4ps of business development: value pricing
TRANSCRIPT
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Ron Baker, Founder VeraSage Institute Profit Starts
with Pricing on Purpose
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” - Warren Buffet
Price for Profit.
Innovate for growth.
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It’s to increase profits.
The default purpose of marketing is not to
increase sales.
1. Profit is a marketer’s ultimate objective.
2. Profit is driven mostly by price.
3. Price is driven mostly by brand perception.
4. Brand perception is driven mostly by what agencies do for their clients.
The value of agencies
Harvard Business Review “If Brands Are Built Over Years, Why Are They Managed Over Quarters?”
By Leonard Lodish and Carl Mela
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What are you really selling?
What are your customers
really buying?
“The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.” - Peter Drucker
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Paradigms drive practices
The wrong theory: Time worked equals value created
The wrong practices: Time tracking software
A Tale of Two Theories
The Labor Theory of Value
The Subjective Theory of Value
Value creation and capture
Value captured
Value created
Price
Customer’s Gain
Costs
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Cost-Plus Pricing
Value-Based Pricing
Customer Value Price Cost Service
Service Cost Price Value Customer
Seven Steps to Implementing Value Pricing
Implementing Value Pricing 1. Conversation with customer
Not: “What do you need?”
But rather: “What are you trying to accomplish?”
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Implementing Value Pricing 1. Conversation with customer
Listen > Talk
Opening: “Mr. Customer, we will only undertake this engagement if we can agree, to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”
Implementing Value Pricing 2. Form a Value Council and appoint a CVO
Role of the Value Council
1. Ensuring that the agency prices on purpose.
2. Constructing and experimenting with various value-based compensation agreements.
3. Assuring continuous learning and teaching every team member the importance of pricing for value.
4. Dealing with price objections from clients.
Implementing Value Pricing 2. Form a Value Council and appoint a CVO
Role of the Value Council (continued)
5. Keeping the agency focused on tracking client results instead of agency inputs.
6. Establishing client selection/deselection criteria. 7. Conducting “after action reviews” at the end of major
assignments.
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AAAA PRICING PRACTICES SURVEY
CFO Costing
CVO Pricing =
How often do agencies track the following?
Chief Compensation Officer Neal Grossman
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“We have as many compensation approaches as we do clients.”
Jeff Hicks, CEO
“All of our compensation agreements are experiments in value.”
Carl Johnson, Partner
“We don’t believe we’re in the business of selling time.”
John Minty Chief Value Officer
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Value Council Ken Whyte, Glen Drummond, Bob Wilbur, Mandy Moote, Tony Mohr
“At innovation consultancy Fahrenheit 212, we put up to two-thirds of our potential revenue at risk, subject to achieving agreed commercial milestones on a project.”
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Implementing Value Pricing 3. Determine the optimal pricing method (fixed, results, usage)
Not: “What do you need?”
But rather: “What are you trying to accomplish?”
34 Sources of Client Value
Increase Reduce Improve Create
Revenue Profit Market Share Retention RoA or ROI Efficiency Cash Flow Visibility
Cost Time/Effort Complaints Risk Turnover Conflict Paperwork
Productivity Process Service Information Morale Image Reputation Skills Quality Loyalty
Strategy System Process Business Product Service Brand
Intangible Value • Specialist expertise/knowledge • Unique social capital • Brand/reputation • Unique result––creativity & innovation • Reducing risk • Excellent experience • Relationship • What else?
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Outcome-based agreements Risk reserves
Ownership of intellectual property
Licensing Usage fees
Royalties
Equity
Fixed value price
Implementing Value Pricing 4. Develop Options
Rational vs. Irrational
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Behavioral Economics
Anchoring
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Options
Options factors to consider:
Timing Scope Number of deliverables Degree of customization Level of service or access Data archiving Payment terms
Implementing Value Pricing 5. Effectively present your pricing
Presenting your pricing
1. Present your most expensive option first; this is your “anchor price.” 2. After stating your price(s), shut up. 3. Use the word “price” instead of “fee.” 4. Use the word “agreement” instead of “contract.” 5. Use the word “fair,” as in “Is this a fair price to you?” 6. Remember to negotiate value, not price. 7. Place a timeline on proposals; no price should last forever.
Implementing Value Pricing 6. Engage in superior scope management
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Implementing Value Pricing 6. Engage in superior scope management
Elements of an effective scope document
Scope statement
Objectives
Constraints
Project structure
Role definition
Assumptions
Deliverables
Functional requirements
Project change control
Approval process
Implementing Value Pricing 7. Conduct an “After-Action Review”
After-Action Review Questions
How could we have enhanced our client’s perception of value?
What were the business results and performance against key metrics?
Did we have the right team on this assignment?
How high were the costs to serve?
Did we stay within time and budget parameters?
Could we have captured more value through higher price?
If we were doing this type of assignment again how would we do it?
What are the implications for the way we design and deliver our services?
What could we do better next time?
TIME
HOPE CONFIDENT COMPETENCE
Insight
PERF
ORM
ANCE
Cycle of Change
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Pricing is an art and a skill, requiring…
Patience
Wisdom
Twitter @ronaldbaker
Phone 707.769.0965
Versage website/blog www.verasage.com
Thank You!