Recently I’ve been hearing a lot, that in professional and consulting firms, that they’ve moved away from the billable hour as a mechanism of pricing, towards a model of fixed pricing, where they are providing prices to their customers up front that are fixed for a particular set or scope.
This is, therefore, seen as the solution to all, a panacea of everything. There is no doubt that fixed pricing is better than the billable hour. However, fixed pricing is not value pricing.
Value pricing is where you price the customer. It is where you’ve had a conversation about the value, designed the scope of the project based upon that value conversation, and set the price in accordance. Obviously, in value pricing, we also recommend the use of options or tiered pricing. However, this is to be distinguished from fixed pricing.
Value pricing is a fixed price, but a fixed price is not a value price.
Value pricing is a methodology. Fixed pricing is a formula.
Often the formula in professional and consulting firms has been based on the ubiquitous time sheet. In essence, a fixed price becomes the billable hour dressed up in some guise. Even if the formula is not based upon time, (though it usually is though) then it is still not true value pricing.
There is no doubt you can build a successful business based on fixed pricing, and a lot of software and services, and other businesses are based on fixed prices. Accordingly, there is no doubt that a successful model is possible.
However, the key point to remember, is that professional and consulting firms have an intimate relationship with a customer, and thus they have the ability to provide a value-based price. Instead, many of the firms are choosing to leave money on the table and choose the a fixed pricing approach, which, obviously, has to be designed with the lowest common denominator in mind.
Accordingly, for firms that are delivering value and are truly having an impact on their customer, the methodology of a value conversation and reaching a value-based price are going to generate much higher profitability, and importantly, a better relationship with your customer.
If a fixed price is based upon time, then nothing has changed in the business. All that we have done, is provided some degree of certainty to the customer, and that is obviously of value. However, we have not addressed the root cause of the issue, and that is being truly focused on delivering value.
Often the excuse given for adopting a fixed pricing model in professional and consulting firms is that you can not scale value pricing. Other than the small issue that there are businesses that are global turning over hundreds of millions which have adopted value pricing. Yes it is necessary to create systems and processes around the role of pricing but it is just a cop out to state that value pricing does not scale.
Professional and consulting firms are in the transformation business, and thus, we should be focused on value pricing as we guide a customer through a transformation.
No matter the formula for the fixed pricing, it will not have the impact, it will not realize the profit, it will not realize the prices that you can command, until you harness the methodology of value pricing.