Applying Trust Principles to Pricing
Let’s get tactical.
Friend Mark runs a small coaching business, mainly by himself. He focuses on an intersection of personal and business development issues: helping people get unstuck.
The usual approaches to pricing in that business are tried and true. Rates are typically quoted for a month at a time, over a planned period of months. Variations on the theme are weekly rates, or hourly rates with a stipulated number of hours agreed upon up front.
Basically, it’s a time-based fee linked to some agreement about the period of time over which the agreement will be in effect. It’s an arrangement familiar not only to coaches, but to consultants, lawyers and other professionals.
Attempts are occasionally made to introduce value-based billing. The attempts succeed or founder based on both the definition of value, and the percent of said value attributable to the professional. I’d love to hear from readers about successful examples, but I’ve rarely run across them.
Mark, however, has some interesting ideas. Let him tell it.
Many of my clients are hourly-type billers like me. Since it takes me 8 hours, on average, to get a client from stuck to where they want to be…one approach is to charge them 8x the rate THEY bill at. Using their rates rather than mine, I suspect, is both easier to comprehend for them, and it strikes them as client-focused.
Another approach is that I figure I can work with about a hundred paying clients a year. So, each client represents 1% of my income. So I now ask 1% of their income as the fee.
Again, from what I can see, it engenders even more trust in the coaching relationship, helps things go faster, and makes it more likely for clients to refer. Now, there’s no way I’d ask them to verify that the figure they give me is 1% of their income – I leave it all up to them. And, of course, if they aren’t satisfied with the journey, I don’t charge them at all. I leave that entirely up to them. [David Maister used to do the same—CHG]
I see two powerful themes in the approaches that Mark is developing. First, I’m sure the pricing feels more ‘fair’ to his clients, because he is overtly working off their economic model, not his. It’s the opposite of one size fits all.
The other thing is that he trusts his clients – right from the outset. And as I’ve often written about, the impulse toward reciprocity plays out strongly in trust. We live up to the trust people place in us – and live down to the suspicions others have of us.
I asked Mark, “Have you ever, to your knowledge, been screwed over by an unscrupulous client taking advantage of your ‘honor-box’ approach to pricing?”
Mark’s answer: “Never.”
Hi Charles, like you i am passionate about pricing (my own book on the topic, ‘Pricing For Profit’ is published by Kogan Page and available from Amazon!!) and have wrestled with the consultants pricing model many times. You are absolutely right when you say trust is a critical factor, but the examples you use seem to work on a ‘cost’ rather than ‘value’ approach. We have run many succesful consulting projects ranging from £5k to over £100k, and position them all with the following broad approach…
Firstly, clients want choice. Every project offers three levels starting with a simple ‘cost’ based fee that is extrapolated from an hourly rate formula, which they would pay regardless of the outcome of the project. There is then a 100% guaranteed fee where we allow them to have complete discretion as to whether we have added value above pre agreed criteria of both soft issues such as ‘improved control’ and hard issues such as increased profits. They can pay all or nothing or any point in between, as they decide. The middle option is a base fee with a success fee top up. Normally we would expect the fixed fee to be based on anticipated hours at our normal rates, and the middle option to be roughly ‘plus 50%’ and the top option to be ‘double’ the base fee.
Several things occur. Firstly, the fact that we are happy to do significant amounts of work on a 100% risk free basis gives any potential client the confidence that we have belief in our own abilities. Few take up this option, but many have said that the mere fact that we offered it was instrumental in their decision to use us at all. Secondly, if we are in a competative environment, we now have three options on the table compaired to normally only one from competitors. If a client is fee sensitive we have a low cost option but they take the risk, or if they are risk averse, we offer a 100% guaranteed option but at a higher price. They are in control and have three options from which to choose.
Perhaps the most critical thing of all though is not directly a pricing issue, but the stage that explores the contribution we are able to make to the business by fixing the things that need to be fixed. We get the client to articulate the benefits of greater harmony in management, in higher conversion rates from quotations, or in increasing margins through smarter pricing for example. These benefits roll on for several years, and are often appreciated greatly by the client (when encouraged by us). It reminds my of the SPIN selling technique (well worth a read) that makes sales people consider the Situation, the Problem and most importantly the Implications (of fixing or not fixing the problem) BEFORE the sales person leaps at identifying the Need and then offering the solution. Consultants can be guilty (me included) at undervaluing the skills, experience and knowledge that allow us to see the problem and solution when others do not. As a result we often do not place as high a value on our contribution as clients might. By spending time up front to explore these issues and make sure the clients appreciate the VALUE of the solution, or the consequences of failing to address the issue, the price becomes a far less significant point.
