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  • #990786
    JohnTranter
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    I keep hearing about this, has anyone actually taken the leap away from hourly based pricing into value based pricing? How did you go?

    Quick intro to Value based pricing:
    My understanding is that many web companies are moving towards a value based pricing system, rather than charging per hour. This is where the amount a project costs is based on the amount of value the service/product is giving the client.

    This is partly to counter the effect that as IT people get better at their jobs, they tend to work faster. When charging hourly, working faster actually means they’re earning less money in a ‘per job’ basis. This means companies are stuck with either

    • Creating a tiered pricing structure (e.g. our senior developers are $125ph, or normal developer for $60ph) This becomes complicated
    • Firing their fast staff and sticking with interns who are earning the most money

    Or you can base the price on how much the service/product means to the client.

    http://en.wikipedia.org/wiki/Value-based_pricing

    Anyone had any success?

    #1178591
    Brad Turville
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    Hey John, great topic. A number of years ago I shifted our accounting firm to upfront value based pricing and have never looked back. I guess a large influence to me was Alan Weiss who is a massive advocate of this strategy. He’s written 40-50 books but namely Million Dollar Consulting and Consulting Bible are absolute gems and go into detail on the techniques and structure.

    It boils down to pricing the project based on the value you add to the client. So how do you determine value to the client? You ask a specific line of questions to determine tangible and in-tangible benefits then you go with your gut and nominate a figure. If you are able to provide tremendous value to a client they are more likely to accept a larger fee from you for providing this. It also comes down to how you articulate it. Check out Alan Weiss as he’ll cover off stacks.

    The massive flaw with hourly rates is that the longer you take to do a job, the more it costs the client. So if you are inefficient the client pays more, but that’s not the client’s fault. So you then decide to discount (read: financial backhand) the invoice. That’s crazy. When you fixed price based on value, it will drive yourself and your team to become more efficient. The client is already happy with the price so if you are able to provide the service quicker, the upside is all yours.

    There’s a quick intro but feel free to shoot back any queries or if you want any example I’m happy to provide. Same goes to any other curious readers.

    #1178592
    JohnTranter
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    BradTurville, post: 208028 wrote:
    A number of years ago I shifted our accounting firm to upfront value based pricing and have never looked back.

    Hey Brad, thanks for replying. How did you existing clients take the change? Or did you only change for new clients?

    BradTurville, post: 208028 wrote:
    I guess a large influence to me was Alan Weiss who is a massive advocate of this strategy. He’s written 40-50 books but namely Million Dollar Consulting and Consulting Bible are absolute gems and go into detail on the techniques and structure.

    Thanks, I’ll take a look at those

    #1178593
    Brad Turville
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    Good question, I receive this one a lot. We shifted all existing and new clients on upfront value pricing. For new clients it’s quite easy as you can education them on how you work from the get go.

    For existing clients, it was firstly an education process that we are growing and improving our business and we find the hourly rate system to be completely unethical in that we get rewarded for taking longer and the bill is always a surprise after the job is complete. With the new system we are completely transparent and agree on the price before starting the job so we are all clear and don’t waste each others time if we aren’t a good fit. We also include a clause to say that if the job went out of scope then originally intended (read: scope creed) we’ll pause the job, revise the fee proposal and communicate this to you.

    I found that once you advise the client why you are changing your pricing structure they are quite receptive but there are always going to be a few that resist. That’s life. More specifically about value pricing the job, it’s not about charging a larger fee but more so receiving an adequate return on the value you add to the client.

    It’s like me saying to you (in a nutshell) “Hey John, we’ve done some research around your tax planning and have found an opportunity where by being creative we will be able to save you an extra $175,000 p.a. in tax. We’d love to get started ASAP and our fee for implementing this for you is $35,000.”

    This may take me 5 mins or 5 days to complete, but regardless of time, the fact is that the value and tax saving to you is massive. That’s what you’re paying for. We need to take time out of the equation. A great example I always use is that of when you have a tooth ache. So you go to the dentist, they put you in the chair, have a look and say, “we need to pull out that tooth.” So you have an injection and they pull the tooth, all in the space of 5-10mins.” You walk out and pay say $250 for the procedure. Now if you were focussed on time you’d say well that was expensive because it only took a couple of minutes. But you want the pain fixed quickly and you are paying for the dentist to solve the problem, not how long they take.

    #1178594
    MissSassy
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    Charging by the hour is crazy and the sooner it can be avoided the better.

    All business need to deliver value first and price second, in reality there is no price it is all about value. Get used to that idea and you will never sell based on price again.

    [MODERATED – removed section outside guidelines]

    #1178595
    Mitchell Ross
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    Hi guys,

    I don’t really have anything to add other than the fact I found this quite useful.

    My business is primarily product based, however we are growing our service offering and this thread has helped me a great deal with my plans!

    Thanks!

    Mitchell

    #1178596
    Dave Gillen – Former FS Concierge
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    JohnTranter, post: 207994 wrote:
    This is where the amount a project costs is based on the amount of value the service/product is giving the client.

    A couple of extra points John…

    1) You have to be able to show that the value to them is far above the cost. Maybe 5x maybe 10x. This is to account for the risks involved for them (you may not deliver what you promise, or you may deliver the service but they may not profit as much as expected, for example).

    2) To do this you need to understand how their business makes money, and how your service will translate into more profit for them (and communicate this with crystal clarity).

    So it’s more than just a change in prices, it’s adding an element of business consulting and insight to your technical service.

    Dave

    #1178597
    IncredibleCo
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    I too don’t charge by the hour. Even when asked I tell the client that I simply provide a quote on every job.

