Guerrilla Intelligence ValueBased Pricing

Value pricing can be hard for clients to grasp because it's unlike other pricing methods they use in business or their personal lives. If value-based pricing was applied to health care, a doctor treating a patient for a broken leg would be paid more if the patient fully recovered, and less if the patient ended up with a slight limp. To complicate matters, before treatment, the doctor and patient would have to agree on a payment scale linked to how well the patient ended up being able to walk.

Use this approach only when you're certain that you can successfully complete the project and that it will provide profits greater than other pricing methods. To protect against undue financial risks, only agree to value-based fees for existing clients with whom you have a strong track record and relationship. You must know the organization and culture, including where the bones are buried, and that you can operate effectively in the client's environment. Unless you are confident about these factors, building in the necessary definitions, measures, and controls can become complicated.

Most consulting project teams are a combination of consultants and the clients' personnel, and the teams that actually perform the work drive project outcomes. So, insist on control over the team, its composition, member selection, and their assignments. Teams must have the skills to get the job done. If a client decides to change one or two team members, it can spell trouble.

Eliminate some financial risk by asking for a good-faith payment at the beginning of the project and by setting checkpoints to measure progress against goals. You should also request interim payments. Don't wait for a big bang finish at the end of the project to collect your fee.

Include a rip-cord provision in the project agreement. If conditions emerge—such as executive turnover, client team changes, or unforeseen external circumstances—agree on terms for ending the project and on the amount the client will pay you.

Two types of retainers exist: prepaid service and unlimited access agreements. Prepaid service agreements are standard in the legal profession. For a set amount paid in advance, a lawyer's clients are entitled to a specified number of hours of legal advice. Most of these retainers are simply prepaid, hourly rate arrangements. As soon as the client has exhausted the allotted number of hours, the retainer must be renewed.

An unlimited access agreement, which is more common in consulting, gives a client access to a consultant for a fixed period for a fixed fee. Such retainers assure clients that they will have access to their consultants of choice for advice, coaching, and counseling for a fixed monthly or annual fee. Generally, retainers are used for advisory services instead of for completing specific projects.

The value of a retainer to the client is in being able to access the consultant's knowledge and experience, not the consultant's ability to complete projects. A retainer agreement usually limits the number of people in the client's organization who can use the consultant's services. Often, only one client representative has a retainer agreement with the consultant.

Retainers are advantageous to consultants because they provide a known flow of income for a specific period. Top consultants usually have several retainer relationships in their practices.

How to Use Retainers

Retainer agreements work best with trusted clients who need advice on high-priority topics. Try to limit the term of the agreement to 60 to 90 days and include frequent checkpoints to measure success. The retainer agreement should identify who in the client organization has access to the consultant and for what purposes. It should also include a provision to create renewal periods and provide separation between advisory work and project work. If the retained consultant is asked to complete a project, the fee for that work is not deducted from the retainer, but is submitted in a separate proposal.

► Equity-Based Pricing

In some circumstances, consultants elect to be paid for their service in the form of stock ownership or options for stock in the client's company instead of cash payment. Some clients, mainly start-ups, may prefer equity payments because they want to preserve their cash. Although consultants can do well if the equity they receive appreciates, the risk of business failure is so high that most consultants prefer to receive some cash along with equity.

How to Use Equity Pricing

Ask for payment in both cash and equity and charge a premium for your services to cover the downside risk. Proceed cautiously with equity pricing, particularly with start-ups. One firm substituted fees for equity in an established Russian truck manufacturer. The potential payout for the consultant was several times the value of hourly rates. But the company went belly-up after several months and the client had no way to pay the consultant except with partially completed truck engines.

Examine the company as if you were a potential investor: Analyze the company's business plan, financial situation, and management before you agree to equity-based pricing.

► Composite Pricing

Pricing services is a creative endeavor that works best as a joint effort with your clients. Any of the preceding pricing approaches can be used alone or in combination with one or more of the others. Frequently, a creative combination can be the turning point that helps you win a project.

Composite arrangements can take as many forms as you can imagine. Perhaps you would charge a fixed fee for the first phase of a project with a performance-based bonus if your work exceeded expectations. Building on that success, you might propose value-based pricing for the second phase. For the right client, you could combine fee-for-service fees with an equity arrangement. Some consultants barter their services for clients' products; others help their clients build their businesses by promoting the clients' products. The possibilities for composite pricing strategies are endless. The only real constraint is the creativity of consultants and clients in devising pricing schemes that meet the needs of all concerned.

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