Like in your article, we have run perhaps 100 projects and never once do i feel the client has abused our trust in them to assess the value of our work fairly. There have been two occasions where the clients assessment was different to my own, but in both cases i beleived it to be their fair assessement.
The overall message is that whilst your examples were creative options to get clients to assess value from their own perspective, we have often found that we can win work and add value with fees of perhaps £40k to £50k, when any hourly rate based formula might only arrive at a fee of perhaps less than have these amounts. As with most things in life, VALUE is in the eye of the beholder!!
Hope that helps
Excellent. Many thanks.
There are many successful examples of Value-Based pricing across all professional firm sectors–from advertising agencies to legal, CPA, IT and consulting firms. Pricing is done upfront, while billing is done in arrears. It’s hourly billing that destroys trust, since value pricing insists that the work is priced upfront, commensurate with value. I also advocate offering a 100% service guarantee.
My own book on this is Implementing Value Pricing: A Radical Business Model for Professional Firms, which contains many examples of professional firms who price according to value created, not time spent. You can read many examples in the Trailblazers section at http://www.verasage.com.
Hey, Charlie, thanks for writing so eloquently about the pricing approach I came to. I hope people find it useful.
It occurred to me that at least for the folks willing to click through and read comments, a few more tidbits might help. This approach is something that evolved for me over time, and really is very tailored to what I do and who I am. So the nature of the journey is probably useful for others…when they follow their own journey, many will get to a different destination.
First, some guiding principles. In no particular order, I started this pricing strategy with the idea that I wanted clients who’d become evangelists, not just “satisfied customers”…wanted to reinforce the sense of connecting as one human to another in the relationship…wanted to make this work broadly available to people who were up to something and could benefit from it, regardless of income…and wanted something fair to me and my clients and that would build mutual trust.
My first approach–also being very value and outcomes-oriented–was hour-for-hour barter…or when we didn’t have something of value to offer each other, simply to tell clients to pay what they thought the work was worth. “Pay what you think it’s worth” didn’t work well: clients found this off-putting, so instead of expanding the client base, it limited it. It seemed like putting clients in the position of assessing what was “fair” was just too tough.
The next stop was to work at my clients billing rate when they billed for a living (a variation on the barter idea)…and to give other clients a range–“for an a typical engagement, I get between $500 and $2000…higher amounts tend to be associated with higher-income clients with a critical work-related area they’re stuck. Lower amounts people who are not earning as much, and/or more life-coaching related issues. I average just under $1,000 per engagement. Given those benchmarks, what feels right for you…and that you’d consider a good deal for resolving the problem you came to me about?”
That worked well for coaches/consultants, but the conversation seemed messier and more elaborate than it needed to be for folks without a billing rate. Also, there was something about putting myself on the same plane as my clients that this didn’t quite do. “Getting unstuck” quickly requires a client vulnerability that makes any sense of “I’m better than you” an anathema to the trust we need to have in each other…one of the essential elements is for clients to reconnect to the value of what they have to offer. Setting myself on a higher (or lower) plane than that just gets in the way, and in our society what we earn communicates that whether we like it or not. So that led to the notion that 1% of their earnings is what I’m bartering for in offering 1% of my resource as a coach–and, in fact, it is a very value-based mechanism since I want to work from their fundamental values as humans.
I’d still say this is an experiment. 1% of income has worked for a lot of clients, but seems off-putting to a few…even though it works to the same $ as the guidelines I used to offer. So I might migrate back to a hybrid of that with 1% of income as an additional benchmark. We’ll see.
By the way, I also wouldn’t want people to think that I must be some sort of saint to be offering my services this way. (Well, I might like it, but it wouldn’t be true!) Part of what makes this a growth exercise for me is how different it is from pricing strategies when I was a senior corporate strategy consultant. I’ve got some karma to work off for having a high billing rate that inflated my sense of self-value. Additionally, charging clients only by the outcome, and only if they’re really satisfied with their journey flips a lot of incentives from the consulting model, too. For example, if clients are late, or take more time than average because (it appears) they’re not working as hard as they might, I have to remind myself that that’s the model I agreed to…and to bring myself to be curious about barriers in working with me so I can work together with my clients on that, as well. (Very often, it’s been that setup that identified the issue that had kept the client stuck in other situations.)
All of that said, Charlie quoted me correctly when he said I’ve never been taken advantage of. And I’ve learned a hell of a lot from trying this model.