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Attracting high-paying clients is one thing, but determining how much to charge is another.
“The most critical decision consultants, trusted advisors and services companies make is how to charge their clients,” says Susan Trivers, author of Tinker. “Will it be by the hour or by value-based pricing?”
In consulting and services, value-based pricing is a strategy of setting prices primarily based on a client’s perceived value of the service. Value pricing is not based on what it costs to perform the service but on how much the customer believes the service is worth.
In the last 12 years Trivers has advised more than 300 companies and is arguably America’s top pricing expert. She is an expert on the impact of terms, conditions and invoicing practices. Trivers works with owners and executives to apply an extreme degree of focus on driving revenue. Her approach is holistic, because revenue growth is a systems issue, not a sales issue.
Her general advice is to graduate from charging by the hour and base pricing on the outcomes you deliver.
“Hourly billing forces you to work long hours, creates negative cash flow, and puts you in the unenviable position of competing on price,” says Trivers.
Value-based pricing compensates you for expertise, innovation and speed. High growth clients will pay handsomely for these and the opportunities are unlimited.
Here are ten tips from Trivers on how to make more money with value-based pricing:
- “Make this mental shift: Revenue (fee) is paid to us for our knowledge, expertise, speed, and quality that have value to the client. As value increases, fees increase. There is no intrinsic dollar value to time.”
- “Articulate and describe in writing three quantitative and three qualitative outcomes your company delivers to clients. Examples: reduce number of low-profit engagements; eliminate unsold hours; prioritize innovative value; deliver quality outcomes at speed commensurate with the work.”
- “Inculcate the benefits of value-based pricing in every single person in the company. If doubts linger the whole company will suffer.”
- “Role play client conversations about value-based pricing until everyone exudes confidence that VBP is beneficial for every client. Everyone should be fluent with the quantitative and qualitative outcomes.”
- “Study the past 12 months of engagements to determine what outcomes were delivered at what price. Use this study to inform the outcomes and scope of VBP engagements. The more complex, the higher the value, the higher the fee.”
- “Prepare for the biggest client objection: ‘How do we know we’re getting our money’s worth?’ Focus on the outcomes the client will receive. Replace a list of inputs with the outcomes. Emphasize knowledge, expertise and quality provided at appropriate speed.”
- “Refashion internal company policies and procedures to support VBP: marketing, sales, terms and conditions and accounting/invoicing systems. Marketing and sales must use the language of outcomes and value; terms and conditions must require payment in advance, upon acceptance; and invoicing must be instant in order to get payment in advance.”
- “Establish a process for providing subsequent VBP engagements/contracts when new needs arise to avoid scope creep.”
- “Establish a product/services development team to continually create new higher-value offerings for higher fees.”
- “Reduce the number of clients who only want low value.”
Trivers was previously the owner of Cafe Aurora in Alexandria, VA. It was there she had a hunch, did an experiment and created astonishing results. Her book, Tinker, tells her “soup pricing story” and how the lessons learned from that hunch, experiment and tinkering can be applied to every company in every industry.
