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Book Summary/Review: The Professional's Guide To Value Pricing 2000

This article is based on the following book:
The Professional's Guide to Value Pricing 2000
by Ronald J. Baker

Printed with permission from: Coleman Management Services, Inc.

Don't think like me - think with me. An expert is someone who doesn't want to learn anything new, because then he wouldn't be an expert. Harry Truman The management consultant is the modern day version of the witch doctor. The value curve: Unique services (4%) - designed for a specific customer - add high value Prevent major problems - have a major impact on the future Experiential services (16%) - high risk or high impact. Brand name service (20%) - service your niche - construction accounting -computer work Commodity services (60%) - the routine work - generic The economist's definition of profit: The successful producer of an article sells it for more than it costs him to make, and that's his profit. However, the customer buys it only because it's worth more to him than he pays for it, and that's his profit. No one can long make a profit producing anything unless the customer makes a profit using it. Render a service that is so good people are willing to pay a profit in recognition of what you are doing for them. The employee + the experience + business practices = future Annual billing multiplied by the number of years you will keep them. Debit Receivables Credit Deferred billing. Now determine how you are going to convert this into cash! Customers don't buy drill bits, they buy holes. Roto Rooter: Much of their work is recovering wedding & engagement rings! Not unplugging drains. Customers buy: Good feelings Solutions to problems Customer satisfaction = perceived performance/perceived expectations. Therefore, lower the expectations and increase the performance = delighted customer. Ask your customers "what are  your expectations?" According to HBR, 65 to 85% of customers who chose a new supplier said they were satisfied or very satisfied with their former supplier. Spending Matrix: Whose Money Spent on You Spent on Someone Else Your Money 1 2 Someone Else's Money 3 4 When you spend your money on yourself, you will do everything possible to maximize your utility. When buying a gift for someone else, you will want to maximize your utility and theirs. The greatest luxury of all is to spend someone else's money on you (the expense account). Fly first class - expensive restaurants and hotels. Someone else spending someone else's money: The government giving grants to businesses. Very little interest in saving money. 80/20 Rule: Lexus 3% of sales but 30% of profit for Toyota 1/3 of credit card holders make 2/3 of purchases 21% of movie goers account for 80% of attendance 1/3 of personal long distance callers make 2/3 of purchases MCI gets 40% of its revenue from 5% of its customers 1/3 of diners at family restaurants account for 90% of visits 1/3 of shoppers account for 80% of grocery spending in a particular supermarket 5% of households buy 85% of Levi's blue jeans 3% of households buy 82% of L'eggs pantyhose 60% of Delta Air Lines' profit comes from 6% of its customers Discriminatory pricing: Most people price their hourly rate in the middle of the pack. There is less competition at the bottom and the top. If you cannot decide what your customers are willing to pay for a service, you are leaving 20% to 50% of your revenues behind. Hardcover V paperback books - production costs very similar Selling price: $25 V $10 Senior discounts; they usually have plenty of money, but because they have the time they can shop around. Nightclubs - arrive early don't pay. Newspapers - cheaper if you subscribe. General Motors makes more money on upscale cars. Cheaper models are to build customer loyalty in the early years. Trade in discounts - get the repeat business. Cosmetics: L'Oreal eye shadow $5 - 4 colours + brush + 0.17 oz; Lancôme: $35 - 3 colours + 2 brushes and much nicer case + 0.15 oz. Look at the ingredients - (almost) the same. Airlines: Leaders in the art of price discrimination. Southwest Airlines perfected the two tier system. Peak and off-peak. They have 86 million seats per year. Yield - $ per passenger mile Load - % seats filled by paying passengers. Advantages of Hourly Billing: easy to do some customers like it shows the effort good for cost accounting transfers risk to customer Disadvantages of Hourly Billing: misaligns interest of professional and customer focuses on time not value risk is with customer fosters production mentality not entrepreneurial spirit creates subsidy system transmits no useful information encourages hoarding of hours focuses on effort not results penalizes technology advances discourages using higher skilled (paid) employees set by reverse competition -see what the others are billing and go in the middle creates bureaucracy does not allow you to set the price up front imagine an airline doing hourly billing (see page 102) does not differentiate your firm diminishes the quality of life limits your income potential encourages the tyranny of time Write-downs and price psychology You will close 1 out of 2 properly qualified leads but only 1 out of 10 unqualified. Pre-screen customers: Are they unable to pay? Are they unwilling to pay? Agree expectations in advance (keep them down) or don't commit and then exceed them. You will learn more from success than failure. Study the successful outcomes. Drucker: Do not solve problems; pursue opportunities. Good clients Effective engagement planning Superior communications