Value Pricing Progress Update March 2016
At the start of this year, I committed to making the switch entirely to value pricing. After a couple of months, I’ve practised the approach on a few projects and enquiries, with some notable successes.
In February, I proposed a small project to an existing customer. They had requested some additional functionality that was outside the scope of their existing service plan.
In this instance, there were two distinct pieces of work available, so that made for 2 easy options. Thinking of a third option to present was difficult, so unfortunately I fell back to a traditional “buy both and get a lower total price” option.
In the end, the customer chose the middle option, which was the larger of the two pieces of work. Although I wasn’t particularly happy with my third option (which simply offered a reduced total price by committing to two projects instead of one), the act of proposing a fixed-price value agreement was extremely refreshing.
Most importantly, other than target delivery dates, the proposal included no mention of time-cost. Instead, the scope of work was defined as end-user outcomes rather than technical deliverables.
Concentrating on goals rather than implementation has made for a much smoother-running project. As the work has progressed, the implementation has adapted but there has been no need to worry about additional time as everything has been in line with those original user goals.
I can’t say that time was entirely absent from my pricing decision at this stage — I did give consideration to my internal costs when pricing the work, but did not expose this in the proposal. Taking a cue from Jonathan Stark, I priced the project such that minor tweaks and changes would not be an issue. It is part of the value of offering a fixed-fee agreement.
New Service Plan Agreement
In this first quarter, we also won another value-based service plan agreement. This had been in the works a little while beforehand, but during the proposal period I offered the customer a value-based alternative to the more traditional hours-per-month retainer approach.
Again, a few options were presented, based on the levels of scope and access that would be available. We eventually settled on a middle-ground agreement between options 1 and 2.
For both this service agreement, which is an recurring service, and the discrete project above, I applied what I’ve learned in value pricing to offer a fixed-fee agreement to the customer, and weighted the fees according to the additional benefits and reduction in risk they were receiving.
Whilst I know I’ve made some mistakes in these first value-based proposals, there has undoubtedly been a huge advantage to working in this way.
Putting together the proposals took a fraction of the time that is usually necessary, as they were simply a formal, written summary of what had been agreed in earlier conversations.
Without the need to break down time and deliverables, I was free to focus on how each option I presented could offer increasing value the value to the customer.
Each proposal was therefore only a couple of sides of A4 paper, rather than reams of technical breakdown that would be necessary under a time-based agreement.
It certainly helped my own mindset knowing that the proposals presented solutions to the customers’ business goals, rather than simply increasing in the number of days and weeks that I would be available to the customer.
Freedom to Explore
By not worrying about the time and minutiae of (technical) deliverables, and instead concerning myself with achieving the overall goals that were defined in the scope, it has freed me to explore alternative options and put in the extra time necessary to research better ways of doing things.
For example, the service plan includes scope for complete redevelopment of an Android application, which is now underway. Without the clock running, I’ve been able to spend some time carrying out in-depth research into how to effectively tackle some of the business goals the app will meet, without feeling the pressure to keep within a set budget of hours.
The biggest challenge has been identifying all the value that could be delivered, and formulating options that truly reflect that. In the coming weeks and months, I’ll be concentrating on developing my skills in holding the value conversation, and training my mind to stop jumping straight to technical solutions.
Have you made the switch to value pricing? How has it affected your own business and the way you operate? Are you worried about making the switch away from time billing? Let me know by getting in touch.