Risk and Its Effect on Price

Much of my role at VeraSage involves combining the disciplines of project management and pricing. It is universally agreed that pricing with purpose presupposes a detailed understanding of perceived value to the customer and of the scope of the knowledge to be transferred. The former goes by the moniker of sales (I prefer the term value investigation), and the latter by the term project management.

It is my belief, however, that while development of a great scope document is clearly necessary to set price, it is risk, not scope, which should have the greater impact actually setting of price. This risk is not only the risk of the professional, but also the perceived risk of the customer. I recently posted a story in the trailblazers’ section of this blog that illustrates this point.

To clarify what I mean, I would like quickly to examine the four responses to risk: avoidance, transference, mitigation, and acceptance. Here is a brief definition of each:

  • Avoidance — avoiding the risk altogether. In some cases this means not performing the engagement.
  • Transference — shifting the impact (dollar amount) of a risk event to a third party.
  • Mitigation — for a negative risk this means reducing either the probability (percentage chance) or the impact of a risk. For a positive risks (yes, there are positive risks, some prefer the term benefit), it means increasing either the probability or impact since you want this event to occur.
  • Acceptance — do nothing about the risk and proceed anyway. Normally, this is done only with lower impact risks.

For a professional knowledge firm (PKF), it is transference and mitigation about which we are most concerned because rarely is a firm engaged in situations of risk avoidance or acceptance. I posit that C and D level customers hire PKFs primarily for risk transference. That is, they want someone to pin the blame on if (when) a project goes south. Whereas, A and B level customers hire PKFs for risk mitigation. They recognize that the work of knowledge transfer is risky and that the possibility of success increases when the work in collaboration with an outside firm. Note that working with a PKF does not eliminate the possibility of failure.

With this idea in mind, I submit that recognizing this crucial distinction of risk transference versus risk mitigation is the critical factor in setting a price for a knowledge transfer engagement. Clearly, a customer seeking risk transference should be charged a higher price than a customer seeking risk mitigation should because they want the professional to accept more risk.

I would love to hear from you on what you think.

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