Adequate performance Appropriate administrative support Quality is a given. It is high among professionals and is no longer a competitive advantage. Price: Unless you want to be a low cost provider, there is nothing exciting here. Go for value: Prices for service are higher than for products: You can't stack them side by side and compare. There's no such thing as the same service. The value of service to the customer is always greater than the price. We need to: perceive client needs quickly and correctly have the expertise and diligence needed to facilitate the satisfaction of client needs have the professionalism, training and skill to ensure that client needs are satisfied in a way that is ethical or prudent deliver cost-effective, timely and responsive service that adds value. The value must be greater than the fee. Focus on service and price, and quality will increase. Marketing is about getting BETTER business not MORE. Build new skills, relationships and reputation. Price psychology: Before the engagement, the professional has the advantage. Complete the engagement and the leverage shifts to the client. Restaurant should sell you the dessert while you're still hungry. Price emotions: Price resistance:  Discuss value rather than price. McDonald's has the Value Meal. Package your services. Payment resistance:  Agree terms with customer. Put the terms on the table - accept credit cards. Price anxiety: Stay in touch; assure them that they made the right decision. Exceed their expectations. Offer service guarantee. The advantages of value pricing: Price according to external value. Pricing is a more friendly term than billing. Value Pricing - price on the margin for each customer. Hair stylist charges extra for Bride on wedding day. Fixed Price Agreement (FPA) FPA makes it difficult to switch providers. FPA encourage efficiency. Time is not the factor for billing - it is our saving. FPAs are for your "A" customers. They increase customer expectations - keep in touch. FPA - keep it simple and use change orders to upsell additional services as the year progresses. Prepare for Fixed Price Agreement meeting: Get customer to envision the preferred future. Focus on WANTS not NEEDS. Have checklist to review before meeting. Listen more than you talk. If you do more than 20% of the talking in a selling situation you are doing something wrong. Talkers dominate a conversation but listeners control it. Take notes - they will talk more. The more you know, the more value you can add. The purpose of the meeting is to discuss with the customer the value you add to the business and their lives. Spend 50% of your marketing on the top 25% of your existing customers 25% on the balance 50% on new customers Customer's "ego investment" Have the customer involved in the design, delivery and pricing Post Christmas purchases: Toy store gets short supplies from manufacture. This creates January demand. You promise the kid the "Toy Train" for Christmas. It is out of stock. You buy something else and explain to the kid it was out of stock. He sees the ad again in January and then you have to go to buy it. Pilots make announcements to give you a sense of control: We are over Seattle; we are flying at 30,000 feet at a speed of xxx and our arrival time is. What good is that information to us really? We know when we are due to land. Everything else has no real meaning for us. Why customers defect (Rockefeller Corporation Study): 1% die 3% move 5% higher relationship 9% competition (price?) 14% dissatisfied 68% perceived indifference It is not the way the work is handled it is the way the customer is handled. You can't compete on quality - it has become the industry standard - the basic expectation. You won't compete on price if you want to make money. All that‘s left is process/service - that's the only place to compete. Why you should not bid work: There are better uses of your time. Keeping your customers happy is better than chasing other people's customers. Attracting a new customer is 11 times more expensive than keeping an existing one. When you win the business, you lose money. Price buyers have no loyalty. If they will come to you because of price they will leave you because of price. The incumbent can retaliate. The competition will lower prices to get customers away from you. Your existing customers will want a better deal New customers will use the low price as a benchmark Competitors will use the low price as a benchmark It does not help give your customer's competitors a better cost position. Do not destroy your competitors' glass houses. If your competitor can't make money he will lower prices just to survive and neither of you will make money. General: Provide guarantees. It takes 12 kudos to reach as many people as one complaint. Approx 40% of service customers are dissatisfied but do not complain. Covert not overt: We only give money back if they complain a lot. Putting price aside what role do you need me to play in your organization? When prospects want to discuss price, it is usually a sign that they are interested. Price selling: Start at the high price and come down. Don't give a range of prices Are you a commodity? Are you different from other people? If so, your services have to be different. The person in the mirror is not generic. Pricing = Guts Treat customers individually; not equally.

Copyright by Coleman Management Services Inc.
"Increased profitability through effective management"
7451 Bassett Place, Richmond, British Columbia V7C 4A8 Canada
Phone 604.241.0666 Fax 604.272.1523

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