Introduction to value-pricing

VALUE–PRICING
Jakob Persson
Leancept AB
www.leancept.com

As presented at the
Stockholm Value-Pricing
Meetup on May 10, 2016.

Why are diamonds
valuable?
http://www.freeimages.com/photo/diamond-ring-1539860

http://www.freeimages.com/photo/laptop-1242490
http://www.freeimages.com/photo/isolated-macbook-pro-1615424
$$ $$$$$
?

–Wikipedia
“The labor theory of value (LTV) is a heterodox
economic theory of value that argues that the
economic value of a good or service is determined
by the total amount of socially necessary labor
required to produce it, rather than by the use or
pleasure its owner gets from it.”

RFP Analysis
Nah. Bad ﬁt
Isthisforus?
Estimation
Nope. Too
much
complexity/
risk
H
ow
m
uch
should
w
e
charge?
Proposal
Too
demanding
considering
chance of
winning
W
hatare
they
askingfor?
Bidding
process
Loss to
competing
bidder
W
hatisthe
com
petition
offering?
Win or loss

High customer acquisition cost that
was almost never fully recovered
since we weren’t focused on building
lasting relationships.

Our interests were largely
in opposition to the
customer’s.

It was almost impossible to
implement true agile and
story points.

Our KPI’s concerned team
billability, not customer
value created.

People in the company
adopted an inside–out
mindset.

Not knowing better?
http://www.freeimages.com/photo/face-dumbfounded-1438542

Laziness?
http://www.freeimages.com/photo/sleepy-lucy-1387909

Not wanting to
understand our
customers?
http://www.freeimages.com/photo/the-wall-1221477

http://www.freeimages.com/photo/escort-car-inside-2-1425603
“Family pricing”
Click to read “The birthday gift”

Where would you have to
pay the least for a bag of
garden soil mix?

Value-pricing joins
genuine rela!onships with
marke!ng concepts

The purpose of any organization—from
a governmental agency or nonproﬁt
foundation, to a corporation—exists to
create results outside of itself.

Address customer
pain points
http://www.freeimages.com/photo/frustrated-look-1474618

Find a problem-
solution ﬁt for the right
problems

Design oﬀers for
customers’ priorities
and values
http://www.freeimages.com/photo/children-playing-1172340

Forge stronger and
more resilient
customer relationships
http://www.freeimages.com/photo/chains-1220833

Value-pricing isn’t a
method
It’s a mindset and a set of principles

• Comprehend value to customers
• Create value for customers
• Communicate the value you create
• Convince customers they must pay for value
• Capture value with strategic pricing based on value,
not costs and efforts

Customers want us to
consider value
1. Make an impact on our business, don’t just be visible.
2. Do more things “on spec” (i.e., invest your time on preliminary work in new
areas).
3. Spend more time helping us think, and helping us develop strategies.
4. Lead our thinking. Tell us what our business is going to look like ﬁve or ten
years from now.
5. Jump on any new pieces of information we have, so you can stay up to date
on what’s going on in our business. Use our data to give us an extra level of
analysis. Ask for it; don’t wait for us to give it to you.
6. Schedule some offsite meetings together. Join us for brainstorming sessions
about our business.
7. Make an extra effort to understand how our business works: sit in on our
meetings.
Source: Implementing Value Pricing by R. J. Baker.

It requires empathy
You need to have an active interest in other
people

Being of service to
others
A reward in itself

Gain appreciation of what
is valuable to other people
Enriches your own life

Take an honest interest
“How can I be of service to you?”
Click to read “Be interested, not interesting”

Authentic relationship
Practice being present and a good listener

Recognize their
humanity
You always deal with other people

Own your challenges
Don’t “outsource” things to your customer
just because they’re hard to ﬁgure out

Smile curve for IT ﬁrms
Determining value to
solve
Value to
customer
Time
Scope
development
Implementa!on
Go live
Ongoing support

The airliner metaphor
Why will people pay 3x the coach class price
only to arrive at exactly the same time?

Solve the right
problems
Not all problems are worth solving, especially
if margins are slim

Be conﬁdent
Believe that you add value and know its worth

Before you can charge a premium price, you
ﬁrst have to believe, internally, that you are
worth it. If you do not think you are worth
multiples of your hourly rate, your customers
never will believe it either.

