Monday, March 31, 2014

Pricing to Maximize Profits

An excerpt from The Value Pricing Imperative for Design Firms

The best way to fight commoditization?  Sit down, look your client right in the eye and say: “Of course we cost more.”  Consider the fees that your firm has paid out to other professionals in the last six months. How much does your accountant charge per hour? Your outside counsel?

Maybe you contracted for some training on your building information management system. The trainer may cost you $200 per hour, plus another $50 per attendee per diem; for five trainees and eight hours, that’s $1,800 for
one day—minimum. That trainer likely charges for travel as well, and maybe ancillaries like a print manual.

Architects and engineers are willing to pay good money for professional services. Why, then, is it so difficult for them to charge more for their licensed, professional services?

Design professionals must close the gap between their fees and those of other professionals. Fees must adequately cover training, professional development, ample profit, and future liability. The productivity improvements from BIM, 3D CAD or 4D CAD have tended to benefit the client, with lower price and speedier delivery, more than they have benefited design firms. In order to stay competitive in today’s marketplace, design professionals must price
their design services according to value, not cost.

There are several ways to change the way you’ve traditionally approached pricing, including:

·         Cost pricing;
·         Parity pricing;
·         Sociopolitical pricing;
·         Strategic pricing;
·         Negotiated; and finally,
·         Value pricing

In value pricing, price is determined partly by the value the client perceives in the service to be delivered, and partly by your cost and profit considerations.

Ramsey Fayad described true value pricing this way:
The concept of value pricing is relatively simple. Value resides in the eye
of the beholder and when, in the eyes of the beholder, it is delivered, a
premium may be charged. In essence, value pricing demands only a better
understanding of client needs, constraints, and competitive threats.

Why then is value pricing not broadly accepted and practiced? Because it demands shifts in attitudes, perspectives, and effort, all of which challenge the natural inertia of wanting to continue doing what has always been done.

In the professional design arena, it is typically perceived to be safer to follow clearly defined existing procedures than to adopt new and untried ones for fear of offending clients.

Any proposal that makes the project easier, safer, faster, or cheaper to achieve client objectives should include a value premium. From the client’s point of view, the extent of the value premium in question will depend on:

• The clarity with which the design professional defines his or her proposed contribution.
• The extent to which the proposal appears to reflect an understanding of current client needs.
• The extent to which the proposal convincingly contributes to the nominated objectives in the judgment of the client.
• The relative importance to the client of the nominated objective(s).
Don’t fall into the commodity trap—value price your way out of it.

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