Notes on Implementing Value Pricing

My notes on Implementing Value Pricing: A Radical Business Model for Professional Firms by Ronald J. Baker.

the customer is the sole and ultimate arbiter of the value that we, as professionals, provide.

There is nothing more practical than a good theory.

“All transformation is linguistic. If we want to change our culture, we need to change our conversation.”

Growth simply for the sake of growth is the ideology of the cancer cell, not a strategy for a viable, profitable firm. Eventually, the cancer kills its host.

Doctors used to believe in leeches and bloodletting, and no matter how efficiently they executed those therapies based on those theories, they simply were not medically effective.

There is no right way to do the wrong thing.

Revenue Is Vanity—Profit Is Sanity

Growth without profit is perilous.

When Robert Goizueta, then CEO of Coca-Cola, was asked what the lesson was from the New Coke debacle, he replied that he learned that Coca-Cola did not own its brand—the consumer did (Tedlow 2001: 105).

A business cannot eliminate risk, because that would eliminate profits. The goal is to take calculated risks and choose them prudently. The dilemma in many firms is that they are allocating a disproportionate share of their resources in perpetuating yesterday and today rather than creating tomorrow. For example, by setting a nice comfortable floor under their earnings (via the hourly billing mechanism), they have commensurately placed an artificial ceiling over their heads as well. This is self-imposed, and it comes from the attempt to avoid risk and uncertainty.

The firm’s goal should be to maximize wealth-creating opportunities rather than to minimize risk.

“Results are achieved by exploiting opportunities, not solving problems. Solving problems only returns the company to the status quo”

As Peter Drucker indefatigably pointed out, not only is the notion that businesses exist to make a profit false, it is irrelevant. Profit is a result of customer behavior. More accurately, profit is a lagging indicator of customer behavior. The real results of any organization take place in the hearts and minds of its customers.

both parties must receive more value than each is giving up; otherwise no transaction would be consummated in the first place

The successful producer of an article sells it for more than it costs him to make, and that’s his profit. But the customer buys it only because it’s worth more to her than she pays for it, and that’s her profit.

A business exists to create wealth for its customers.

In the final analysis, a firm does not exist to be efficient, control costs, perform cost accounting, or give people fancy titles and power over the lives of others. It exists to create results and value outside of itself. This profound lesson must not be forgotten.

Business is not about annihilating your competition; it is about adding more value to your customers.

the very nature of a transaction between a willing buyer and seller is not based on an equality of labor but rather the inequality in the subjective value of the good bought and sold.

Quite often, supply does indeed create demand, especially as it relates to innovations and new technologies. But there is no guarantee of consumer acceptance just because costs were incurred; the high rate of product failures is a testament to this fact. Nonetheless, in the long run, a product or service will continue to be produced only if people value it, and its price can cover its full costs of production.

As a consumer, if I’m dehydrated in the desert, near death, a bottle of Evian water is priceless, compared to the same quantity of water used to wash my dishes or dog. If my basement is flooded with water, now it has a negative value to me, since I will have to pay someone to remove it. Value is not only subjective, it is contextual.

One CFO of a top-tier law firm said to me, “You are right; we sell intellectual capital, but it is denominated in hours.” Well, you might as well plunge a ruler in the oven to determine its temperature if you think hours spent is a good measure of value created.

NOTE: Great example of how people desire to cling to their stability

It is not costs which create value; it is value which causes purchasers to be willing to repay the costs incurred in the production of what they want (Sowell 2004: 177).

To argue that you can measure value in hours is to say the value of Jonas Salk’s polio vaccine is based on how long it took him to develop it.

No firm can be everything to everyone, and specialization has become more important in order to segment various customers so you can tailor a value proposition to suit their needs.

price transmits the most important signal to the customer—what the firm believes it is actually worth.

Since most costs in a professional firm are fixed, you can see that the largest payoff comes from focusing on strategic pricing, not trying to increase efficiency by lowering fixed costs.

The main function of your firm’s marketing strategy is not simply to acquire revenue at any price but to gain your share of highly profitable work.

Most professionals do not pay enough attention to the actual motivations of the customer, thinking they already know why they are being engaged to perform a service. But there are almost always motivations other than simply “I have to get my tax return in by the due date” or “My banker is demanding a financial statement review.” It is not enough to focus on the technical product; you must probe deeper to discover the customer’s true expectations and desires.

Since value is always subjective, you have to get close to the customer to understand exactly what she values.

There is no right way to value price the wrong customer.

Doctors must not complain that the patient did not attend medical school; similarly, it does no good for a firm to complain that its customers “just don’t understand the value of what we do.”

Prior to every single engagement, a firm needs to know exactly what the customer’s expectations are, providing the opportunity to manage those expectations and better control the outcome. For instance, if a millionaire anticipates paying no taxes, he has an unrealistic outlook. The options are to educate him, thereby lowering expectations, or to refuse the engagement altogether.

