by Tim Williams
Do the executives on the front lines of your firm have a clear, unequivocal understanding of the principles that guide your commercial decisions?
The iconic Mad Man Bill Bernbach once remarked:
“A principle isn’t a principle until it costs you money.”
The firms who are stuck in the outmoded paradigm of selling hours cave in at the first objection of well-trained professional buyers, because they only know how to discuss and defend their costs.
On the other hand, the progressive firms that have a genuine understanding of the value they create have the confidence to follow specific rules of engagement during the process of setting and discussing remuneration. By proclaiming their commitment to modern pricing methodologies based on the value they create rather than the costs they incur, these firms are putting stakes in the ground that not only help them create healthier margins but strongly differentiate them from the countless other firms caught in the commercial gridlock caused by hourly billing.
If you haven’t taken the first step away from the industrial-era labor theory of value (hours worked = value created), then the idea of a statement of progressive pricing principles will feel unrealistically aspirational. But you can take heart in knowing there are professional firms of all stripes — on every continent — which are practicing these very principles.
A VALUE MANIFESTO
- We will price our services based on the value we provide rather than the hours we work. We will stop selling inputs and sell outputs or outcomes.
- In remuneration discussions, we will use the language of value in place of the language of cost.
- Because pricing is an important strategic decision that requires judgment in place of calculations, we will never quote pricing on the spot.
- We will always provide pricing options, but never ranges.
- We will never lower our price without also subtracting value. We will downsize instead of discount.
- We will begin each new engagement with an in-depth understanding of Scope of Value before we execute a Scope of Work.
- We will trade the standard hourly rate card for a “pricing stack” — a variety of different ways we capture the value we create for our clients.
- We will identify opportunities to benefit from varying levels of risk and reward and create a diversified portfolio of remuneration agreements.
- Beyond "work for hire," we will develop new revenue streams based on the intellectual property we create and the intellectual capital that resides in our firm.
- We will enter each pricing discussion by asking ourselves "How can we align the economic incentives of both buyer and seller?"
- We will define and manage scope not as hours worked, but as outputs delivered or outcomes achieved.
- We will only begin work after we have an agreed price and an approved agreement.
A key characteristic of firms with well-defined pricing principles is they understand the benefit of challenging the commercial status quo. They know that respectfully challenging a prospect’s flawed pricing paradigm or procurement process puts them ahead of the game. Rigorous research by CEB/Gartner shows that in complex B2B sales like professional services, the “challenger” approach outperforms the typical “relationship builder” approach by a factor of almost 13 to 1.
The ingenious American investor Warren Buffet once observed that even if your firm has enough money, it can never have enough reputation. Your revenue streams aren’t your highest value; the principles that create them are.