Ori Wiener, author of High Impact Fee Negotiation and Management for Professionals, asks the question many of us want answering, how much are we worth?
Price is what you pay, value is what you get.(Or so said, Warren Buffet, who was himself quoting Benjamin Graham in the Berkshire aHthaway 2008 annual report)
As the quote above demonstrates, irrespective of what might be determined as the value of an assignment, professionals and clients need to agree a price for the service. Given the difficulties in determining value it is not surprising that many professionals and clients skip the value challenge and go straight to price. One contributing factor is the tendency for clients to ignore value as soon as they are able to identify a PSF’s rate structure, eg billable time units such as hourly or daily rates (Weiss, 2008a). This backdrop and the wide usage of such rate structures add to a professional’s challenges to focus fee discussions on value.
Practitioners tend to adopt one of four methods for determining the price for an assignment:
- Simple value-based
- Input or cost-based
Many PSFs will apply different rates according to the level of skills of the professionals involved, particularly if leverage, ie the application of junior or support resources, is possible.
There are a number of issues associated with this approach, which are extensively covered in the literature. The biggest problems with a cost-based approach to pricing are that it:
- provides relatively little incentive for efficiency;
- does not on its own pay attention to the benefits accruing to the client; and
- tends to limit the earnings capacity of the professional or firm to the total amount of resources available, typically time.
Under such a system the firms with the greater negotiation power and skills are likely to capture the lion’s share of economic value. The issue here is that too many professionals take the price (assuming they can establish one) as a given rather than questioning how they could differentiate. This would require enquiring further into what clients would pay more for and why. Likewise the market price may not be acceptable to a specific client.
- Last year plus
Another perspective to be considered is the overall relationship. Some pricing structures such as volume discounts or success/abort fees only make sense if there is a minimum number of projects in a given time frame. This allows risks to be spread out over the total number of projects, rather than be concentrated only on one. A success/abort fee may be too risky if applied only to one instruction (especially if it is material in size). On the other hand, assuming a reasonable spread of wins and losses, the risk of only applying the ‘abort’ part of such a fee arrangement is dramatically reduced when several projects are considered.
My view is that none of the above methods is sufficient on its own. Rather, my preferred approach would be to view pricing from a number of perspectives. I would, however, try to put as much effort as possible into the value perspective as this is, to my mind, the only way to generate premium value and to differentiate from competitors.
This extract from High Impact Fee Negotiation and Management for Professionals by Ori Wiener is ©2017 and reproduced with permission from Kogan Page Ltd.
High Impact Fee Negotiation and Management for Professionals by Ori Wiener offers the most comprehensive and practical guide available to help all professional services fee-earners ensure that they get paid exactly what they're worth.
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