amount of time, but never sold time so he never based value or ost on
it.
Time is a constraint, so hourly billing limits billing.
Profitability:
By removing the connection between time and price, you can list fixed or value based prices
typically at a higher average amount than a typical hourly billing.
Positioning
You can focus on the pain your client has, and how your solution solves that problem instead of
talking about hourly rates, you become an advisor that learns about the problems theyre
experiencing and how you can help.
Team Management
Team members will no longer have to submit time sheets. Value or fixed fee firms can still track time
in order to manage future capacity planning.
Client Management
Clients will know exactly how much your service, job, or engagement will cost. No guess work, no
uncertainty, and no confusion in terms of payment! In fact, as youll see below, you can remove A/R
completely.
Innovation on Services
Since a firm focuses on value, if a client has a problem outside your typical package of services (but
still falls under your skill set), you can create a new offering to assist that client.
No more Accounts Receivable
Since pricing is 100% transparent through the process, charge the client upfront and get paid
(remember, youll also offer a service guarantee, so the client has zero risk paying upfront).
Payment terms
Customers cyclical cashflow, not your internal workflow.
Value is determined outside your firm, not inside.
Ex: Christmas retailers, you know they're broke during Summer, but flushed in Q4/Q1 and let them
pay more in heavy seasons and less when they're not, so tax work is done march/april, and billed
end of year. And then we can help them budget
Value guarantee
If youre not satisfied/delight, only pay what you think the value was. Customers love this because
customer will pay more to have this unconditional guarantee amazon, LL Bean, Zappos,
Nordstrom, Fedex (overnight or you dont pay)
Service guarantee: You already offer it, bc if any customer really complained, you'd prob refund it,
so why not make it public.
Access Options
in unlimited access Call me or talk with us, anytime or any topic
Customers don't like reaching out for hourly prices because they feel like theyre being nickeled and
dime, so instead just build it into your pricing. This will lead to more work, and more value work.
More high value to get into the strategy rather than get into post transaction. Unlimited access give
them an incentive to call you first before talking with other consultants or professional providers.
Like a country club access, they know its built into the price and will reach out to you more.
Bundle Options
Customers cyclical cashflow, not your internal workflow.
Value is determined outside your firm, not inside.
Ex: Christmas retailers, you know they're broke during Summer, but flushed in Q4/Q1 and let
them pay more in heavy seasons and less when they're not, so tax work is done march/april,
and billed end of year. And then we can help them budget .green, gold, and plat.
Advisory Services
If youre not satisfied/delight, only pay what you think the value was. Customers love this
because customer will pay more to have this unconditional guarantee amazon, LL Bean,
Zappos, Nordstrom, Fedex (overnight or you dont pay)
Service guarantee: You already offer it, bc if any customer really complained, you'd prob refund
it, so why not make it public.
Value conversation:
Ask them questions about their life, or business, why did they switch,
why now, why us, and what does a successful relationship look like for
them?
Really understand the value drivers are for the customers. But you need
to do this one customer at a time.
Best, all time opening, with new or current value customers
Dear Mr/Mrs customer, we will only undertake this engagement if we
can agree to our mutual satisfaction that the value we are creating is
worth more than the price youre paying us is that acceptable? - Ron
Baker
That puts both parties on quest to uncover value.
Value questions are about asking questions, and listening.