The problem with pricing by the hour is that the assumption is that the price per hour is correct (often calculated by a salary multiple) and the time to do the task was correct. The assumption is that time multiplied by the rate equals the correct price. In my view, nothing could be further from the truth.
When selling intellectual property it truly is a bizarre pricing model. You are valuing what you know and the outcome the client gets based on a salary multiple (to get to the charge rate) and the time taken to do the task. Very strange! I understand it’s an easy way to calculate a price. The issue is this model does not value how smart you are and the impact you make.
There has to be a better way. And there is. It’s all about value pricing. Value pricing is where you price the job upfront based on the value you create for your client. You cannot value price after the fact. That means you have to ‘scope’ the project out first (by talking with the client and doing some research), find the value you are adding and then present an implementation plan to the client based on how you are going to help them.
Now for historical work you have a challenge with pricing. And that’s price parity. You may think it is worth more but if the client has been paying $X for the past few years then they may pay $X + a bit -but not the price you think it is worth. For a new project that the client has not bought before then that’s a different story.
To work out the value you are adding you need to think the following. Without me, they can achieve ‘X’ result. With me that can achieve ‘Z’ result. The difference (‘Y’) is your value that you can add. The impact might be financial, emotional or both.
1. Cash-flow improvement. If the client is constantly juggling cash, never with any money and always stretching creditors and arranging payment plans then that is the current situation. If you can educate them, put systems in place, show them how to improve profit and then monitor their behaviour and let’s say the outcome over the year is that they are $200,000 better off. Your cash ‘value add’ is $200,000. They are also sleeping better at night; less stressed, have more working capital to expand and are generally happier. Your emotional value add is massive. How much would you charge? Well a 10:1 return is a pretty good deal. So maybe $20k – $30k.
2. Tax minimisation. If your client has a tax exposure of say $550,000 because of their current structure and trading environment then that is the current reality. You come along and re-structure their affairs and negotiate with the tax department and you get their exposure down to $150,000. Then your cash value add is $400,000. What can they do with $400,000? Maybe expand the business, pay the house off sooner, retire early and get some of their life back. Your emotional value add is huge. What’s that worth to the client? Pick a number – maybe $30k – $60k.
If you know the numbers in advance (cloud accounting helps with that enormously) then you can scope out projects that make a difference with your clients. If you can articulate your value in advance and present in such a way that makes sense financially and emotionally then you’ll win the business.
At the end of the day the only right price is what the market is prepared to pay for it. That means the right price is just before NO. In other words if they keep saying YES without hesitation then the price is too low.
Starting on Monday, March 17 I am presenting a full day workshop (visiting 14 cities) called ‘Capitalising on the cloud’. It’s all about helping your clients based on you knowing the numbers. Pricing is part of the program. Bring your team along and learn how to use cloud accounting as a service offering which adds value to your clients. Check out www.cloudseminar.com.au for more details.