In my first book Developing Knowledge-Based Client Relationships: The Future of Professional Services the final chapter was titled Value-Based Pricing: Implementing New Revenue Models. Pricing by value rather than time is clearly a central aspect to building true knowledge-based relationships, since knowledge should be measured by the value of its application rather than time spent by professionals.
The chapter in my book provides a fair overview of the key possibilities and factors in value-based pricing. However I am not a deep expert in the field. When discussing the issue with clients, I usually refer to Ron Baker, who among other claims to fame has written books including Pricing on Purpose, Professionals Guide to Value Pricing, and one I’ve long had on my bookself, The Firm of the Future.
Ron is currently in Australia running a series of workshops on The Firm of the Future, and he kindly invited me to join his masterclass session in Sydney this morning.
At the heart of Ron’s work is helping professional firms to throw out their timesheets and implement value-based pricing. It is a rich and complex domain which goes to the heart of the practice and identity of a professional firm. Ron provides some great foundation resources on the website of his company Verasage Institute.
A few key points strike me about value-based pricing:
Value-based pricing is central to the future of professional services. In a world where value is increasingly shifting to professionals with world-class expertise, fees charged need to be commensurate with value creation.
Value-based pricing is not always the best approach. The reality is that for limited scope engagements, there are lower transaction costs in using hourly fees – it is easier for both professionals and clients to quote and comprehend. However this should not mean that the practice is extended beyond its natural scope, which is a small proportion of professional services engagements.
Implementing value-based pricing changes everything. A firm that shifts to value-based pricing models is changing its fundamental business model. It shifts how professionals work and how they perceive their work. It transforms the nature of the client relationship. This should not put firms off commencing the journey – and it is a journey – but it is important to realize this is not about tinkering at the edges.