I read in one of Alan Weiss’ books the following quote:Â “80% of people are undercharging for their value, because they are charging for their work instead.”Â How many service providers know what their real value is to their customers?Â How many are undercharging for these?
In my experience, many large service providers have a difficulty determining real delivery costs and therefore have a hard time even charging for their work, let alone their value–but that is a topic for a different post.Â
Â One way to differentiate yourself as a service provider is to charge according to the value you offer your clients as opposed to time and materials.Â For example:Â One consulting company I worked with prided themselves on charging a “fixed rate” for their consulting projects but calculated the rate according to the number of hours they expected the project to take.Â Â In one case they charged $240k for a project that delivered approximately $16 million in additional revenue! Had they had an eye for charging for the value they delivered, they could easily have doubled their price and it would’ve still been a bargain at 3% of the total upside generated.Â
How do you calculate the value you deliver?Â By asking the hard questions of the economic buyers to determine the value drivers behind the purchase (the attributes of your services that enable customers to generate additional revenue, decrease costs, or mitigate risk):
- How much more money will you be able to make as a result of this project?
- How much money will you save?
- What impact will this project have on future projects?Â How would you quantify that impact?
- How much will this project contribute to your growth?
- How many new customers will you be able to acquire? What is each new customer worth to you?
- What kind of headcount reductions do you expect?Â What does each FTE cost you?
- How many errors will you be able to prevent?Â What is an average cost of each?
By quantifying the answers to these questions you’ll be able to establish a fair and reasonable price for your services.Â Â When presented with the results that you are offering vs. activities your competitors are offering and your prices in the context of the huge value that they are receiving, most value-oriented buyers will choose value over some activity that they then have to monitor and take a step further on their own.