IMGCAP(1)]I was recently invited to Shanghai for a weeklong visit, and as the date neared, I found myself getting anxious. The city is massive.
With a population density nearly four times that of my hometown, a language barrier, and Eastern worldview, it’s intimidating. Naturally, the question is, why bother?
“Because of the benefits of travel,” gushes a friend. “Your mind opens, experiences are priceless, you’ll learn new things, make new friends. . .”
True, the benefits outweigh the costs. As I think about it, I’ve gone through similar experiences before. San Francisco is our favorite city. The first visit was intimidating. “Where will I stay? How will I get around?” The second visit was better. “This time I’ll stay here and go there.” By our tenth visit, we were giving advice to other passengers on the plane ride out there.
Extend that traveling mindset to another future destination: value-based pricing. As value-based pricing is typically presented, the first steps for transitioning a firm from hourly billing to a value based model are hard to find. Below I’ve outlined a process that will help your firm travel to this strange new place.
For our purposes, the value-based pricing model I’m referring to has three features:
• The price of the service varies based on the value of the project to the client. It provides you equitable compensation in return for providing clients great results.
• The price of the service is fixed and paid up-front. In addition to cash flow benefits, this eliminates billing hourly in arrears and relieves the client from making uninformed value decisions.
• The service provided focuses less on the output the firm provides, and more on the outcome the client has described.
The benefits of a value-based pricing system like this include improved cash flow, higher client satisfaction, and more rewarding work for partners and associates. Implied in all of this is a higher per hour rate and more time for knowledge workers to learn and think, increasing their value to clients.
So, What Could Be the Problem?
Sounds great, right? This is where anxiety creeps in and the journey looks difficult. “Why aren’t more firms doing this?” you might wonder. “This is just flat-rate pricing. That won’t work for us. Our clients are used to our rates. Our competitors are going to say we’re overcharging. Isn’t this unfair to clients? We can’t just change the firm over on the drop of a dime.”
I’ve heard all of this and I agree. It’s not easy. However, if the benefits are worth it, you can make the transition. It’s a process, not an event, and I’ll outline it for you.
Step One: Structure the Project
The first part of the process is structuring the project. Start by defining an idealized vision of the future. Step out three to five years and imagine a day in the life of a value-based pricing firm. Think about a single partner and their work with their best client. The firm grip on language the partner has developed to communicate value. Their ability to get to true economic buyers in the organization, buyers who can prioritize their budget. A willingness to push back on conventional wisdom for the client’s benefit. A clear understanding of the outcomes the client is after. The partnership that has developed between your firm and theirs. The partner’s deep understanding of where the client wants to go. The firm seeing the benefit from twice as much revenue coming from that client at half the hours.
That vision has to be clear and it has to be compelling. This is critical because change is hard. Think back to traveling to China. If you didn’t see the benefit, why would you go? Start by finding a professional services firm that has adopted this model. Bring them in and have them sit on a panel with your leadership team. Don’t get stuck in the present. Simply let them tell you about their days, weeks and months.
Once you have a clear vision, bring it back to today. How many future-oriented, outcome-focused conversations are your partners having today? Half a dozen a month? One a week? None? This is important because you need to set up metrics to measure progress. As Drucker taught us, what gets measured gets managed. You can live with zero value-based, future-oriented conversations right now. You should be upset if you’re still at zero 12 months from now. When you know where you are today, set the target for 12 months from now.
I suggest you set up two numbers because your firm is full of smart, aggressive people, and they are all at full utilization right now. The first number is the ideal number of conversations you want them to have in the next 12 months. Follow that with the absolute minimum that you can live with. A minimum acceptable standard. Anything below is failing. Think about the minimum hours you require from an associate. Now think about the absolute worst performance you had to live with for more than six months. That’s your unwritten minimum acceptable standard. It’s just as important as the optimistic number you put up for the goal.