If the customer says your price is too high,
what they are really saying is, “I don’t see the
value in your offering.”
It is not a ques!on of money; rather, it is
lack of belief.

Most professionals underprice
their intellectual capital
• “We do not have enough
quality customers.”
• “Customers view what we do
as a commodity.”
• “Customers do not
understand the value we
provide.”
• “Our people do not
understand their worth.”
• “When customers engage in
hardball negotiation tactics,
we capitulate.”
• “Our profession has too
much capacity, which drives
prices down.”
• “We operate in what
economists call “perfect
competition,” where no one
ﬁrm is a price maker; rather,
we are all price takers.”

Intangible factors
✓ Specialist expertise or knowledge
✓ Unique social capital of the firm
✓ Brand and/or reputation of the firm
✓ Specialized proprietary technology not
possessed by competitors
✓ Opportunity to achieve a unique result
given time, circumstances, and specialized
knowledge
✓ Reducing risk to the customer through
business model innovations—offering fixed
prices, payment terms, service and price
guarantees, risk-sharing pricing strategies
✓ Minimizing risk to the customer on the
engagement itself
✓ Providing education to the customer
✓ Knowledge elicitation—transferring
specialized knowledge to the customer so
they can develop their own in the future
✓ Decrease conflict, complaints, time, or
effort
✓ Increase morale, image, customer service,
or reputation,
✓ Nature of the relationship with the firm,
including comfort, convenience, and peace
of mind
✓ Developing customer strategy, business
model innovation, product or service
design, Total Quality Service

Explore impacts
What desired outcomes motivate the project
as an investment?

Why?
Who?
Who?
How?
How?
How?
How?
What?
What?
What?
What?
What?
What?
Impact mapping

Time vs value
Why hourly billing is ﬂawed

Hourly billing and ﬂexible scope are
often used as insurance against
unforeseen circumstances that are hard
to plan for
but
Making the customer pay for you not
knowing your job – is that fair?

Expensive insurance
Cost-plus pricing puts a cap on your
profits
Salary cost
Profit
Office
rent and
perks
Support
staff

Customer’s
proﬁt
Price
Capturing value
Costs
Price
Value captured
Value created
What you’re
missing!

Do the research
Understand challenges common to the
customer’s ﬁeld

Aim to understand
Listen twice as much as you talk

Qualify the customer
Not every customer is worth having

Price buyers are simply looking for the
lowest price, with li"le concern for
marginal value and low firm loyalty.
Value buyers are willing to pay more for
marginal value and tend to be loyal to
various brands or firms they perceive as
offering more value for the same dollar,
but only a$er doing extensive
homework on compe!ng offerings.
Convenience buyers are not very loyal
but are more willing to pay a higher price
for exactly what they want, when they
want it.
Rela!onship buyers place a high value
on firm brand and are willing to pay for
perceived value, as well as incremental
value offerings.
Price buyers Value buyers
Convenience
buyers
Rela!onship
buyers
Value of firmPricesensitivity
Low
Low
High
High

Use the right language
If you don’t discuss value, you’ll be discussing
costs and it’s a debate the customer always wins

✓ What do you expect from
us?
✓ What is your business
model? How do you make
profit?
✓ What are your company’s
critical success factors
and Key Predictive
Indicators (KPIs)
✓ How will the services we
provide add value to your
customers?
✓ Which of our firm’s
offerings is of the highest
value to you?
✓ Who is the next best
alternative (competitor)
to our firm?
✓ What is your current
pain?
✓ How do you see us
helping you address these
challenges and
opportunities?
✓ What growth plans do you
have?
✓ If price were not an issue,
what role would you want
us to play in your
business?
✓ How important is our
service and price
guarantee to you?
✓ How important is rapid
response on questions?
What do you consider
rapid response?
✓ Why are you changing
firms? What did you not
like about your former
firm that you do not want
us to repeat?
✓ Do you envision any other
changes in your needs?
✓ How do you suggest we
best learn about your
business so we can relate
your operations to the
financial information and
so we can be more
proactive in helping you
maximize your business
success?
✓ What trade journals do
you read? What seminars
and trade shows do you
regularly attend? Would it
be possible for us to
attend these with you?
✓ What will the success of
this engagement look like?
✓ What is your budget for
this type of service?

