In my last blog post I briefly introduced the concept of value pricing advocated most famously by Ronald J. Baker author of the best-selling books Pricing on Purpose, Professionals Guide to Value Pricing and The Firm of the Future.
After doing some research, I found out that this topic seems to engage lots of professionals over a wide range of business fields at the moment.
One of them is Larry Phipps, a North Carolina licensed land surveyor with more than 20 years of business experience who recently also formed a consultancy company supporting surveying firms amongst others at implementing value based pricing.
The core message Phipps wants to convey to businesses is, that despite the general perception time does in fact not equal money.
Moreover, Phipps states that ultimately the true benchmark of value has to be how your work impacts the client.
In return, this also means that being successful in pricing based on value partly depends on carefully choosing clients and helping those to really understand the value of the work your provide.
Phipps admits that in some cases this practice does indeed entail turning down clients.
However, he is convinced that this is critical to a businesses success:
“Those projects where your costs exceed the value you can create must be referred to someone else”
Ross Dawson, a globally recognized entrepreneur, strategy advisor and bestselling author, shares Phipps’ view that value-based pricing is central to the future of professional services.
Dawson asserts that it is indispensable for fees charged to correspond to the value creation in a world like today’s, where value is increasingly shifting to professionals with world-class expertise.
Nonetheless, Dawson also admits that value based pricing might not always be the best approach. For limited scope engagements, he claims, using hourly fees does incur lower transaction costs.
Taking up an opposing position and thus joining the ranks of the time based pricing’s advocates is Edward Mendlowitz, Certified Public Account with over 40 years of professional experience.
Among the many arguments in favor of time based pricing and billing he offers, one stroke me at especially insistent yet simple – Mendlowitz states:
“Time is our inventory and hours the units.”
And inventory, he adds, must be controlled. Therefore, timesheets need to be maintained and the use of them to fix prices is the easiest and most logical consequence.
Personally, I cannot deny that there seems to be some truth in Mendlowitz’s statement – control over inventory is crucial to the efficacy and success of a business.
Consequently, if you select time to be your inventory it seems reasonable to base your prices on billable hours – the unit of the measurement of your inventory.
Nevertheless, simply from a human being’s point of view, I also have to acknowledge that the idea of not getting paid simply according to the time I spend completing a task but really for the value my work creates to others, sounds a lot more appealing.
To finish off, I’d like to leave you with a quote by Warren Edward Buffet, American entrepreneur, investor and philanthropist, illustrating why it might be only reasonable to concentrate on concepts focusing on value creation:
“In a chronically leaking boat, energy devoted to changing vessels is more productive than energy devoted to patching leaks.”