Methods of Pricing
VALUE PRICING
While the most appropriate and perhaps purest way for you to price your service or product is to determine the real value it adds to the client's business, it is often very difficult to come up with true value pricing. There are, however, several techniques that you can use to determine a price that reflects the value of the services you render.
One possible approach is to suggest a combination of a base fee and a large incentive payment or bonus payment based on achievement. For this strategy to be effective, you must negotiate the exact measure of achievement in writing in advance. When the benchmarks used to measure results are clearly understood and agreed to by both parties in advance, it is less likely that there will be arguments at the end of an assignment concerning whether a bonus or incentive has been earned.
Another way can arrive at a value pricing strategy is through analyzing the pricing policies of the competition for similar services. When you look at the pricing schedules of large consulting firms offering the same services, you'll see that their pricing structures are often significantly higher than those of smaller firms. While these higher fees are often based on the firm's ability to offer a broader range of services, you must realize that those higher prices often include overhead costs that you as a sole practitioner do not have. In comparing pricing structures, then, you should strive to come up with a price that includes the value portion of that large consulting firm's pricing structure but not the overhead expense. Clients often perceive that they are getting unique value for the price they are paying when you employ this strategy, particularly because you are a small personal service business entity.
It should be noted that for formula pricing purposes the general rule among consultants is that they will average 50 percent of their available time on income producing client assignments (i.e., billable hours). While formula pricing does not represent the actual value that the client is receiving, it does help you to set a standard for what you're seeking to achieve. For example, financial consultant Dick West charges $150 per hour for everything he does.
As with any formula approach, the balance among down time, productive time, and overhead cost varies and needs to be monitored closely over time.
HYBRID PRICING
Hybrid pricing is a combination of value pricing and formula pricing that employs formula pricing for the basic "bread and butter" assignments and value pricing for those projects that truly contain added value. Most successful portable executives who operate as consultants focus on developing enough fee for service retainers to cover their basic overhead, allowing them the flexibility to take on riskier projects that offer the potential for value payoffs.
"WHAT THE TRAFFIC WILL BEAR" APPROACH TO PRICING Deciding to charge whatever the traffic will bear is probably the least recommended form of pricing, but it is often employed by those who are either just starting out or trying to break into a new market. With this approach, becomes dependent on pricing to obtain assignments, and is therefore not necessarily conveying the full value of the skills he or she is selling. At close examination, this approach creates an employer employee relationship model that is not unlike that of the employee within an organization. This approach should be used very cautiously, since it can keep you from ever realizing the real value of your offering.
Discounting
You can create a wonderful pricing system that reflects the value of the products or services rendered to the client and then lose it through a loose or uncontrolled discounting policy. First consider the types of discounts you are willing to give and then calculate the probable impact of discounting on your pricing. Some of the types of discounting are:
- Volume discounts. Most businesses are willing to give lower prices to their customers based on a high volume of business. In granting these kinds of discounts, it is important that you base them only on the actual volume and the continuation of that volume. High volume discounts should not be granted just because a client's volume peaks. Regardless of the situation, must establish policy around volume discounts very clearly.
- Another form of discounting is the retainer relationship, often used by individual consultants or interim managers. This type of discount grants the client a lower price in exchange for a guaranteed fee over a specific period of time. This is an important stabilizing factor in the development of a portable executive's business, but you need to establish precisely what the retainer covers and be prepared to charge separately for those services not included in the scope of the retainer agreement.
- Seasonal discounting is another important pricing factor, in that it allows you to maintain continuity and also absorb overhead during an off season. You must be careful, however, that it doesn't become a permanent part of your pricing structure, which will erode your margins.
- Barter exchange is another form of discounting that can be instrumental in building your business. The most common barter exchange consists of specialist services for office space ass of defend office services. Bud Titsworth, who started as a portable executive in 1980, has never paid any cash for rent, but has always had an office on barter terms with a client.
