A great little story on value based pricing and a recurring theme I have been hearing from clients and prospects consistently over the last year or two. They want to know “how much is it going to cost me” and are they getting value for what they pay. When you can deliver what you say you can, when you say can and with high quality/satisfaction, people will happily pay for it.
The big challenge in services based businesses is the fear of “idle” people and a focus on the “billable hour”. The mantra for most of the years I have been in services oriented businesses has been utilization. The problem is higher utilization can be a double-edge sword. If one has too high a utilization rate, for too long, people get burned out and leave. That’s the last thing you want in a services business.
The flip side is not a high enough utilization rate and profitability of the company dips too low.
Hourly billing also involves a lot of time and energy spent on the price/cost of that hour. Long discussions and back and forth on that number, sliding scales, services “shopping”; these are all low value activities that partners, clients and prospects endure when the focus is “the billable hour”.
The beauty of value based pricing is so much of that wasted effort goes away. The focus is not on maintaining a tight focus on a perishable resource (time), rather, it is is focused on delivering a quality product for the customer.
Take the example in this article. “MANY COMPANIES WORRY ABOUT THE COMMODITIZATION OF THEIR OFFERINGS AND THEIR INABILITY TO JUSTIFY PREMIUM PRICING–BUT IF YOU FIGURE OUT HOW TO TAKE CARE OF YOUR CUSTOMERS’ “DEAD SQUIRRELS,” YOU’RE GOLDEN.”
As the story points out, in order to remove the impact of the visitor under his porch, the author was more than happy to pay the equivalent of $1500 per HOUR. How many in the services business get that kind of billable rate? Not many!
Moral of the story, focusing on solving the problem and delivering it with quality, will result in the billable hour discussion going away.