The consumer is not a moron, she is your wife.

“The essential difference between emotion and reason is that emotion leads to action while reason leads to conclusions”

In one study, 68 percent of the respondents said they were willing to drive to another store to save $5 on a calculator selling for $15; but if the same calculator cost $125, only 29 percent of the respondents were willing to do so

Social risk is closely related to psychological risk, and refers to the probability a service will not meet with approval from others who are significant to the customer making the purchase.

The number one complaint in firms is not bad quality but rather lousy service.

Customers are not price-sensitive; they are value-conscious.

While commodities are fungible, goods tangible, services intangible, and experiences memorable, transformations are effectual. All other economic offerings have no lasting consequence beyond their consumption.

With transformations, the customer is the product! The individual buyer of the transformation essentially says, “Change me.”

today’s sophisticated customers are demanding more from their professionals than merely providing services and a good experience; they want transformations and they hold the professional accountable for guiding the transition.

These are inherently personal transformations, guiding the individual into their preferred vision of the future—guiding them from where they are to where they want to be.

You are touching your customer’s soul, forging a unique rela­tionship with them virtually impervious to outside competition and commanding prices commensurate with the value of the results you are creating.

What really determines the value of the flight is what you are doing at your destination.

Now, leery of trusting the promise of an oasis, we defend the merits of the desert.

Pricing is one of the most important, and convincing, forms of communication and positioning for firms.

cutting price is the equivalent of giving up respect,

As Nobel Laureate economist Douglass North remarked in 1994, “The price you pay for precision is inability to deal with real-world questions.”

Language was invented to ask questions. Answers may be given by grunts and gestures, but questions must be spoken.

Skipping this step is similar to a contractor attempting to build a customer’s dream home without any architectural plans.

The better your firm comprehends the customer’s value drivers, the more likely you will be able to create maximum value, convince the customer they must pay for that value, and capture that value with an effective strategy custom tailored to the customer.

NOTE: This language is accurate but impenetrable to the novice. "Value drivers"? Why not "wants", "desires", "goals", "satisfaction", or most simply "happiness"? Find out what's going to make the buyer happy and estimate what that happiness is worth to him or her.

This is an opportunity for you and the customer to create a shared vision of the future, to analyze where the customer is at this point, and to develop the necessary action plan to move them to where they want to be—providing the highest value of transformations

This focus is crucial, because if you do not discuss value with the customer, you will be forced into a discussion of hours, efforts, activities, deliverables, and costs, usually by procurement, in-house counsel, or some other professional buyer within the customer’s organization.

If the customer says your price is too high, what they are really saying is, “I don’t see the value in your offering.” It is not a question of money; rather, it is lack of belief.

Questions require doubt, something educated professionals are not comfortable with. After all, we are paid to have the answers, not express doubt; and if you already know the answers there appears to be no need to gather any more information from the customer, chaining ourselves to the limits of our existing knowledge.

Talkers may dominate a conversation but the listener controls it.

the customer is sending a signal they are not serious if they deny you access to the economic buyer, and you may want to invest your resources in more profitable opportunities—such as servicing existing customers.

Avoid the ever-present temptation to provide solutions to the customer’s needs and wants.

NOTE: This is in the context of the sales conversation.

Before doctors prescribe, they must diagnose, which is the role you must assume at this stage in the conversation. Anything less is malpractice.

Active listening and effective questioning are two of the most important skills your firm can possess at this step in implementing value pricing.

Ignorance is the most important component for helping others to solve any problem in any industry

If price were not an issue, what role would you want us to play in your business?

How important is rapid response on questions? What do you consider rapid response?

Some firms have begun to include the seven types of customer risk explained in Chapter 7 in their conversations, showcasing how their firm reduces these risks to the customer.

You cannot manage value retroactively, which is why the firm always wants to price when it possesses the leverage—that is, before the services have been delivered. A service needed is always worth more than a service delivered.

NOTE: How does payment tie in here? Sure price in advance. Get a purchase approval in advance. But what about payment in advance? I say yes but curious what Ron thinks.

You can’t sell your way out of unprofitable business. No business is better than bad business. More businesses fail chasing sales, rather than profit. ––Gary Sutton, Corporate Canaries, 2005

Proper customer selection—there is no right way to value price the wrong customer.

Not confusing mutual gain (discussed in Chapter 3) with equal gain. Both parties must profit, but it does not always have to be in equal proportions.

NOTE: I would argue that both parties should profit in equal proportion, but not equal amount

price competition is only good for weak competitors; it is all they have to differentiate themselves.

Price is usually more important in the mind of the seller than the buyer.

Efficiency is a table stake—the minimum you need to be in the game. Real competitive advantage is built on effectiveness, not efficiency.