Word of the Year: Pricing

Word of the Year: Pricing

It’s simple. Companies are in business to make money. They do this by:

  1. providing a service;
  2. producing a product.

Many companies struggle with how to correctly price their products and services. They want customers knocking on their door but don’t want to leave money on the table by offering cut-rate prices, too many discounts, or lost opportunities that negatively impact their profit margins.

It would be insulting to recommend to our clients that they implement a blanket fee increase or simply “charge more for products.” Instead, Lucrum Consulting focuses on helping clients identify the value they deliver and recommending price adjustments based on that value.

The following are two real-life examples of how to maximize revenue. One example is how Lucrum helped a client turn a free estimate into a revenue generating service to boost profitability. The second example is something Lucrum’s own founder, Jeff Heybruck, realized soon after starting to offer fixed fee CFO level services.

Let’s face it, pricing is about adding value

First things first: never underestimate the value of a service rendered. Don’t believe this statement? Read the story about the ship owner who learned this lesson the hard way.

The point is, value-based pricing is an effective practice. And one of its off-shoots – value-added pricing – is a thriving revenue generator that is gathering momentum in the marketplace.

One company that has successfully implemented this concept into its business model is Pavement Exchange Group (PEG), a general contracting company based in Charlotte, N.C. that specializes in pavement maintenance and related services throughout the United States. Until a few years ago, PEG was investing a lot of unrecoverable expenses in staff travel to prepare bids and develop a scope of work for their customers. This emerged as a significant concern for Henry Miller, the company’s founder and managing partner.

“During my conversations with the Lucrum team, it became clear that we were spending a disproportionate amount on bidding jobs we may or may not get,” said Miller. “Lucrum’s recurring recommendation was to find a way to make our proposals a value-adding document that the customer would want to pay for.”

From there, Miller and his team developed a tool they refer to as the Pavement Condition Index (PCI) – a proprietary report that uses a numerical index between 0 and 100 to indicate the general condition of a client’s pavement.

After implementing this process, PEG clients have been amazed with the report’s level of detail.  It includes a color-coded site plan showing pavement condition, a timeline for replacing deteriorating areas and recommendations on how to manage their hard surface areas for the next 5-10 years, etc.

Miller has found clients are more willing to pay for the report AND any add-ons outlined within the document. Another benefit is since PEG is charging for it; they are providing an objective consulting service. There is no inherent conflict since the customer owns the report and it’s up to them on how to use the recommendations made by PEG in the PCI report. This means the customer can rest easy knowing their pavement surfaces are in good condition, locate their own subcontractors to make repairs if the surfaces are in need of repair, or they can hire PEG to create a plan and implement the recommendations contained in the PCI.

“Our PCI report has been a game-changer,” explains Miller. “It basically tells our clients how they can add longevity to their paved surfaces or budget for repairs over time. This is something every business owner values and will pay more to achieve. As a result, we’ve been able to generate more revenue while providing better quality and improved customer service.”

Time really is money

Many of the tasks provided by consultants to their clients are fixed – they don’t vary greatly regardless of the level of service requested by the client. For example, a managed service IT provider has to load software updates and perform computer maintenance each week or month.  However, as any business owner knows, while the services may not change from the month to month, the time it takes to accomplish each task can.

One solution Lucrum recommends to clients is to separate the core services from those that vary based on service level or time availability. Using the IT company example, while updates and maintenance are fairly consistent, the service level for troubleshooting problems  and phone support may result in a different price point.

The same is true in Lucrum’s business; preparing a monthly financial package and handling insurance audits takes about the same amount of time regardless of client size. Let’s assume that preparing a financial package for a client takes a half-day. Accordingly, that one task consumes a disproportionate amount of time in a one-day client vs. a two-day per month client.  Taking such a large amount of time out of the total available to that client means Lucrum may have to perform some other essential services outside of the regularly scheduled visit in order to maintain quality standards and client service.

For these reasons, many IT companies and Lucrum Consulting have effectively implemented a declining rate per hour for fixed fee services. Meaning as the client selects higher service levels, the investment does not rise at the same rate. For example, a client opting to increase from 1 day to 2 days per month may only spend  50 percent more money, but get 100 percent more time.

Consulting firms such as bookkeepers, IT providers, and HR consultants are increasingly moving to a sliding scale billing model for this very reason. The likelihood of exceeding the scope of work to maintain quality and standards is higher at lower tier service levels so the smart business owner prices that in. On the other hand, customers appreciate the fact they can get almost double the time for a relatively small additional investment.

In the end, clients receive quality service, while the business owner has generated additional income for engagements that probably required additional work beyond the agreed-upon time commitment. Brilliant, right?

Need assistance with setting your company’s prices or determining the value of your business’ services to increase sales this year? Let Lucrum Consulting help. We can show you the benefits of value-based pricing and how it can move your business forward in 2018.

 

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