Finished another book on being proactive – this time with regards to pricing.
The book was a long exploration on recognizing the value of what you’re creating, and figuring out how to charge appropriately for it.
I’m in the intellectual capital business. I’m constantly solving people’s one-off problems. There’s something specific about their problem that requires my problem-solving skills.
How to charge for this?
Let’s pick a common answer – Hourly Rate.
Hourly Rate looks at it like: Desired Yearly Income / Number of Hours = Hourly Rate
And bam. Now we’ve just tied my motivation to how long it takes to solve the problem. Now I’m stuck in a cage with every thought being measured every 6 minutes. This isn’t 1984, but it’s close.
What happens if I have two clients? They both happen to have the same problem. How do I bill them?
Half equally to both? What if the first one comes a month before the second one?
It’s a hard question to discern what’s fair: is it more fair to give a refund to the first client and charge half to second, or charge the second only for the time it takes me to consult my notes? Is that fair to me?
Pricing on Purpose suggests doing away with the hourly rate entirely and charging for the value received. With both clients, they both received the same value: their problem was solved. With this model, I could reasonably charge both clients. It’s not based on hourly rate, it’s based on value received.
I made a move awhile ago from hourly rate, to daily rate, and then to monthly rate. Life was much better. Clients and I were both thinking in terms of months. But it was really just an expansion on the old model of:
Monthly Rate: Desired Yearly Income / Number of Months = Monthly Rate
The book argues it’s important to decouple the time is money mentality and charge based on value the client received.
As an etymology on the Time is Money phrase. The book says it originated with Ben Franklin. He was speaking about Opportunity Cost. It’s a snippet of a quote to a young man who is thinking about taking half the day off. Ben is saying that the man shouldn’t look at just the dollar he spends that afternoon, but also at the 5 dollars he could have made by working – so he’s out 6 dollars that afternoon not just 1.
Want the book’s answer to the hourly rate question?
I wouldn’t want to spoil a book for you.
From their website:
The book presents the theory of value—long established in economics—and details how any business can use various pricing strategies to create, communicate, and capture the value of their products and services. It takes a new approach of focusing on the external value as perceived by the customer and advocates matching price to value. Written in everyday language so it’s valuable to beginning executives as well as professional pricers and marketers, it covers:
· What and how people buy
· The fallacy of commodity thinking
· The five Cs of value
· The market share myth
· The difference between cost-plus pricing and value pricing
· A comparison of the Subjective Theory of Value and the Labor Theory of Value
· Customer segmentation strategies
Online at: http://www.verasage.com/
The author also has a blog which you can follow.
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