Value Pricing Boot Camp

Presented by

Ed Kless and Ron Baker

A Better Model• Firm/customer first defines scope of value

(McKinsey approach)• Firm then determines scope of work• Capacity/project management approach• Firm uses price-led costing, offer options• After Action Review

Firms that Value Price…• Have a clear purpose, strategy and ideology• Have turned pricing into a core competency• Have excellent project management skills• Understand they sell intellectual capital, not time• Only work with clients who value them• Routinely fire low-value clients• Maintain minimum prices• Price EVERYTHING up-front and use Change Orders• Don’t treat all clients equally• Have replaced timesheets with KPIs and AARs• Have appointed a pricing cartel and/or a CVO

How Are Hourly Rates Determined?

Overhead + D.N.I.

Expected Hours

= AHR

The Role of Pricing in Product/Service Development

Cost-Based PricingProduct > Cost > Price > Value > Customers

Value-Based PricingCustomers >Value > Price > Cost > Product

McKinsey: 1% Improvement

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Fixed Costs Variable costs Volume Price

Value creation and retention

ValueValuecapturedcaptured

ValueValuecreatedcreated

$

Scope ofBenefits

Costs

Baker’s LawBaker’s Law

Bad customers drive out good customers

Factors Affecting Price Sensitivity

Perceived substitutes effect–Woolite, new customers (inexperienced)

Unique value effect–Heinz 27% > 48%; Volvo; “Positional” or “Expressive” goods

Switching cost effect–Boeing vs. Airbus, CPAs, Vets, Amazon.com

Difficult comparison effect–cell phones, stockbrokers, IBM

Price quality effect–Rolls Royce, Rolex, car wax ($5 > $25)

Factors Affecting Price Sensitivity

Expenditure effect–paper clips; bus at total purchase, households % income

End-benefit effect–steel GM vs. Coach Luggage; “AOG”; Michelin; 2 for 1 coupon

Shared-cost effect–4 ways to spend money; tax deductible

Fairness effect–gas discount cash, or premium for credit card; rental car gas; coke vending mach

Inventory effect–pantry; perishability

Seven Purchase Risks

Performance Risk–Will not perform function purchased for

Financial Risk–Monetary loss if product fails (services higher risk than products)

Time and Loss Risk–Customer’s time due to failure (AOG)

Opportunity Risk–Risk of choosing one product over another (IBM)

Seven Purchase Risks

Psychological/Social Risk–Purchase will not fit customer’s self-concept. Restaurants, cars, movies, hairstylists, cosmetic surgery, etc.

Physical Risk–Chance the purchase will cause physical harm (medical care, Michelin tire ads)

Three Internal PricesThree Internal Prices

Reservation PriceReservation Price–Walk-away price; normal profit (Must)

Hope For PriceHope For Price–Supernormal profit (Should)

Pump Fist PricePump Fist Price–Windfall Profit (Aspiration)

Advantages vs. Disadvantages

1. More profit/higher revenue2. Less price disputes3. Fewer, better clients4. Attract, retain talent5. Better client relationships6. Less admin cost7. Better focus on value8. Match value w/ expectations

at start of engagements9. Competitive differentiation10. Better team relations

1. Difficult paradigm change2. Determine value difficult3. No confidence in our skills4. Communicating value5. Clients hard to change (could

lose)6. Creates risk–can we tolerate?7. S/T profits may fall8. More time up-front required9. Lose team who are confused

Disadvantages (cont.)10. New processes11. Lots of education required12. Those not good will fail13. Won’t know profitability of

project14. Must quit doing some work15. Change Orders slow project16. Price may be lower than

current17. Hard to price commodity

services18. Lose accountability19. RFP work hard to do

Where do profits come from?

Land

Labor

Capital

Profits?

Thank You for Attending!!

Ron BakerVeraSage Institute

E-Mail: ron@verasage.com

Web site: www.verasage.com