Let’s play the “what if” game. What if you walked into a grocery store on a mission to buy a loaf of bread, and, when you went to pay for the bread, they told you they couldn’t tell you the price?
What if you heard something like this? “We have to figure out the time necessary to grow the grain. We have to account for the fuel and fertilizer used by the farmer. Then there is the harvesting of the grain and the transportation of the grain to the mill. We can’t forget the other ingredients, such as milk, eggs, salt, etc. The flour and other items had to be baked, packaged and transported here to the store. At each step along the way the farmer, the baker and this store all have to figure out our costs, so we can apply our cost multiplier and know how much to charge you for this bread. We will send you a bill in a couple of weeks for the amount we calculate.”
We all know that a professional service and a loaf of bread have very little in common. The “what if” conversation is silly. Our problem is, it doesn’t matter what we know. What does matter is the public perception and also our clients’ knowledge of the difference. Too many clients essentially see a survey as a loaf of bread. (See “Value Pricing: The Client Matrix,” in the June issue of POB for some ideas on how to spot the tendencies of potential clients.)
Silly or not, the predominant business model used by surveyors asks the client to “buy that loaf of bread” with little or no real idea of the final cost. It’s no wonder many clients don’t see the importance (and therefore the value) of a survey. We ask the client to accept our broken business model simply because we don’t know how and won’t take the time to learn a better way.
When you boil it all down, implementing value-based pricing is nothing less than a fundamental change in the usual business model.
Hourly rates are built on the assumption that “time is money.” Yet few clients care about the surveyor’s time. Why should they care about our time? I can think of no good reason.
The switch from charging for our time to charging for value brings huge advantages. The entire system is better for the client and (if properly managed) the surveyor. The most important and perhaps least obvious advantage of value-based pricing is it shifts the focus to where it properly belongs--on the client.
Too often we lose sight of the fact that our clients do not exist to make our lives easier; our clients do not exist just so we can have a job. The opposite is (or should be) true; we exist to help the client. Hourly billing focuses on the business. Tracking the time we spend doing research, making field measurements or writing reports puts the focus on us. To successfully shift to value-based pricing, you must instead concentrate on the client. What does the client need and what do they want? Once you understand their needs and wants you are well on the way to determining the value you can provide. Don’t tell clients how good you are. Tell clients how good they can be (with your help).
The change to value based pricing involves more than switching how we view our basic relationship with our clients. We must also begin to recognize and study ways to implement the five C’s of value.
Each of the eight steps we will discuss individually over the next several months is designed and built upon a foundation of the five C’s. This makes sense because our clients have no need to know internal processes. They only need to know that we work with them to help them achieve their goals.
The five C’s of value are:
Comprehend--What value do your services provide to your clients? You’d better have a good answer for this question. If you do not know the answer, how can you expect the client to know?
Create--With careful planning, we can create value for clients. The list of ways to create is long and varied, depending on the type of work you do. Once you understand the value, creating more becomes easier.
Communicate--Comprehending and creating are useless if we keep that information to ourselves. We must take full advantage of the numerous ways we can help clients understand the importance (and value) of what a professional surveyor can provide.
Convince--Yes, that sounds like giving sales pitches to clients. Like it or not, that is part of the game. It is not only reasonable; it is required that clients be willing to pay a fair share of the value we create for them. Those who want all of the benefits of our knowledge without paying for that knowledge need to be someone else’s client.
Capture--After you and the client recognize and agree on the value being created, the next step is deciding how much of that value fairly belongs to the creator (you). There are many sophisticated techniques to help the professional with this step. We will explore some of those techniques in future articles. For now, just remember that being picky about the projects you accept and then properly managing those projects (and the clients) is a win–win situation.
Next month we will begin looking at the eight-step process of implementing value-based pricing. Get ready to change your approach.
Five C's of Value
- Comprehend value to clients
- Create value for clients
- Communicate value created
- Convince clients to pay for value created
- Capture value with pricing based on value rather than cost