baker -- 4p value pricing
TRANSCRIPT
Ron Baker, FounderVeraSage 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
Price for Profit.
Innovate for growth.
It’s to increase profits.
The default purpose of
marketing is not to increase sales.
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
“Even campaigns that don’t do much to boost sales can increase margins by differentiating brands and thus allowing companies to raise prices.”
Harvard Business Review“If Brands Are Built Over Years, Why Are They Managed Over Quarters?”
By Leonard Lodish and Carl Mela
What are you really selling?
What are your
customers really
buying?
“The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.”- Peter
Drucker
Paradigms drive practices
The wrong theory: Time worked equals value created
The wrong practices: Time tracking software
A Tale of Two Theories
The Labor Theory of Value
The Subjective Theory of Value
Value creation and capture
Valuecaptured
Valuecreated
Price
Customer’s Gain
Costs
Cost-Plus Pricing
Value-Based Pricing
Customer Value Price Cost Service
Service Cost Price Value Customer
Seven Steps to Implementing Value
Pricing
Implementing Value Pricing1. Conversation with customer
Not:“What do you need?”
But rather:“What are you trying to accomplish?”
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?”
Implementing Value Pricing2. Form a Value Council and appoint a CVO
Role of the Value Council
1. 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 Pricing2. Form a Value Council and appoint a CVO
Role 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.
AAAA PRICING PRACTICES SURVEY
CFO
Costing
CVO
Pricing
=
How often do agencies track the following?
Chief Compensation OfficerNeal Grossman
“We have as many compensation approaches as we do clients.”
Jeff Hicks, CEO
“All of our compensation agreements are experiments in value.”
Carl Johnson, Partner
“We don’t believe we’re in the business of selling time.”
John MintyChief Value Officer
Value CouncilKen Whyte, Glen Drummond, Bob Wilbur, 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.”
Implementing Value Pricing3. 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
RevenueProfitMarket ShareRetentionRoA or ROI EfficiencyCash FlowVisibility
CostTime/EffortComplaintsRiskTurnoverConflictPaperwork
ProductivityProcessServiceInformationMoraleImageReputationSkillsQualityLoyalty
StrategySystemProcessBusinessProductServiceBrand
Intangible Value• Specialist expertise/knowledge• Unique social capital• Brand/reputation• Unique result––creativity & innovation• Reducing risk• Excellent experience• Relationship• What else?
Outcome-based agreementsRisk reserves
Ownership of intellectual property
LicensingUsage fees
Royalties
Equity
Fixed value price
Implementing Value Pricing4. Develop Options
Rational vs. Irrational
Behavioral Economics
Anchoring
Options
Options factors to consider:
TimingScopeNumber of deliverablesDegree of
customizationLevel of service or
accessData archivingPayment terms
Implementing Value Pricing5. 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 Pricing6. Engage in superior scope management
Implementing Value Pricing6. 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 Pricing7. 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?
TIME
HOPE CONFIDENTCOMPETENCE
Insight
PERF
ORM
ANCE
Cycle of Change
Pricing is an art and a skill, requiring…
Patience
Wisdom
Twitter @ronaldbaker
Phone 707.769.0965
Versage website/blogwww.verasage.com
Thank You!