Last month, we addressed the first step in value pricing: effectively listening to what the client wants and needs. If you have done a good job of listening, you should now have a firm foundation on which to price the client.
Notice I did not say price the work. With value pricing, you don’t have a set price you charge in every case for “elevation certificates” or “foundation surveys.” Instead, your goal is to set the optimal price for each client. Listening to the wants and needs of the client provides you with the information needed to develop a plan (or plans) of action to meet those goals.
Much like a tailored suit, each plan is carefully constructed to fit each client and each situation. It naturally follows that you will not have a one-price-fits-all policy if every client receives a custom-tailored plan.
The question then becomes: What is the optimal price, and how do I determine it? The bad news is that there is no magic formula. Although there are many ways to precisely calculate your price based on your costs, that is seldom the optimal price. The good news is that many of the factors that determine value in the mind of the client are well known. (See the sidebar for a list of 10 factors that influence price sensitivity.)
It goes without saying that the optimal price is never below your cost to serve the client. Fortunately, the time surveyors spent in the past tracking costs (and then mistakenly using those costs to determine the price) has not been wasted. By switching to value pricing, you are merely breaking the connection between cost and price.
So what factors should be considered in setting the optimal price? Here are a few:
- Be selective about your clients. When the value you can provide is below your cost to provide the service, just say no.
- Know your client and understand what motivates them. (You determined this in the first step.)
- Know who is paying for the work.
- Understand what the client values. Personal service, timeliness, product quality, confidentiality, a long-term business relationship, reputation and other factors can all influence what a client is willing to pay.
- Don’t let your competition set your price. Neither the client nor competition will set your optimum price--only you can do that. This is another reason you can never compete based on price alone. This does not mean you can’t negotiate prices with some clients. However, you should never reduce your price without also reducing the value of the service being provided. If the client needs the project to cost less, you respond by reducing the value of the proposed work. (Of course, you should never reduce the quality of the service to a level below the minimum required by state or local law.)
- Focus on the client, not the competition. Knowing what the client values (see the fourth point) will allow you to focus on details that have meaning for the client.
- Know your capabilities. What do you provide that is valued by clients? Is there anything additional you can offer to add more value? Always watch for opportunities to add a product or service, especially those with a high value-to-cost ratio.
Once you’ve established an optimal price, you can determine the value of your service to the client. Just as each project is unique, so is the value you provide on each project. Again, there is no magic formula. After you have considered the situation from the client’s point of view (external), you should consider the situation from your own point of view (internal). Answer these questions, and you will be able to develop the true value of your product to that particular client.
- What risk(s) (both monetary and non-monetary) will the client assume if they use a cheaper professional?
- What risk(s) will the client assume if they use someone who ignores minimal professional requirements?
- Is the value of the client’s property increased through the service we provide? If yes, by how much?
- What is the cost to the client if the expected service does not meet their minimum needs?
- What is the cost to the client if the expected service is not provided on time?
- Does the client have experience with this type service? Can they distinguish between excellent service and good service? What keys separate excellent from good, and good from poor?
- What is the client’s history with other surveying firms? Have they experienced the problems associated with “cheap” professional services?
- Is the client discussing the work with other surveying firms? If so, which firms? How do the equipment and personnel at those firms compare with yours? (Note: Companies with advanced technical equipment and capabilities should use their advantage to deliver a product sooner, but never at a price discount.)
- If firms with older technology are being considered for the project, how long will it take them to provide the service? Can you turn it around faster?
- Is the client being advised by outsiders (banker, lawyer, real estate agent, etc.)? If so, can you demonstrate your value to those individuals as well as to the client?
This list could go on, but you get the idea.
Our ultimate goal is to determine how much value the client sees in our work. We can then focus on increasing that value in the mind of the client. Once the value is established (and increased, if possible), we set our price as a fair portion of that value.
Remember that, if despite our best efforts, a fair portion of the value is still less than our cost to provide the service, we turn down the work. There is no right price for the wrong client or the wrong project.
Next month, we will focus on how to present our proposal to the client.
10 Factors That Influence Price Sensitivity
In his book “Implementing Value Pricing,” Ronald J. Baker, founder of VeraSage Institute, outlines 10 factors that influence price sensitivity. Here are some ways that these factors can affect surveyors when it comes to pricing our projects.
- Perceived Substitutes Effect. Are there alternatives to your service? How do they compare in price and quality to your service?
- Unique Value Effect. Does your service provide value that cannot be obtained from any other source? (No one but Frank Lloyd Wright ever designed a Frank Lloyd Wright house.)
- Switching Cost Effect. Will existing clients suffer a significant monetary (or non-monetary) cost to switch? Developing personal relationships with your clients can greatly increase the non-monetary switching cost to the point where many will refuse to switch.
- Difficult Comparison Effect. Developing and presenting a comprehensive plan to address the client’s needs (with various price and service levels) is critical. This makes the competitor who throws out a dollar figure in the first three minutes of the initial phone call look like they have no clue what they are doing.
- Price Quality Effect. In many people’s minds, cheap equals poor quality and expensive equals high quality. This is not always true, but the perception is there nonetheless.
- Expenditure Effect. High dollar services will be more carefully considered than low dollar services.
- End Benefit Effect. High benefit means much less sensitivity. Low to zero benefit means high sensitivity. This is part of why pushing for government mandates for clients to get surveys done is a bad idea. When the end benefit is perceived as little more than a bureaucrat putting a checkmark on a form, the client will assume zero benefit.
- Shared Cost Effect. When dealing with Class 3 and 4 clients (see “Value Pricing” in POB’s July issue for details), recognize that they are not paying for the service. Therefore, price does not matter.
- Fairness Effect. As with the end benefit effect, when someone else requires a client to get a survey (bank, title company, government agency, etc.), there is a natural tendency to resent the requirement despite the fact the surveyor is not the one making the requirement.
- Long Term Utility Effect. How long does a “survey” last? Notice the critical answer to that question is not your answer but the client’s answer. If you add value in ways that will make the survey last longer in the eyes of the client, you will have an advantage over your competitors.
“Implementing Value Pricing: A Radical Business Model for Professional Firms,” by Ronald J. Baker (John Wiley & Sons, Inc., 2010) is available through Amazon, Barnes & Noble and other major booksellers. The list above can be found on pages 73-76. For more information, visit www.verasage.com.