We hear it from partners in every firm, no matter where in the world we are: “Our clients just don’t want alternative pricing methods. They always bring the conversation back to hours.”
Of course they do. Because you aren’t discussing value up-front with them. Mostly because firms haven’t taken the time to understand the value they are creating. If you don’t understand the value you create, you’ll never be able to capture it with effective and strategic pricing.
The empirical evidence is overwhelming: Customers do want alternative pricing methods. There is an enormous backlash against the billable hour, since it misaligns the interest between the firm and the customer and rewards inefficiency. Customers want certainty in price, and more value than the price they are paying.
If you don’t discuss value, expect to get beat up on your price. The problem with this is obvious: customers have an incentive to maximize value, but minimize price. Which would you rather discuss?
Before the famed consulting firm McKinsey & Company will accept a customer, they claim they have to provide at least three times more in value than the price they charge. What would happen if all professional service firms were to use this approach?
They would have to focus on value.
A June 2, 2006 article in Lawyers Weekly (“In House verdict: no more time billing”), an on-line ezine for Australia’s legal profession, cites an Australian Corporate Lawyers Association (ACLA) survey of 1,800 in-house counsel members, 55 percent of which still use the hourly billing method. But get this: “96 percent are looking for a change.”
In the article, Peter Turner, the CEO of the ACLA notes: “most corporate and government departments are value conscious. If they think they get value, then cost is a secondary issue.”
Furthermore, a 2004 survey conducted by the Association of Corporate Counsel (USA) found that 75 percent of in-house counsel were unable to cite a single innovation offered by their outside law firms. Of the 25 percent who did cite an innovation, it was with alternative pricing arrangements.
So, your customers consider pricing on a basis other than hourly billing to be an innovation. How lucky for professionals! No major R&D costs developing a new iPod or other new service; simply put some intellectual capital and creativity behind your pricing and you will have an enormous competitive advantage.
Another complaint we hear from professional service firms is their customers are quite sophisticated buyers: using procurement officers, strong-arm negotiating, beauty contests, Requests for Proposals, along with a myriad of other buying tactics to beat up on the firm’s pricing.
Cry all you want, but this isn’t going to change. Buyers have an enormous advantage when it comes to comparing buyers and their prices. Sellers cannot do this—it’s illegal—so they have to think smarter when it comes to being compared based on value, not price.
If your firm is going to be involved with professional buyers, then you better have a professional seller to engage in a discussion of value. Even the most hardened procurement officer is still interested in value, which is why the IBM slogan, “No one ever got fired for buying IBM,” was such an effective advertising campaign
Why not put a “Chief Value Officer” (CVO) up against procurement or in-house counsel. Someone who understands the value your firm is creating for the customer. Someone who is a professional pricer and understands that customers are not price sensitive, they are value conscious. Someone who is the eyes, ears and throat of the customer internally within your firm.
Until your firm makes the required investment in intellectual capital in order to comprehend, create and communicate the value you provide to your customers, you will not be able to capture that value intelligently and with confidence.
And if you can’t do that, you will end up talking about efforts, activities, costs, and hours. All of which have absolutely nothing to do with the value your firm creates.
This is not the customer’s problem. It’s yours. In the entire history of pricing changes, nearly all of them have been driven by the seller, not the buyer. After all, the buyer doesn’t have the same incentive to change your pricing methods as you do, since they buy relatively infrequently.
So, change your conversations from hours to value. Do this up-front before you do any work on behalf of a customer. Appoint a CVO and Establish a Pricing Cartel in your firm—a group of people who will become, over time, experts in creating and capturing value.
Your firm will become obsessed with value. Your customers will appreciate it, and then won’t bother with hours. I guarantee it.