You Know Your Costs, But Do You Know Your Value?

LinkedIn Article by Tim Williams 
March 26, 2017

Most professional firms walk into pricing discussions armed with an understanding and defense of their costs (spreadsheets populated with people and estimated hours) but have spent virtually no time or energy comprehending the value they’re about to create for their client. It’s little wonder that the senior executives at most professional firms are easy prey for the tactics of professional buyers in compensation and contract negotiations.

Bring to mind an effective salesperson you dealt with recently — perhaps the person who sold you your last car. He or she likely focused on the unique features of the car, it’s durability, reliability, resale value, and how well it fulfills the mission you’re buying it for in the first place. 

Now imagine this same salesperson instead focused on the costs involved in making the car: the cost of labor and overhead in the factory, and how many hours it took to build. Even the novice salesperson knows better, yet professionals routinely do this very thing when presenting their pricing. They carefully prepare and rehearse a defense of their costs, skipping right past what their clients are buying in the first place: the ability of the firm to apply its expertise to solving business problems.

Estimate Your Value Before Estimating Your Costs

To move from defending your costs to selling your value, the first essential step is to move away from bottom-up costing and instead take the same approach used by your clients when they price their products: top-down pricing.

The difference in these two approaches is enormous. Pricing professionals set the cost question temporarily aside and instead start with the question “What is the value of this product or service to the customer?” By starting with “What is the value”? rather than “What is the cost?” you begin to arm yourself with a deep understanding of the value you’re creating for your client.

Here are five key questions that can help you do this.

Assign a rating from 1 to 10 to each of the following questions. The result will be a “value score” that will help bolster your pricing confidence.

1. STRATEGIC IMPORTANCE

How important is this assignment in context of the client’s overall strategic objectives? 

2. VALUE HORIZON

Does this assignment have the potential to create long-term value for the client, or is it essentially tactical and short term?

3. VALUE CLASSIFICATION

To what degree does this assignment require some form of specialized expertise, such as category expertise or high proficiency in a specialized discipline or service area?

4. UNIQUE QUALIFICATIONS

Is our firm uniquely qualified to perform this work, or could it just as easily be done by someone else? 

5. FINANCIAL IMPACT

If we succeed in achieving the objectives of this assignment, what will be the likely financial impact for the client (either in terms of incremental revenues earned or operating costs reduced)?

The Framing Effect

Next, apply one of the key principles of pricing psychology: the framing effect. How you frame your price is as important as the price itself. This starts with the language we use. Behaviorists teach that before we can change our behavior (how we sell), we must first change our language. Words matter. 

Professional service firms are generally in the bad habit of employing the language of cost instead of the language of value. In client-facing situations, we shouldn’t be using the word “cost” at all. That’s the word professional buyers use, but in our role as professional sellers the word is “price.” 

Also on the list of “bad words” that should never be used in client-facing situations: 

  • Estimates
  • Hours
  • Rates
  • Billable time
  • Labor
  • Time of staff
  • Multiples
  • Utilization
  • Reconciliation
  • Shortfall
  • And many more …

These are all terms relating to costs, and when we use them we’re essentially helping the cause of the buyer, whose job is to bring the discussion down to the lowest common denominator.

The job of the professional seller is to leverage the lexicon of value: price (not cost or estimate), talent (not time or hours), solutions (not services), plus language like objectives, outcomes, results, success, and accountability. 

Arm Yourself With the Right Ammunition

When you walk into a compensation discussion armed only with the information on a spreadsheet, you’re walking into an unfair fight. 

Professional buyers are locked and loaded with tried-and-true techniques designed to keep the dialogue focused on the expense of doing business with your firm. 

Your most effective response is not to “respond” at all, but rather to proactively frame, present, and sell your value. Keep the discussion focused on what your client is really buying: your solutions to their business problems. 

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