Over the last decade it has been a lot of discussions about pricing based on value. However, there are several issues related to that and not an easy task. To begin with your company must be committed to really go for value creation meaning down prioritize other activities that might be short term valuable for the organization but not long term value crating for the customer. Let´s give an example:

Assume that you are running a consultancy company and to differentiate you develop concepts and best practice charging for results in the deliveries. Since all my portfolio companies are charging based on value created I have notices the trade off that has to be made compared with traditional consulting business selling heads. Here are some very tangible tradeoffs:

  1. All contracts has to limited in time, otherwise you do not create sustainable value. The contract might very well be extended or complemented, but always with the objective of doing yourself redundant.
  2. No contract should be less than 2 years.  In my experience. everything sustainable take two years to create.
  3. You should share your risk with the client, otherwise you do not believe in your work. It can be a success fee, monetary, options or shares. But must certainly, you should not get fully paid if you do not deliver expected value to the client.

Now you might wonder why paragraph 1-3 are tradeoffs? Well they are because in traditional consulting you try to sell the same consultant to the same customer as long as possible expanding with more consultant creating a dependency where your people know more about the customer than the customer itself. Selling on value is diametric to selling heads; you might have to say no to a deal because you know that you will not be able to create the value. You might even be force to say no because you know that you will only compensate for the clients incompetence and not developing sustainable changes in the business. It is hard but true. On the other hand, you will probably be better off in margins and interesting assignments. The other route to take is selling heads on a global market with global supply and global demand, where the competition is perfect and the only discriminator is price, volume and location.

However, there is another major issue as well… But that will be my next post, until then have a nice summer holiday…

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Pricing Success fee Value-based pricing