Ask VeraSage: How does a firm implement Value Pricing?

Feb 1

I received this email from Jeff on January 30, 2008:

Mr. Baker,I am halfway through your Pricing on Purpose book and am thoroughly enjoying it. However I must admit I was sold on the concept before I started reading. It is the main reason why I left the engineering consulting industry (cost plus profit business model) in favor of the software industry (value based pricing). After looking ahead at the remaining chapters in the table of contents and jumping ahead to the final chapter, I'm concerned the book is not going to provide the answer to the "holy grail"—how does a firm implement value based pricing?Two questions for you:

Do any of your previous books focus on implementing value based pricing at professional services firms? I was recommended to a title of yours that seemed to fit this description written in 2000, but the large internet book retailers I checked listed it as out of print.
I currently am product manager for an ERP product focused towards project based businesses. Are you aware of any software tool that has been created to help drive firms through the change to value based pricing? On the surface it seems there is an opportunity for this.

Thanks for the great book and any answers you can provide.Jeff

I remember my first conversation with Ed Kless. He told me he had read two books that changed his life: Professional's Guide to Value Pricing and The Answer to How is Yes, by Peter Block.I immediately purchased the book to see what type of company Ed was lumping me in with. After reading it, I was humbled to be included next to Peter Block's book. It has become a bible of sorts around VeraSage, precisely because we receive so many "how to" questions.(By the way, now you know why Ed is a Senior Fellow, though he still has the annoying habit of using HKTs).I can't do Block justice in a short space; suffice to say he thinks starting out with "how to" questions is the wrong the approach. That's why he says the answer to how is "yes." If you're willing to pay the price to get something done, the "how to" questions tend to answer themselves. Block argues that people who ask "how to" questions are actually against the change.Now, I'm not saying that's the case with Jeff's question here. There is a time and place for "how to" questions, and perhaps Jeff is at that point. But when I shared his question with Ed, here is how Ed suggested I reply to Jeff's email:

Ron,It is actually a very simple reply.
Jeff,Thanks for your email. Unfortunately, you are asking the wrong question. The only answer to a "How to" question is another, deeper question, "What are you refusing to do in order to begin pricing with purpose?" Once you answer this question you can begin to implement.Take care,Ron Baker

Seriously, I think we have to begin to respond this way. I strongly feel that once we begin to answer the how, we are sunk. They have won the battle of words. Hope this helps.

I think Ed's right. My book is actually full of illustrations of how other companies price. It even has a chapter on establishing a pricing cartel and appointing a Chief Value Officer, along with plenty of resources for further guidance. Aren't those answers to "how to?"I was reminded by Jeff's email of something I wrote in the last chapter of Measure What Matters to Customers: Using Key Predictive Indicators.Imagine after Thomas Jefferson wrote the Declaration of Independence. Now he has to convince others to sign it, at great peril to their life and liberty. Using the six questions Peter Block uses in his book, here's the questions that would most likely be posed to Jefferson—that is, if our Founding Framers thought like today's businesspeople:

How do you do it?
How long will it take?
How much does it cost?
How do you get those [other] people to change?
How do we measure it?
How have other people done it successfully?

How would Thomas Jefferson have answered these six questions?

I don't know.
I don't know.
Possibly your life.
I don't know.
I don't think you can measure Life, Liberty and the Pursuit of Happiness.
No country has ever done it successfully the way we are proposing. Sign here.

Block suggests two better starting questions:

"What [type of future] do we want to create together?"
"What is the price [we are] willing to pay to achieve it?"

It is simply impossible to know "how to" do something until you attempt it. In a free market system, it is the leap, not the look, which generates the indispensable understanding and the necessary knowledge to generate wealth.This is why VeraSage recoils at "how to" questions, especially when people want to dive right into them without first understanding the "why to" questions. Tiger Woods didn't ask "how to" become a professional golfer. He just went out everyday and paid the price because that's the future he wanted. Once you decide to do that, the "how tos" are just plumbing.I know this is a somewhat heretical view, which is why I urge you to read Block's book. "How to" questions are barriers that people who don't want to change use as hurdles, since once you tell them how you do it, they can easily reject your answer as not relevant to their situation, company, customers, etc.We at VeraSage hear and see this behavior all the time. It's why we find Block's argument so compelling and his book so profound.So, Jeff, the answer to "how to" implement Value Pricing is, truly, Yes. Just like Ed asks, "What are you willing to do to make it happen in your company?"It's a not a software tool, it's a mindset change. And it's not a just a pricing strategy, it's a business model change—from selling time to selling intellectual capital.You will also find many resources right here on this Web site, especially in the Trailblazers section, from firms that have made the transition. No two firms followed the same path to the "holy grail." They blazed their own trail.As will you, if, that is, you're willing to pay the price.