4Ps of Business Development: Value Pricing


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4Ps of Business Development: Value Pricing

  1. 1. 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 Innovate for growth. Price for Profit. 1
  2. 2. The default purpose of marketing is not to increase sales. It’s to increase profits.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 2
  3. 3. What are you really selling? What are your customers really buying?“The customer never buys a product. Bydefinition the customer buys the satisfaction ofa want. He buys value.” - Peter Drucker 3
  4. 4. The wrong practices: Time tracking software Paradigms drive practicesThe wrong theory: Time worked equals value created A Tale of Two Theories The Labor Theory of Value The Subjective Theory of Value Value creation and capture Customer’s Gain Value created Price Value captured Costs 4
  5. 5. Cost-Plus PricingService Cost Price Value CustomerCustomer Value Price Cost Service Value-Based Pricing 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?” 5
  6. 6. 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 CVORole of the Value Council1.  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 CVORole 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. 6
  7. 7. AAAA PRICING PRACTICES SURVEY CFO CVO Costing Pricing = How often do agencies track the following?Chief Compensation OfficerNeal Grossman 7
  8. 8. “We have as many compensationapproaches as we do clients.” Jeff Hicks, CEO“All of our compensation agreementsare experiments in value.” Carl Johnson, Partner “We don’t believe we’re in the business of selling time.” John Minty Chief Value Officer 8
  9. 9. Value CouncilKen Whyte, Glen Drummond, BobWilbur, 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.” 9
  10. 10. 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 Cost Productivity Strategy Profit Time/Effort Process System Market Complaints Service Process Share Risk Information Business Retention Turnover Morale Product RoA or ROI Conflict Image Service Efficiency Paperwork Reputation Brand Cash Flow Skills Visibility Quality Loyalty Intangible Value•  Specialist expertise/knowledge•  Unique social capital•  Brand/reputation•  Unique result––creativity & innovation•  Reducing risk•  Excellent experience•  Relationship•  What else? 10
  11. 11. Equity Outcome-based agreementsRoyalties Risk reserves Ownership of intellectual property Licensing Usage feesFixed value price Implementing Value Pricing 4. Develop Options Rational vs. Irrational 11
  12. 12. Behavioral Economics Anchoring 12
  13. 13. 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 13
  14. 14. 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? Cycle of ChangePERFORMANCE   HOPE   CONFIDENT   COMPETENCE         Insight   TIME   14
  15. 15. Pricing is an art and a skill, requiring… Patience Wisdom Thank You! Versage website/blog www.verasage.comRon@verasage.comTwitter @ronaldbakerPhone 707.769.0965 15