Sent by Jonathan Stark on April 1st, 2017
Reader Warwick Absolon wrote in with the following question (shared with permission):
Been loving reading these posts. It all makes sense. One question I have (and it may have been covered in a roundabout way previously) is this:
Yesterday I approached a client with ’are you interested in having a value bill arrangement with us?’ He responded was he didn’t know what it was (surprising as he was a very sophisticated client). So I replied that we guarantee an outcome and we take the risk and we charge accordingly. He could not see how it was different to our current fixed price arrangement. Did I do something wrong? For example, not offer the fixed price amount - just go straight to value bill?
What thoughts do you have?
Warwick Absolon --------
Thanks for the question Warwick!
Your message raises three common issues that I think everyone would benefit from hearing about:
1. The correct term is “value pricing” not “value billing” - Maybe people use these two terms interchangeably, so this probably sounds like a distinction without a difference. However, there is a huge difference between “pricing” and “billing” and confusing the two terms can indicate that one doesn’t yet quite have their head around the core concepts of value pricing.
2. Don’t use the term “value pricing” with clients - Value pricing is just a method for coming up with a fixed price. There are other methods, like time & materials, and cost plus pricing. Whichever one you use, the client just sees it as a fixed price. They don’t need to know what method you used to calculate the price. In fact, it’s none of their business. I never use the term “value pricing” with clients. If they ask me how I come up with my prices, I say, “based on past experience with similar projects”.
3. Changing your pricing approach with a client is hard - If a client is used to having a particular type of financial relationship with you, it can be difficult to switch them to a new one. Going from hourly to fixed pricing based on value it particularly hard because in most cases it means fundamentally changing the nature of the relationship from order taker to trusted partner. Even switching from say, fixed prices based on time & materials to fixed prices based on value, can be hard because you have to have a different conversation prior to creating a quote. i.e., Instead of talking about features and scope, you have to talk about outcomes and benefits.
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