Have You Really Modernized Your Pricing Strategy? Here’s the Test.
Has your firm turned the corner on agency compensation? Many agency executives insist they have, pointing to the fact they have negotiated better hourly rates, better retainers, or better terms on cost-plus remuneration agreements. The problem, of course, is that they are simply getting better and better at doing the wrong thing.
Unless you have stopped tracking and billing for hours, your firm cannot rightly claim to be part of the pricing revolution. The essence of pricing transformation in professional services is the acknowledgment that hourly rates represent the costs to the firm, not the value to the client. Beyond that, the mere presence of a time tracking system sends the wrong message to employees and unintentionally incentivizes less-than-honest behavior.
20 Questions
To assess the progress you’ve made in modernizing your revenue model, here are 20 questions for your leadership team. Ask them to assign a rating to each of these questions (where 1 represents “strongly disagree” and 10 represents “strongly agree”).
Our client-facing documents use the language of value in place of the language of cost.
We have sorted our products and services into different classes of value and have applied different pricing approaches to each.
For common production and implementation services, we have developed unit-based pricing.
We consistently avoid providing information about our costs to prospective clients and have taken the position that as a rule we don’t sell our services based on hourly rates.
We have created a "pricing stack" of various pricing methodologies we use with current or prospective clients.
In pricing discussions with clients and prospects, we start and keep the dialogue focused on the value of outputs or outcomes rather than the cost of inputs.
We are effective in identifying and dealing directly with the true economic buyer in client organizations, not just the technical buyer (procurement).
We actively seek to disrupt the buying process by challenging the prospect's thinking and proposed approach.
We have discontinued the practice of "discounting" in all its forms and instead offer different ways for the buyer to "win" without lowering our price.
We precede all major plans, briefs, proposals and Scope of Work documents with a section on Scope of Value (expected outcomes).
We consistently present clients and prospects with several options rather than a single proposed price.
We are actively seeking to diversify our compensation/remuneration portfolio with a variety of pricing approaches and a healthier mix of risk and reward.
We have developed a position regarding ownership of intellectual property (in its various forms) that we have adopted as a default position in contract negotiations.
We have identified areas where we can “productize” our intellectual capital and are actively creating new forms of IP, including packaged programs, that have the potential to produce new revenue streams.
We have implemented approaches that define and manage scope as the completion of outputs or the achievement of outcomes, not the expenditure of inputs (hours).
We are effective in identifying work that exceeds the original scope and getting paid for it.
We have replaced measures related to inputs (utilization, "billability," etc.) with measurements related to what clients really buy: outputs and outcomes.
We are diligent in identifying unprofitable engagements and "outplacing" clients who are too price sensitive to be profitable.
We have been successful in communicating our new approach to pricing internally and are enforcing a new pricing process based on top-down pricing in place of bottom-up costing.
We have provided our internal teams with the basic tools, information and resources they need to implement our new approach to pricing.
If the average score to these questions is 8 or above, you can congratulate your team on their efforts to transform your revenue model. If you’re among the majority of firms that haven’t yet reached this level, just remember that successfully adopting the principles and practices of professional pricing is a journey. While parts of it are “revolution" (eliminating the practice of billing for time), it's mostly evolution. It's about changing minds, changing behavior, and changing the tools the firm uses to approach pricing decisions -- one client and prospect at a time.
As one agency executive put it, “Learning to price more creatively is like learning a new sport; you get better and better with practice.”
By Tim Williams