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Amongst all the debate about adviser remuneration there is little being said about value-based pricing and yet it is a concept which is most likely to match the clients perception of value with the professional’s desire to avoid conflicted models or time-based billing.
It is simply setting a price based upon how much actual value you create for a client rather than time involved in creating that value or the cost of a product solution.
Perhaps the reason why it is perceived as being particularly difficult is because there is a reasonable degree of skill involved in establishing what value means to the client to begin with. So it is “hard to do“, whereas quoting a cost per hour is “easy to do“.
However, generally speaking that which is hard to do attracts greater value from the market than that which is easy to do……see where I’m going with this?
Value-based pricing is an excellent method of extracting proper “market value” while introducing genuine leverage into a professionals practice, and the direct link between the tangible benefits created for a client and the cost of the service is as close as you can get to eliminating conflicted advice.
Let’s be honest about this: why would or should a client care that it takes a professional 2 hours to do a job which is worth $100,000 to the client? The client cares about the $100,000 it is worth to them, not how many hours you took to provide a recommendation that secured that $100,000 of value for them.
Why would a professional charge (say) $300/hour and bill the client $600 in total for this piece of work that is worth $100,000 to the client if the client was prepared to happily pay (say) $5,000?
Frankly; who cares what the hourly rate works out to be if the clients net worth increased by $100,000 because of the expertise of their professional adviser?
The question for most professionals at this point is
How do we get the client to pay a value-based fee?
There are 2 critical steps, each requiring “facilitation and coaching” skills in order to get to a value-based fee agreement with a client.
- Clearly establish what the issue is which requires professional intervention, and obtain agreement on what “success” looks like.
- Determine what value is being delivered in order to deliver a “successful” outcome.
The first step is well within the skillset of every professional and presents no significant challenge. The second is somewhat tougher. While it is about ultimately determining the value, or worth, to the client it must be remembered that value consists of a number of facets which extend beyond just a financial measure.
Convenience and speed may well have a value to the client. Discretion and confidentiality often do as well. The ability to get other associated parties onboard with a concept or agreement can be immensely valuable. It is the combination of value elements such as these which determine the actual worth to the client; value is not one dimensional.
In order to grasp what that true worth is to the client from successfully managing an engagement there has to be a discussion which is centred upon client expectations and potential engagement limitations (or barriers). Only when they are clearly understood by both the professional and the client can there be an agreement about what constitutes fair value pricing.
The framework for the scoping to determine the worth of the engagement to the client should consist of the following:
- Their perception of your skill or expertise which is going to assist them
- The relative importance of the issue in the clients overall personal or business plan
- Specific financial outcomes which are being sought
- The priority or speed which is expected by the client in handling the issue
- The degree of personalisation or bespoke work which is likely to be required to achieve the desired objective
- Clarifying the consequences of inaction or the wrong action – understanding what the downside is and what further implications that has
- The level of interaction or communication the client and/or their other advisers expect during the engagement
- The proposed budget that the client has established already for this issue
With clear understanding and mutual expectations about the scope of the work and its magnitude, together with mutual understanding of its value to the client, pricing the engagement as a proportion of its worth becomes a reasonable proposition.
Getting a client to feel that value-based pricing is reasonable and pragmatic largely comes down to managing their expectations whilst fully scoping the engagement beforehand. There is a tendency in professional services for those working on time-based fees to only partially scope an engagement, which not surprisingly then presents the opportunity for further billings as the project goes on and on. Just as unsurprisingly, there is a tendency for clients to get peeved with projects where invoices mount and there is no apparent resolution in sight.
Resolving that to everyone’s satisfaction requires that the professional facilitates a discussion that identifies precisely what the expectations are; what is at stake; and what value the professional can and will deliver to achieve the desired outcome.
When that is achieved then value-based pricing becomes a genuine option.