What are the key success factors in implementing value pricing?
Let's start with the observation that if you are working, and charging, on an input-time basis then you are at best completing somebody else's to-do list. This makes you an order-taker (and therefore price-taker), rather than an order-maker and price-maker.
Value pricing means looking at what your client is trying to achieve and delivering outcomes (as detailed in your client's KPIs) - instead of reactively taking orders.
A proactive solution-provider enjoys a different relationship with a client compared to one who merely waits to be given orders to fulfil. Your client relationship needs to be that of a trusted advisor; you need to be talking with a decision-maker rather than a mere gate-keeper. This means, by definition, that you need to be higher up the food chain in the client organisation.
Your relationship with your client will need to be open and honest in a number of ways, starting with sharing of KPIs; clear objectives and well-defined KPIs is a pre-requisite to ensuring there is clarity over what you are being asked to achieve.
Jointly shaping your client's desired outcomes results in you working together on diagnostics, the process of establishing what outputs are needed to drive the required outcomes.
Under this approach, you do not need to discuss inputs with your client; it becomes your responsibility to ensure that the given inputs achieve the required outputs and, as an internal exercise, to check that cost-to-deliver is less than selling price.
Risk – and risk management
Value-pricing involves taking on more risk - and managing that risk. Once you start to take responsibility for outputs or even outcomes, you will have increased your risk and therefore need to price accordingly to earn an appropriate return.
A good place to start in taking on more risk from your client is a guaranteed Service Level Agreement, or SLA; as an example, you might guarantee to provide a response to all emails within 2 working hours but manage this risk, by excluding any travel to client offices beyond an initial face-to-face briefing meeting.
Another general feature of value pricing is a fixed-price guarantee, which further reduces your client’s risk – there are various ways for you to manage this risk, such as menu pricing (different menu options for gold / silver / bronze level of service) and limitations on IP usage (by time, medium and geography).
You may also consider offering unlimited access to you staff; as every lawyer knows, whenever your client phones you up, it is an invitation to offer a solution.
You can also start to guarantee outputs, say to deliver a piece of work that meets the brief by a certain date for a fixed price. In order to do this, you will need to document carefully the assumptions, such as date of receiving the brief, clarity over outputs and scope plus the process around client feedback and approval.
You may also look at agreed outcomes, which will need to be a mixture of perceived and tangible benefits and which should be things that you can genuinely take sole responsibility for influencing. As an example, an ad campaign might drive traffic to a client website (top of the funnel / TOFU objective), but should not be targeted with converting website hits into completed sales (bottom of the funnel / BOFU objective).
Once both sides have agreed their respective responsibilities on both sides, any failure by your client to meet that triggers a change in scope; it is then up to you whether and how much you charge for scope changes. Minor changes you might wave past as a goodwill gesture, medium changes may involve a conversation and larger ones may require a revision to price.
You will also need to ensure that both you and your client review the project after the event to establish what went well and what did not; this is essential in order to make improvements going forward. This is the second area where a trusting relationship is key as it requires rigorous honesty on both sides.
The after-action mop-up should not become an exercise in your client looking for opportunities to claim fees back from you; rather it should be a discussion to fix anything that did not work and optimise anything that needs improvement.
The right sort of client
The types of client best suited to value pricing are those who have a willingness to be visionary and focus on outcomes. By definition, these need to be smart, motivated, self-confident people.
Your value-pricing client also needs to have a degree of autonomy and authority to be able to make these sorts of decisions, so you will need to pick them carefully, spending time testing their willingness to work differently.
On a very practical level, obviously it helps if you have a reasonable client base to start with and, as with anything new, you want to start small, probably with a new client in order to test-and-learn.
Last updated 19/04/2016