Value-based pricing is defined by wikipedia as pricing set “primarily, but not exclusively according to the perceived or estimated value of a product or service”. What this means to potential clients is that you’ll be paying a fixed price to buy that product or service instead of paying your consultant an hourly rate. Much of what is written about value-based pricing focuses on why it makes sense for the consultant, but I’m going to share a few reasons with you on why it makes even more sense for the customer. As a customer, if you’re hiring a consultant you should only hire one that offers value-based pricing.
Plan More Effectively
There’s only a few high level topics discussed when we talk about getting work done. If you’re hiring a consultant that list is typically – what are you going to do for us, how long is it going to take, and what is it going to cost. Well if you are planning to hire that consultant on a Time & Materials (T&M) basis the answer to ‘how long is it going to take’ may vary wildly and be difficult to predict at all. I can tell you that from my experience as a consultant, when a customer wishes to purse a T&M engagement it often leads to several things ultimately happening. The biggest impact on time to completion is scope (what needs to be done). With a T&M engagement scope can be never-ending. The deliverables are frequently changing and each time a deliverable changes, your deadline gets pushed. You can easily get stuck in a loop of never-ending scope changes and a deadline that never comes.
With a value-based engagement several very different things happen. Scope is tight and limited. The customer and consultant are on the same page with what needs to be done. This means the consultant can give hard deadlines for when such an assignment will be finished. The beauty here is that the consultant is motivated to prioritize your assignment. Compared with a T&M approach, you can expect your assignment to have a much greater probability of completion by the agreed upon date. Even if more time is needed it won’t cost you more money because everyone agreed to and signed on the dotted line in the beginning. With a value-based pricing approach to hiring your consultant you can plan much more effectively.
Actually Stay On Budget
To many customers a low hourly rate sound much more affordable than agreeing to spend potentially thousands of dollars buying an entire project, but it’s not. Allow me to explain. For reasons I mentioned above, a T&M engagement is often leads to frequent scope changes and each time the scope changes so does the price. When you think about these changes in small increments – one hour here, two hours there – it doesn’t seem like much, but it adds up rather quickly. By the end of your engagement you’ll end up spending much more than you budgeted for and would have spent if you instead opted for a value-based pricing approach.
Happy Consultant, Happy Customer
Many popular consultants are incorporating value-based pricing options into their lists of services. There are many reasons for that, but ultimately these reasons are mutually beneficial for the customer. For example, you may get what you think is a great hourly rate from your consultant, but that often means your consultant needs to make the difference up elsewhere. This means they have to take on more work than they were expecting which lowers the priority of your project. This ultimately works against your objectives.
You are hiring a specific consultant to deliver their best work and a value-based pricing model is also more valuable for them. With an appropriate budget and a long-term approach to success (non-hourly rate) your consultant will be free to innovate to the best of their abilities on your project. A value-based pricing approach is less worrisome for both parties and as such encourages a healthier relationship. The better the environment for your consultant the better results for you the customer.
There are many reasons why a value-based pricing approach to hiring a consultant makes more sense. Always keep a high-level view of your project in focus. The end goal is success and every customer wants to increase the probability as much as they can. Pursuing a value-based pricing approach to hiring consultants is a great way to increase your odds of success.
If you’d like to learn more about product management or talk more about the services I offer as a product management consultant please feel free to reach out to me at sean@nxtstep.io. Keep disrupting.