    #1178598
    JohnTranter
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    FS Forum Support, post: 208473 wrote:
    1) You have to be able to show that the value to them is far above the cost. Maybe 5x maybe 10x. This is to account for the risks involved for them (you may not deliver what you promise, or you may deliver the service but they may not profit as much as expected, for example).

    2) To do this you need to understand how their business makes money, and how your service will translate into more profit for them (and communicate this with crystal clarity).

    I’m just trying to think how this would work in practice. So for a potential customer, do you
    a) Ask for their specific business information e.g. sales, margins
    or
    b) talk in generalities .e.g. companies who do X find that their sales rise by Y%?

    edit : obviously not option (b) as you have to know the worth, but it still leaves the question of how to estimate the increase in value to the customer

    #1178599
    bb1
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    Ok so what is the differnec between “Value based pricing” or providing a “fixed price quote”. Isnt it the same. We all determine effort and what its worth to the client. Please explain

    #1178600
    Taylored
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    Hi,
    I’d like to put an opposite view on value based pricing. Essentially everything comes down to an hourly rate. I have recently had an experience where I quoted a price to client for the level of services they described. I left it open to negotiation for a starting period as the level of work necessary is always an unknown. Generally, I can tell the amount of work from bank statements. I saw 2 employees, they had 15 on the payroll, I saw one bank statement, they had 7. They basically bought the entree then wanted to eat the buffet and take the knives and forks home. When I tried to renegotiate after three months their mantra was “its a fixed price”. When i worked it out I was essentially working for $15 per hour. I have another client where the rate hasnt changed in 3 years but I have got faster and my technology is better so now I feel I am overcharging him and have put the price down.

    So my point is that, in a services based business at least, the hourly rate is always relevant even though current thinking seems to be that value pricing has no reference point to hours needed? I tend to take my hourly rate and times it by how long I think it will take then fix the rate at that. Sometimes I win sometimes I lose but in the end winning and losing still gets based on an hourly rate in a service based business and respectfully, I cant see how it can be anything else,

    Just my opinion

    Cheers

    Marc

    #1178601
    ThexArm
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    Hi Guys, just remembered there is a free flying solo guide to Pricing Business Services you get as part of your membership to FS. Look in your my account to find out more. http://www.flyingsolo.com.au/about/member-downloads

    There is a difference between fixed fee price and value based fee.

    Fixed fee price is like a locksmith charges for coming to your home and unlocking a door. His charges are $$$ irrespective of the job because it is a standard service. The only outcome here is unlocking the door. Another example may be a bookkeeper charging $x for getting monthly books balanced. That would be fixed fee service. But, if he were to provide management accounting services such as cash flow management, KPI reports etc. to add value to his customers’ business then he would charge based on the perceived value to the client.

    Value Based fees is more suitable where the service is not standard and there are multiple outcomes (there are competitors providing similar service but may get different outcomes). If you believe you have more skills, knowledge and expertise to achieve a better outcome through your service you would price it based on that value. As it was mentioned above in one reply that an accountant charging high fees for providing a service by uniquely identifying an opportunity.

    #1178602
    bb1
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    Taylored, post: 208510 wrote:
    So my point is that, in a services based business at least, the hourly rate is always relevant even though current thinking seems to be that value pricing has no reference point to hours needed? I tend to take my hourly rate and times it by how long I think it will take then fix the rate at that. Sometimes I win sometimes I lose but in the end winning and losing still gets based on an hourly rate in a service based business and respectfully, I cant see how it can be anything else,

    Just my opinion

    Cheers

    Marc

    Got to agree here, because at the end of the day the service provider wants a certain return for their hours, they are not going to give “value based pricing”, which is going to result in them only earning $100 per hour if their hourly rate is $150. Not sure of any industry that wouldnt base it on a given hourly return based on estimated effort.

    #1178603
    Dave Gillen – Former FS Concierge
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    JohnTranter, post: 208500 wrote:
    I’m just trying to think how this would work in practice. So for a potential customer, do you
    a) Ask for their specific business information e.g. sales, margins
    or
    b) talk in generalities .e.g. companies who do X find that their sales rise by Y%?

    edit : obviously not option (b) as you have to know the worth, but it still leaves the question of how to estimate the increase in value to the customer

    John – yes where possible I ask for their traffic, sales, leads, margins etc. The more info you have the less uncertainty exists in the proposition. It’s not always possible though so you just have to work with what you have. Plus a company is more likely to hire someone who’s focusing on their success metrics rather than someone who’s just talking about the a-z of their service, because it shows understanding of the problem to be solved.

    Bert – it won’t suit all industries, but it can allow some service businesses to access a higher rate than their typical hourly rate. For example if you can make a company $20k in a day’s work (and show it), you might be able to justify charging $2k or more, rather than $50/hr based on labour costs.

    Dave

    #1178604
    bb1
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    FS Forum Support, post: 208547 wrote:
    Bert – it won’t suit all industries, but it can allow some service businesses to access a higher rate than their typical hourly rate. For example if you can make a company $20k in a day’s work (and show it), you might be able to justify charging $2k or more, rather than $50/hr based on labour costs.

    Dave

    Hi Dave, yeah I get it that it wont work for all industries, but to reverse my example above. I get in 2 accountants both for the same task, and the outcome will be for me a potential 20K saving.

    Accountant 1 gives me a “value based price” of $2K, and the other gives me a fixed price quote of $1K, my job specification to the was the same. The promise from them is the same. which will I select. Why would a client be happy to pay more because I have called it a “value based price”.

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