Now is the Best Time, Not the Worst, to Transform Your Pricing Strategies

Even in periods of strong economic growth, smart companies are rebelling against the idea of paying their professional service providers for activities (hours). In periods of economic stress, they simply can’t afford it.

Instead of buying inputs, client organizations want and need to buy outputs, or if possible, outcomes. Now more than ever, they need a tangible return on their investment. They need results, not efforts. 

Many professional services firms are thankfully headed in the direction of pricing based on the value delivered to the client rather than the costs incurred by the firm. But the majority of professionals continue to mistakenly assume their clients will resist this idea. They fail to appreciate the strong client-side arguments for selling outputs (deliverables) and outcomes (results) instead of inputs (hours):

1.    It aligns priorities. When professional service firms are paid for solutions to problems instead of hours recorded on a timesheet, clients can be assured their business partners have all the right economic incentives. 

2.    It keeps both parties focused on effectiveness. When clients pay for outputs or outcomes instead of inputs, teams are motivated to deploy their expertise to solve problems quickly and effectively, not log lots of hours on a timesheet. 

3.    It creates a bias for action. When client organizations “rent people” by paying for their time, teams are mostly worried about staying busy with “billable work.” When clients instead pay for actual deliverables or results, the firm turns its attention to work delivered in place of hours spent.

4.    It improves accountability and workflow management. Instead of tracking recorded time, value-driven firms are instead tracking milestones and promised delivery dates. It enhances levels of trust.

5.    It replaces reactive behavior with proactive thinking. Firms that bill for inputs are often in the habit of reacting to what clients want rather than helping clients determine what they actually need. They fill the order, bill the hours, and move onto the next project. Firms that charge for problems solved instead of hours worked work much harder to provide the critical thinking designed to make sure their clients are doing the right thing in the first place.

6.    It creates an incentive to engage the best talent. In the hourly rate system, teams are perpetually worried about staying “within estimate” and fret about having to justify hours to their clients, so instead of engaging the help of senior talent who are best suited to solve a problem, they assign less expensive, less effective junior talent. Not so when the goal is to solve the problem as quickly and effectively as possible.

In the marketing space, a number of large agency networks are seeing the benefit of selling outputs and outcomes rather than inputs. Instead of just dutifully providing a schedule of hourly rates, one of the world’s leading advertising agencies now approaches its current and prospective clients with the following framework:

We realize that what matters most are the actual deliverables and results we produce, not the time or effort we put in. As your partner, here’s our view of how you’ll benefit from this value-centric approach: 

* In the future, we will begin all new assignments with a “Success Workshop.” Instead of focusing on hours and staffing, we’ll begin by identifying the results and outcomes that will be most important to you. 

* Every Scope of Work document we prepare will begin with what we call a “Scope of Value” which summarizes the objectives, expectations, or KPIs for the assignment.

* From there, we’ll present solutions that include fixed pricing options based on specific outputs and outcomes. You will no longer see complicated estimates or ranges based on hours. This means you will pay only for the output or outcome we agreed to and the value it creates – not for the effort or time that goes into it. 

Yet another agency approaches compensation discussion this way:

Unlike other firms, we don’t sell our time. Because, frankly, you’re not buying our time or our efforts. You’re buying great work that delivers great results. 

Let’s face it, paying agencies by the hour actually encourages slow problem-solving, duplication of effort, over-staffing and the kind of fuzzy math that erodes the client-agency relationship. 

We earn our keep by building your business. By pricing our services based on the work we deliver rather than the hours we work we’re able to focus on what really matters: the success of your brand. 

A multinational public relations firm sets the stage by saying:

We know a lot of companies have grown tired of the traditional agency compensation model. Under the old conventional hourly rate structure, agencies told clients, “We worked these many hours, so you should pay us this much.” 

But we all know the amount of time an agency spends isn’t a good measure of effectiveness. We believe that when our compensation is tied to the work we deliver – rather than hours worked – we’re able to focus what really matters: the success of your brand. And instead of spending our time tracking internal costs and hours, we’ll invest in continually improving the work and results we produce on your behalf 

Professionals, your time is not inherently valuable. Clients are not buying your presence; they’re buying your years of experience solving pressing business problems. Now more than ever, clients don’t want to purchase an hour of your time; they want your 28 years of professional experience. 

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Tim Williams leads Ignition Consulting Group, an international consultancy that advises professional service firms in the areas of business strategy and pricing practices. Tim is the author of several books, including "Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success."

Twitter: @TimWilliamsICG