Step Two: Identify the Right Players
The second part of the process is identifying the right clients and prospects for value-based pricing conversations. Your best shot at success is with your best prospects. When planning a trip to China, you can’t go everywhere, so you start with big cities, important sights and major attractions. Your initial prospects for value-based projects will follow the same script. Target your best-performing clients. These are not necessarily your top billing clients. Your best initial value-based pricing conversations are future based, meaning that you’re going to be talking about something the client is after in the future. To make it easy on your firm, look for clients that have some of the following characteristics:
• above average revenue growth;
• recent investment in staff or technology;
• a history of using consultants;
• identifiable economic buyers who can prioritize budgets (vs. simply allocating a given budget).
Your firm should identify at least as many clients and prospects as you hope to have successful value-based conversations with. You need the revenue growth because it naturally leads to discussions about the future, which we’ll cover in detail on the next step. You want evidence of recent staff or technology investment because that too is an indicator of future growth. If they’ve used outside help like consultants before, you won’t be battling the concept of should we or shouldn’t we use outsiders that rages inside so many organizations. Being able to identify economic buyers who can prioritize a budget—not just allocate an existing budget—indicates that you’re going to visit with someone who will come up with the money for the right outcome.
In addition to focusing on the right companies to have these conversations with, it’s equally important to focus on which people you want to see having these conversations. As tempting as it is, resist the temptation to test this with underutilized junior partners, new associates or hired guns. While it may be easier at first, if there’s going to be future buy-in by the entire firm, you need these initial conversations to come from the top.
Start with a top-performing partner because their interactions with clients are already close to future-oriented, outcome-focused conversations. They’ll be the toughest to get buy-in on the vision because they are successful in their current ways, but they’ll also have the best chance at success. Once they warm to the idea, the first thing they’ll want to know is what these conversations sound and look like.
Step Three: Enter the Conversations
The third part of the process is learning the new language required for value-based conversations. You can have these conversations about any business topic, but as with a first trip to a strange land, we’re going to narrow the focus and see where the topic leads us. Specifically, we’re going to focus on the future. Where the client plans on being one year from today and why they consider the work to get there to be worth the effort.
The thing about value-based conversations is they aren’t solution oriented, meaning it’s not about an output we can provide. These talks are outcome oriented, meaning they are based on what the client is focused on, learning why they are focused there, and helping where you can. Two-thirds of this information doesn’t come from you, only the client.
For instance, the client says, “Next year? Well, we’ll have identified a strategic acquisition. . .” In a non-value-based conversation, the partner will feel the urge to talk about acquisitions and the firm’s success in identifying, valuing and aiding such transactions. A value-based conversation, on the other hand, will focus on understanding the why behind that desire. What will an acquisition do? Why now? What are the business reasons? What are your personal reasons? What are the financial reasons? What about nonfinancial reasons? What advice do I have for them regardless of whether or not I do the work? Would you, the client, be interested in help with that?
The client’s answers contain the value. Value resides with the client, and your partners need to practice uncovering it and helping the client quantify it. To get started on value-based pricing, your firm needs to deliberately have these conversations in the next 12 months. Only after you hear a strong “why bother?” behind a desired outcome will you be able to unlock value-based pricing and the treasures within.
Getting Started
That three-step process is the best way to start on the road to value-based pricing. It’s a proven way to get early success you can build on. The reason it works is because your people are applying this process in other areas of their lives. It’s just like the way you make sure the first trip into a foreign land will be successful enough to warrant a return trip.
Start with the structure, building a vision and how you’ll measure progress and success. Second, spend time identifying the right companies and people to have conversations with. That includes wooing the partners in your organization who are most likely to have success with this approach, regardless of how busy they are. Third, focus on the language of the value-based approach. Your firm’s outputs have different worths to different clients, and the better your partners are at identifying where the highest value lies, the more rewarding your work is.
Follow that approach to get started. Note that it’s activity based, and you’re looking for small successes to build on. It’s just like my trip abroad. I understand the big picture benefits, I’ve identified my target, and now I need to get there, get my bearings, and enjoy it enough to want to have other journeys. Start building your structure today. Twelve months from now, you want stories and metrics to improve on.
Greg Chambers is the founder of the sales-and-marketing consultancy
