Originally published by Tim Williams on LinkedIn: You Know Your Costs, But Do You Know Your Value?
Most professional firms walk into pricing discussions armed with an understanding and defense of their costs (spreadsheets populated with people and estimated hours), but have spent virtually no time or energy comprehending the value they’re about to create for their client. It’s little wonder that the senior execs at advertising agencies and other professional firms are easy prey for the tactics of professional buyers in compensation and contract negotiations
Bring to mind an effective salesperson you dealt with recently — perhaps the person who sold you your last car. He or she likely focused on the unique features of the car, it’s durability, reliability, resale value, and how well it fulfills the mission you’re buying it for in the first place.
Now imagine this same sales person instead focused on the costs involved in making the car: the cost of labor and overhead in the factory, and how many hours it took to build. Even the novice sales person knows better, yet senior executives in professional firms do essentially the same thing when presenting their pricing. They carefully prepare and rehearse a defense of their costs, skipping right past what their clients are buying in the first place: the ability of the firm to apply its expertise in solving business problems.
Estimate Your Value Before Estimating Your Costs
To move from defending your costs to selling your value, the first essential step is to move away from bottom-up costing and instead take the same approach used by your clients when they price their products: top-down pricing.
The difference in these two approaches is enormous. Pricing professionals set the cost question temporarily aside and instead start with the question “What is the value of this product or service to the customer?” By starting with “What is the value”? rather than “What is the cost?” you begin to arm yourself with a deep understanding of the value you’re creating for your client.
Here are five key questions that can help you do this:
1. STRATEGIC IMPORTANCE
How important is this assignment in context of the client’s overall strategic objectives?
2. VALUE HORIZON
Does this assignment have the potential to create long-term value for the client, or is it essentially tactical and short term?
3. VALUE CLASSIFICATION
To what degree does this assignment require some form of specialized expertise, such as category expertise or high proficiency in a specialized discipline or service area?
4. UNIQUE QUALIFICATIONS
Is our firm uniquely qualified to perform this work, or could it just as easily be done by someone else?