Tim Dietrich

Custom Software Developer

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Thoughts On Value Pricing

A few weeks ago, I was interviewed by Kirk Bowman for his new Art of Value podcast. It was an interesting conversation, because I've given up on Value Pricing, while Kirk is a strong advocate for the pricing model.

However, something about that conversation must have struck a chord with me, because ever since, I've spent a lot of time thinking about Value Pricing. Kirk presented several compelling arguments for Value Pricing, and I truly believe that he is on to something.

But I'm still not convinced that Value Pricing is always the way to go, or that it makes sense for my business. I say that based on my own experience. I've used the Value Pricing model in the past, and have had mixed results. Ultimately, I decided that it simply wasn't worth the effort. I know that the model can work in some situations, but feel strongly that it doesn't work consistently.

I'm going to explain why I have issues with Value Pricing. To do so, I'll start by describing the typical early stage of a client engagement.

A Typical Scenario

A client (or prospective client) has approached you because they have a problem that they want to solve, or a goal that they want to achieve, and they are hoping that you can help them.

They might have an idea of what it will take (the time and money involved) to solve the problem or achieve the goal. Chances are, they do not. Either way, it really doesn't matter.

However, they do believe that there is some value in solving the problem or achieving their goal. Otherwise, they wouldn't be coming to you in the first place. They are not expecting you to determine what the value is in solving the problem or achieving the goal. They simply need to know if you can help, and, if so, how much the solution will cost (as well as how long it take for you to deliver it).

As the consultant, it is your responsibility to get a through understanding of the client's problem or goal. It is only with that knowledge that you will be able to come up with one or more solutions. To determine the time and effort involved in developing the proposed solution, you need to rely on your research, experience, and skills. And then, based on the time involved and your hourly rate, you can determine a price for the project.

It is the client's responsibility to determine whether or not the value obtained in solving the problem (or achieving the goal) outweighs the cost of the proposed solution. Maybe the value only slightly outweighs the cost. Maybe it's a break-even. There may even be a good reason that the client will want to move forward with the project, even if the cost outweighs the value. (There may be politics involved, or perhaps this the project is a loss-leader of sorts.) In any case, the decision to move forward is up to the client.

Challenges With Value Pricing

Based on that scenario and my understanding of Value Pricing, here are some of the reasons why I think that the model is problematic.

Value Pricing places the responsibility of determining value squarely on the shoulders of the consultant. I don't think that's fair, and I don't think think it is what clients are expecting. In fact, I think that many clients would find the consultant's focus on determining value to be frustrating.

Value Pricing makes it the consultant's responsibility to determine whether or not the project is worth undertaking. I cannot imagine saying to a client, "There isn't enough value for you in moving forward with this project, so I'm not interested in working on it."

Value Pricing is absolutely dependent on determining value (duh!). But how do you realistically determine value? On man-hours saved by automating or improving a process? Maybe. By increased revenue? That makes sense in some cases. But what about the value in quality of work-life? In the value that a loss-leader solution might bring at some point? It's difficult, if not impossible, to determine the monetary value in those scenarios.

A Few More Thoughts on Value Pricing

Here are a few more thoughts on Value Pricing, and why, for me personally, the model just doesn't make sense.

I'm a minimalist, and I stive for simplicity in all areas of my life. Value Pricing is complicated. I'm sure that if you were to use the model for some time, you would get better at it. Even so, I think it introduces unnecessary complexity.

From what I can tell, consultants turn to Value Pricing because they are afraid that they are leaving money on the table, or that they've hit some sort of glass ceiling (one that they've put there) in terms of income. Maybe so. One easy solution is to raise your rate. It really is that simple.

Arguments Against Hourly Billing

There is an argument that is often made against hourly billing that claims that you are somehow penalizing yourself if you are good at what you do and complete projects quickly. I see it like this: Once I've completed a project, I'm able to move on to the next project. I'm not going to work at a different speed simply because the meter is running.

Another argument made against hourly billing is that it is unethical. The assumption being made is that if you bill hourly, you will, without a doubt, pad your hours. I'm sure that there are some consultants out there that find that practice to be tempting. Maybe I'm being naive or overly optimistic (which is quite odd, because I'm typically pessimistic), but I like to think that most consultants are professionals, are ethical, and always keep their clients' best interests in mind.

Keeping An Open Mind

And finally, I want to make it clear that I'm still being open-minded about Value Pricing. I'm continuing to study it, and will continue to consider it. Ask me a year from now, and you might find that I've completely flip-flopped, and have adopted the Value Pricing model. Never say never.

If you are a consultant and are considering Value Pricing, I encourage you to check out Kirk Bowman's Art of Value podcast, as well as his Twitter feed. I think you will find his take on Value Pricing to be intriguing. I think that if anyone can convince me to give Value Pricing another try, it's Kirk.

What are your thoughts on Value Pricing? Share your comments below.