How to Start Value Pricing
Source: Journal of Accountancy
In this article Ronald Baker (www.verasage.com) says: "Today, thousands of firms price their services according to the external value created--as perceived and determined by the client--rather than internal costs incurred in generating those services."
Firms should establish a pricing council and appoint a chief value officer (CVO).
Here are excerpts from the first four of his eight steps required for pricing on purpose:
STEP 1
Through a series of questions (click here for questions--Exhibit 2) you
can comprehend and communicate the value you can add, establishing the scope of
value and then the scope of the work to be performed.
STEP 2
The information from Step 1 is presented to the pricing council, where three
options, at three levels of service, are established. For example, American
Express' Green, Gold and Platinum cards vary in price based upon the value and
services they deliver. Firms should offer clients options, not a
take-it-or-leave-it single price.
STEP 3
The pricing council then goes through the 20 questions to ask before
establishing a price (click here for questions--Exhibit 3). Based upon
the answers, the council then conjectures three internal prices for each level
of service, based upon its assessment of the client's subjective value and price
sensitivity.
- Reservation price. Below this price, the firm would turn down the work. It must get this price. It will generate a normal profit.
- Hope for price. A firm should get this price more often than not.
- Pump fist price. This is an aspiration price, when the firm is adding extraordinary value.
Many firms use the following nine-box model:
| Reservation | Hope For | Pump Fist | |
| Platinum | $C | $B | $A |
| Gold | $N | $M | $L |
| Green | $Z | $Y | $X |
From this brainstorming session, the pricing council then determines at which price the three options will be presented. (Obviously, not all nine prices are presented to the client.) The upper bound of these prices should be based upon the value being created, yet all will be lower than that value to ensure the client earns more value than the price paid.
STEP 4
Present the options to the client. A member of the pricing council should attend
this presentation.
For the complete article, click here and read "Pricing on Purpose: How to Implement Value Pricing in Your Firm."
From Journal of Accountancy, American Institute of Certified Public Accountants, http://www.journalofaccountancy.com/Issues/2009/Jun/.
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