Value Pricing Agreements. Why ditching hourly rates is a good thing.
The philosophy of Value Vs Hourly rates is a long standing one that Straight Talk has wholeheartedly adopted. However within the business community due to a long-standing and enshrined belief in hourly rates sometimes the message of Value Pricing gets confusing and is lost to clients.
So what does Value Pricing really mean?
Firstly, let me ask the question.
If you had to pay an hourly rate to someone would you want to pay someone who takes a little amount of time or a lot of time? Of course, assuming you get the same outcome your answer would be a little amount of time. Why? Because you would be charged less.
In the reverse, if someone takes a long time to do something, (because they have less experience, or just work slower), measured and paid for by the same hourly rate you will have to pay more.
This scenario once considered does not make sense at all. It means that by paying hourly you are paying more for incompetence. It hardly seems fair now does it?
The conservatives will often argue “we only charge for efficient time spent”. We contend efficiency (being a subjective phenomenon) should be measured by the purchaser not the seller.
On understanding this, most customers are very comfortable with a Value Pricing Agreement (VPA).
There are two types of Value Pricing Agreements. One is very clear and states there is a clear outcome for a clear fee – creating a very tight and understandable scenario (Tangible VPA).
For example. We will help you pitch for and win a contract that is expected to generate $100,000 pa and our VPA for that (whether it takes us one meeting or a 3 month very detailed tender process) is $20,000. In this scenario the service provider takes the risk on the input required – not the client. All the parameters are clearly set, and in this example; a bit of a no brainer to say yes too!
Another version of a Tangible VPA builds in a reverse guarantee where the service provider takes on the risk of the outcome.
For example, as a client you currently make $800K net profit pa and you expect without help you can get to $1M net profit pa. A possible VPA might be – if we work with you and you are able to increase your profits to over $1M net profit pa then we will share a negotiated % of that excess.
The hourly rate in either scenario could be as little as $10 an hour to upwards of $1000 per hour. Either is satisfactory to the client as they know beforehand the expected return on their investment. Under the first scenario there is still a risk on the actual outcome as there is no guarantee built in; neither for the winning of the contract or the performance of that contract. What is guaranteed is the total investment in the service provider’s engagement.
When a large hourly rate is earned it is simply a reflection of decades of experience that cannot be bought off the shelf.
The second type of Value Pricing Agreement is measuring value on less tangible business essentials. (Intangible VPA)
The conversation goes a little like this. What if we could…
- put you in front of your ideal audience over and over again?
- ensure your best client was so impressed they could never leave?
- introduce a new skill to your team that will continue to be used over and over again to help your business achieve better results?
- help you win that one ‘big fish’ client you have been chasing?
- Create a happy workforce with you to reduce sick days and HR overload?
- train your sales people to sell just the right product to customers rather than what the customer asks for naively? and,
What if we could achieve all of the above and give you better management skills, or identify a looming crises that you have not seen and can avoid now?
Notice that all these scenarios are a little less fixed and may involve several different approaches and (especially the ones involving people) may take 2 mins or 2 months to achieve. Some could simply require the equivalent of an “extra board member” to be there and available when the need arises.
A positive result in any of these examples is of value – sometimes even more because they are examples of ‘the gift that keeps on giving’.
The question is how much?
And that is where a Value Pricing conversations begin.
Value Pricing, here, can be more aligned to an insurance policy. If we can afford an ongoing fee and continue to make sound profits what might happen if we try and cut corners? Not many businesses operate without insurance on their assets and often their people.
This Intangible VPA is so important and, while often the most undervalued, can be over time the best investment.
Under an Intangible VPA your consultant is always close at hand.
The benefit of having your advisor by your side continuously is that one-off issues can be dealt with efficiently. Additionally another eagle eye is constantly looking over your business and catching potential crisis’s before they happen.
Imagine the alternative.
Your consultant needing to have lengthy meetings just to understand where the business has transitioned to since you last spoke. As a result you are paying a significant fee before your assignment has even started. Then there can be ‘issues’ arising that could have been avoided by regularl contact with your advisor. This is a major per of the ongoing service and relationship of a Value Pricing Agreement.
The other big negative when a client does not have a Value Pricing Agreemnt is they will often not bother to touch base with their advisor out of fear of an extra fee or they just keep on working in the business and not on it so the advisor never knows the issue. We have seen countless examples of this occurring with clients that have infrequent meetings …” if only you had told us about this before you proceeded, we could have saved you thousands”
By engaging in a yearly, ongoing value pricing arrangement we often see with continuous input just one strategy implemented saves you in excess of the VPA fee every year until your business is sold, making all your future direction for free. This doesn’t happen every year but it only needs to happen once and the client is in front for ever … if it happens every other year their ROI simply goes through the roof.
If you are a business owner that would like to explore the benefit of an advisor engaging with you via a VPA please contact us by emailing email@example.com
Alternatively if you are a consultant needing assistance in implementing VPA’s in your practice we would also be very pleased to assist.
Some of the philosophies outlined in this article and more examples can be found in Geoff’s book