VALUE–PRICING

Jakob Persson Leancept AB

www.leancept.com

As presented at the Stockholm Value-Pricing

Meetup on May 10, 2016.

What is value?

Why are diamonds valuable?

http://www.freeimages.com/photo/diamond-ring-1539860

1947

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

Is this fo

r us?

Estimation

Nope. Too much complexity/risk

How much should

we charge?

Proposal

Too demanding considering chance of winning

What a

re th

ey

asking fo

r?

Bidding process

Loss to competing bidder

What i

s the

competit

ion offe

ring?

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?

Store A

Store B

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.

Becoming a value-pricer

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 firmsDetermining value to

solve

Value to customer

Time

Scope development

Implementa!on

Go live

Ongoing support

Source: Implementing Value Pricing by R. J. Baker.

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.”

Source: Implementing Value Pricing by R. J. Baker.

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

Source: Implementing Value Pricing by R. J. Baker.

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

Pro

fit

Office rent and

perks

Support staff

Customer’s profit

Price

Capturing value

Costs

Price

Value captured

Value created

What you’re missing!

Value-pricing projects

Do the researchUnderstand 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 firmP

rice

sen

siti

vity

Low

Low

High

Hig

h

Source: Implementing Value Pricing by R. J. Baker.

Use the right languageIf 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?

Source: Implementing Value Pricing by R. J. Baker.

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 doesIt 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.

Source: Implementing Value Pricing by R. J. Baker.

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?

Source: Implementing Value Pricing by R. J. Baker.

• 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.

Source: Implementing Value Pricing by R. J. Baker.

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: QAP3:

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

20 %

80 %

€25,000 vs.

Contact us for training, mentoring and consulting services in value-pricing and customer intimacy.

www.leancept.com

Twitter: @leancept

www.leancept.com

Twitter: @leancept

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