ron baker, founder verasage institute @ronaldbaker value pricing as a business model
TRANSCRIPT
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Ron Baker, FounderVeraSage Institute@ronaldbaker Value
Pricing as a Business
Model
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What is a Business Model?
How your firm creates value for customers, and how you
capture that value.
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“Disruptive threats come inherently not from new technology but from new
business models.”
Andy Grove, Founder, Intel
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The Firm of the Past
RevenuePeopleHours Efficiency Hourly
Rate= x x
We sell time
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The Firm of the Future
Profit Intellectual
Capital
Effectiveness
ValuePrice= x x
Our customers buy intellectual
capital
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A 1% increase change in, yields
- Fixed Costs
+ Revenue - Variable costs
+ Price0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2.7%3.7%
7.3%
11.0%
1.5%2.5%
4.6%
7.1%
McKinsey AT Kearny
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1% Increase Price = Increase Operating
Profits
1% of revenue = 1%WindfallCurrent profit
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Price for profit.
Innovate for growth.
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“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
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What are you really selling?
What are your
customers really
buying?
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“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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“When it leaves the factory, it’s lipstick. But when it crosses the counter in the department store, it’s hope.”
Charles Revson, Founder, Revlon
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It’s to increase profits.
The default purpose of
marketing is not to increase sales.
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Cost
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
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The First Law of Pricing: All Value
is Subjective
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Confusing Cause and Effect
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A Tale of Two Theories
The Labor Theory of Value
The Subjective Theory of Value (Carl Menger, William Stanley Jevons, and Leon Walras)
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Salaries + Overhead + DNI Expected Hours
= Hourly Rate
Precise, but precisely wrong
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Cost-Plus Pricing
Value-Based Pricing
Customer Value Price Cost Service
Service Cost Price Value Customer
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Eight Steps to Implementing Value
Pricing
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Implementing Value Pricing
Eight Steps at a Glance
1. Conversation with Customer
2. Pricing the customer, not the services (CVO/Value Council)
3. Developing and pricing options
4. Effectively present options to customer
5. Option selected codified into an FPA
6. Proper Project Management
7. Scope creep, utilize Change Orders
8. Conduct Pricing After Action Review
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“Language was invented to ask questions. Answer may be given by grunts and
gestures, but questions must be spoken. Humanness came of age when man
asked the first question. Social stagnation results not from a lack of answers but
from the absence of the impulse to ask questions.”
Eric Hoffer, Longshoreman
Philosopher
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Implementing Value Pricing1. Conversation with customer
Not:“What do you need?”
But rather:“What are you trying to accomplish?”
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Implementing Value Pricing1. 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?”
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Spiritual Value
Specialist expertise/knowledge
Unique social capital
Brand/reputation
Unique result—creativity & innovation
Reducing risk (Guarantee)
Pleasant experience (MOTs)
Make the Customer “look good”
Relationship
Knowledge elicitation
What else?
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Implementing Value Pricing2. Pricing the customer, not the services
Role of the Value Council
1. Ensuring that the firm prices on purpose.
2. Constructing and experimenting with various value-based compensation agreements.
3. Assuring continuous learning and teaching the importance of pricing for value.
4. Dealing with price objections from customers.
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Implementing Value Pricing2. Form a Value Council and appoint a CVO
Role of the Value Council (continued)
5. Keeping the firm focused on tracking customer results instead of firm inputs.
6. Establishing customer selection/deselection criteria.
7. Conducting “after action reviews” at the end of major projects.
8. Providing education throughout firm
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Implementing Value Pricing3. Developing and Pricing Options
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The Second Law of Pricing: All
Prices are Contextual
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Behavioral Economics
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1 Yr Sub Price Mkt Share
Web only $59 16%
Print only $125 0%
Print & Web $125 84%
1 Yr Sub Price Mkt Share
Web only $59 68%
Print & Web
$125 32%
42.8%
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Anchoring
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Framing
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Implementing Value Pricing3. Developing and Pricing Options
The Six Ts of Options
1. Turnaround Time
2. Terms
3. Talent
4. Technology
5.Tailoring
6.Transference
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Hours x Rate Fixed price Change orders Service guarantee Price guarantee Payment terms Unlimited Access
Value Price Premiums
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Implementing Value Pricing4. Effectively present options to customer
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.8. Finite number of price objections—shouldn’t we have
answers?
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Implementing Value Pricing5. Fixed Price Agreement (FPA)
Elements of an effective FPA
Memorializes the meeting of the minds
Specifies scope of work
Includes deadlines, delivery dates, and other milestones
Details customer’s responsibilities for providing information
Includes payment terms
Establishes parameters for Change Orders
Bundles Unlimited Access
Includes service guarantee and price guarantee
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Implementing Value Pricing6. Proper Project Management
Effective PM
Scope of work
Who performs work
Resources needed
Capacity planning—forward looking, not backwards
Customer responsibilities and commitments
Deadlines—duration, not time spent
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Implementing Value Pricing7. Change Orders
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Firms that Value Price
Have a clear purpose, strategy, and position
Have made pricing a core competency
Have excellent project management skills
Understand they sell intellectual capital, not time
Only work with customers who value them
Routinely fire low-value customers
Maintain minimum prices
Don’t treat all customers equally
Have appointed a value council and/or a CVO
Have replaced timesheets with Key Predictive Indicators, PM, AARs
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At least 84% of us are copying,
not innovating.
If you just copy, you will always be behind.
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Don’t solve problems; pursue opportunities.
Peter Drucker
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www.journalofaccountancy.com
June, 2009Pricing on Purpose: How to Implement Value Pricing in
Your Firm
November, 2008The Firm of the Future
April, 2010Project Management for Accountants, by Ed Kless
Simon Sinek, www.TED.com
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Thank You!
Phone: (707) 769-0965 Twitter @ronaldbaker
VeraSage website/blogwww.verasage.com
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Implementing Value Pricing8. Conduct a Pricing “After-Action Review”
After-Action Review Questions
How could we have enhanced our customer’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?
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Simon Sinek, Start with Whywww.ted.com
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