Cost, Price, and Value – There is a Difference

This is a guest post from Garrett Kuk, of Speakeasy Media. Solo PR Pro strives to bring you new ideas and information on alternative practices for your reference. This post should not be considered a specific recommendation of this approach (each consultant and situation differ), but it offers some interesting food for thought.

I was fortunate to attend the SXSW session, “How to Abolish the Hourly: How Value Pricing Wins Clients, a session from John Lax and Lee Dale. Their presentation focused on cultivating long-term partnerships with clients rather than perpetuating a model based on hourly billing.

Envision a scenario where a client hires you for a revenue solution that yields $5000 in new sales…that takes you just 1 hour to implement.

Traditional hourly pricing disconnects the cost of a consultant's time from the value the client receives. Most solo entrepreneurs (and even consultants and larger agencies) who maintain a fixed hourly rate risk devaluing their own expertise — and future revenue — by billing the above solution at one hour.

The traditional solution? List more deliverables, bill for “scope” and “research,” justify a higher invoice amount, and…you get the picture. Is there a better model?

Avoid Deliverables, Focus on Outcomes

What are your clients buying from you? What are you selling?

Value pricing requires that both clients and vendors focus on outcomes. It is always a challenge for clients and vendors to measure return on investment. Understanding and focusing on high priority outcomes maximizes time, value, and impact for both the client and the vendor. This strengthens your clients' correlation between your partnership, advice, and expertise & their progress toward business objectives, goals, and successes.

Pay special attention to how your clients introduce or describe you to others. If they reference deliverables (rather than outcomes), you may want to reexamine how your position your services.

Uncreative Results

Lax and Dale provided the following example of value pricing in action: an amusement park desired a fixed number of season pass-holders prior to a set deadline. The client and vendor agreed on a project fee, and quickly determined that quick sales were more important than an elaborate publicity campaign. As a result, the season passes were posted on Craigslist and sold in record time.

Tracking Resources

How do value-priced organizations monitor time?

Both of the session’s presenters have moved away from hourly timesheets, and Lax and Dale acknowledged that every tracking system has inherent flaws (web browsing on company time, anyone?).

Tracking time as Half-Day and Full-Day, while still imperfect, reinforces the depth of effort and creativity required to produce meaningful and measurable outcomes for the client without the temptation of multitasking or focusing on minutiae.

Ethics on the Margin

Following the presentation, audience members (and undoubtedly a few readers here) questioned the ethical implications of value pricing and potential for corrupt business practices. While I share these sentiments, I am equally intrigued by the potential for service professionals to reshape their identity around value. It is especially difficult to consider value pricing in this difficult economy, as cost-cutting is of primary importance for many organizations.

In principle, however, value pricing deserves some consideration for how it shapes and guides clients and vendors into a partnership, seeks to create shared trust, and focuses on profitable outcomes rather than simply fulfilling hourly quotas.

For more in-depth content on the subject, the speakers recommend Ron Baker and Tim Williams, pioneers of value pricing.

Garrett Kuk, of Speakeasy Media, consults with businesses on social media strategy, is a member of the Social Media Club of Atlanta, and holds leadership positions with PRSA Georgia and the Notre Dame Club of Atlanta.  Connect with Garrett at his Speakeasy Media blog.