Learn to ask the right
questions and be comfortable
not having all the answers.

Design proposals
around beneﬁts
Feature - Advantage - Beneﬁt

Feature
Facts and
characteristics
The drill bit is diamond-
tipped
Advantage What it does
It makes holes in metal
in seconds
Beneﬁt
What it will do for the
customer
It saves you time

FAB example
Included in the project Makes it possible for you to Which gives you the beneﬁts
Mobile-friendly (responsive)
website that works on
computers, tablets and
smartphones.
Gain increased visibility and
likelihood to be found on te web,
regardless of whether the user has
a computer or smartphone.
More visitors can use the website
and contact you which creates
more business.
This is actual value

Don’t work for
customers you don’t like
You need to genuinely care

✓ Amount of annual
revenue
✓ Prompt payment
history
✓ Potential for growth
✓ Potential for future
referrals
✓ Actual referrals
✓ Profitability of
customer
✓ Risk of having
customer in portfolio
✓ Timing of work (fiscal
or calendar year)
✓ Reasonable
expectations
✓ Willing to take advice
✓ Profitable and not
undercapitalized
✓ In business for at
least three years.
✓ Pleasant, outgoing
personality.
✓ Technically
competent.
✓ Business is not
chronically
undercapitalized.
✓ Business is not
dominated by a small
number of customers
or suppliers.
✓ Clearly established
demand for the
product or service.
✓ Business has a scope
for product or service
differentiation
through innovative
marketing.
✓ Business has a
strategic plan.

Price the customer
There’s no such thing as a “standard price”

✓ What is the customer’s cost of not solving this problem in
dollars?
✓ What is the economic beneﬁt to the customer if they solve this
problem?
✓ How do we help the customer grow their business and be more
proﬁtable?
✓ How do we help make their business more valuable?
✓ How do we help the customer achieve their preferred vision of
the future?
✓ How do we remove surprises for the customer?

• Reserva!on price—a price that will provide a
normal profit to the firm relative to the risk it is
assuming.
• Hope For price—a price that will return a
supernormal profit to the firm relative to the risk it
is assuming.
• Pump Fist price—a price that will return a windfall
profit to the firm relative to the risk it is assuming.

Develop options
Give the customer a choice

Complete Medium Small
Custom design and development of a website ✔ Template-based Template-based
Mobile friendly responsive website that works on smartphones, tablets and computers ✔ ✔ ✔
Visitor analysis and tracking ✔
Front page featuring a ﬂagship product and a strong text pitch ✔ ✔ ✔
- Prepared for photos and content for featuring technology and product beneﬁts ✔ ✔
- Form to signup to receive information as it becomes available ✔
Products page ✔ ✔ ✔
- Prepared for content about the products and product lines ✔ ✔ ✔
Newsfeed/blog page ✔
- Prepared for a list of news and press content ✔
- Form to signup to receive news by email ✔
Press center ✔ ✔ ✔
- Prepared for downloads of photos, logos and press releases ✔ ✔ ✔
Career page ✔ ✔
- Prepared for career opportunities and positions available ✔ ✔
- Application form to send in resume or request more information ✔
Contact page ✔ ✔ ✔
- Prepared for address, phone numbers and contact form ✔ ✔ ✔
Price 75,000 SEK 45,000 SEK 35,000 SEK

Remember, after showing or
stating your price, shut up. The
ball is now in the customer’s court.

Handle risk by breaking
work down
Work with manageable chunks

Estimate with hourly ﬂexible scope
P1: Document
existing system
P4: QA
P3:
Write
backend
P2: Design and write frontend
portion of new system
Scope variance
€100K
Break it down into phases,
price each phase
€??? €??? €???

Beware of contingent
pricing
Percentages sow dissent

Contact us for training, mentoring
and consulting services in value-
pricing and customer intimacy.
www.leancept.com
Twitter: @leancept

www.leancept.com
Twitter: @leancept
Simply be"er business
We help make ﬁrms and agencies more valuable,
their customers happier
and their teams more eﬀec!ve

Introduction to value-pricing

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Introduction to value-pricing

Similar to Introduction to value-pricing (20)

Recently uploaded

Recently uploaded (20)

Introduction to value-pricing