Value First, Price Last

Once you start pricing work based on value delivered rather than time incurred, more is affected than just the figures in your proposal. It shapes how you think, act and operate your entire business.

This has been my experience as I transition my business to a 100% value pricing model. When you can no longer fall back on time-and-materials, you are forced to look at your business in a different way and to figure out the real value you deliver.

This is not to say that it is easy to do. Whilst simple value pricing (if such a thing exists) might be to charge a percentage of monetary return on investment, that is not always something that is available. In fact, it may not even be the primary motivation for a project.

You need to be able to determine what is valued by each individual customer for each project, and that’s something that can take time and require thinking about things a little differently.

Start with Value

When you can no longer fall back on your time, you have to change your approach to business to establish value early on in any engagement. In any other business, this would be the norm, but for some reason, in knowledge businesses we seem to get stuck worrying about our own costs and time rather than what we’re delivering to the customer.

Doing things this way, it’s easy to work backwards: What’s the budget?…What’s our rate?…Here’s what we guess we’ll do in that amount of time. The price becomes the primary and ongoing concern.

Time billing means it is very easy to spend a lot of time (and money) delivering nothing — and expecting to get rewarded for it. In any other context — indeed, in any other type of business — this would be crazy. Imagine paying £30k for a new car, but finding only half of it turns up because our engineers ran out of time”.

Value pricing doesn’t let you get away with this form of lazy pricing. It forces you to really understand your own business before you even start working with a customer.

In making the switch, I’ve had to completely rethink how Plymouth Software is positioned; the services we offer; and the outcomes of those services to our customers — what we deliver.

In a very short time, I’ve been forced to completely change my business model in three key areas:

Position

If you define your business by the deliverables (a web site designer, for example), your business has a very broad, generic target customer. In fact, if you’re anything like I was, your target customer is anyone who wants an app/website/whatever.

This is a problem as it means you have to redefine your value proposition to every new customer for every new job, and you can easily end up attracting the wrong customers to your business.

When you start thinking about your ideal client — who is it you actually want to work with; what are their hopes, dreams and worries (what my business mentor calls their 2am issues) — you can begin to figure out what they really value.

It took me a little while to realise what I was really doing was positioning my business. This is a whole subject in itself, and something that Philip Morgan covers in his work — I recommend checking out his blog and books if you’re interested.

It took me a little while to realise what I was really doing was positioning my business. This is a whole subject in itself, and something that Philip Morgan covers in his work — I recommend checking out his blog and books if you’re interested.

Product(isation)

Once you have your ideal customer in mind, and have gained an understanding of what they value, you can begin to standardise your offer.

One extreme of this would be an off-the-shelf product of some sort. For software companies, that’s usually a SaaS or downloadable resource such as a paid app, theme, eBook, and so on. However, there’s often a huge amount of upfront investment and risk required to make the leap from client-work to the dream product.

At this stage, I’m productising my consulting efforts — something I first learned about through Brian Casel. Productised consulting sits somewhere in the middle-ground of off-the-shelf and bespoke work. By providing a common structure around your service offering, you can begin to match your services to your customers’ goals. I’ve started this by productising the early stages of any engagement.

As an example, after an initial review, we now follow up with short phone consultation to discuss a business idea, we follow up with a code-review and/or a full-day discovery workshop (depending on the project).

The outcomes from these allow us to dig into a project and put together a realistic and value-based delivery proposal for our customers. Both of these services are offered on a fixed price basis, with a number of scope options to match customers’ needs.

This is by no means a new concept, and all of these services require a lot of input. However, by structuring them in this way, we can tweak and adapt them to better suit the needs of our target customers as we learn more about them.

Price

It’s perhaps surprising that price is the last item to be considered, but it is with good reason.

Only once you’ve figured out your ideal customer, established what are their goals and needs, and honed your business services to meet those goals, can you begin to calculate the value you deliver — and derive a price.

That price cannot be derived by a simple formula. It requires conversations with your customer. Setting the price for your services becomes an art — something that can change with every project; and something that actually feels good to present.

If you have taken the time to understand the value of your work, you know that your price is fair and mutually beneficial to everyone involved.

The Benefits of Value First

Thinking about the value you deliver forces you to reflect on your business in a way that’s easy to brush under the carpet when charging for time. The benefits are immeasurable, though. You become more confident in your business offering; you can standardise (and thus document) your operations and workflows; you can identify an ideal customer and align your business with their goals.

Most importantly, your customers receive real value from working with you, and you build stronger relationships as a result. This can only come from figuring out the value first, and making the price a result of that value rather than the driving force behind it.

It’s a difficult, long and ongoing process, but the switch to value pricing does more than just change the figures in your proposal — it transforms everything about your business.


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.



Date
March 30, 2016