Praise for IMPLEMENTING VALUE PRICING
A Radical Business Model for Professional Firms
"Ron Baker is the most prolific and best writer when it comes to pricing services. This is a must-read for executives and partners in small to large firms. Ron provides the basics, the advanced ideas, the workbooks, the case studieseverything. This is a must-have and a terrific book."
Reed K. Holden founder and CEO, Holden Advisors, Corp. This is the End of Time! Brilliant. Ron Baker's most recent offering is ambitious in scope, exploring topics that include economic theory, customer orientation, value identification, service positioning, and pricing strategy. He weaves all of them together seamlessly, and includes numerous examples to illustrate his primary points. I have applied the knowledge I've gained from his body of work, and the benefits to meand to my customershave been immediate, significant, and ongoing. He is on a radical crusade to align the interests of service providers with those of their customers by having lawyers, accountants, and consultants charge based on the value they provide, rather than the effort it takes. Implementing Value Pricing is a manifesto that establishes a clear case for the revolution. It provides detailed guidance that includes not only strategies and tactics, but key predictive indicators for success. It is richly illustrated by the successes of firms that have embraced value-based pricing to make their services not only more cost-effective for their customers, but more profitable as well. The hallmark of a manifesto is an unyielding sense of purpose and a call to action. Let the revolution begin."
Robert G. Cross, Chairman and CEO, Revenue Analytics, Inc. Author, Revenue Management: Hard-Core Tactics for Market Domination
Table of Contents
Foreword xvii
Preface xxi
About This Book xxiii
About the Web Site xxiv
About the Words Used in This Book xxv
Acknowledgments xxvii
About the Author xxxi
PART I A RADICAL BUSINESS MODEL
CHAPTER 1 The Firm of the Past 3
CHAPTER 2 The Firm of the Future 7
The Business Model of the Firm of the Future 8
Revenue Is Vanity - Profit Is Sanity 8
Businesses Have Prices, Not Hourly Rates 8
Why Intellectual Capital Is the Chief Source of Wealth 9
Negative Intellectual Capital 11
Why Effectiveness Trumps Efficiency 11
What, Exactly, Is Productivity? 12
There’s No Such Thing as Generic “Efficiency” 13
Where Do Profi ts Come From? 15
If Only I Knew Then What I Know Now 17
Summary and Conclusions 18
PART II FOUNDATIONS OF CREATING VALUE
CHAPTER 3 Why Are We in Business? 21
The Economist’s Definition of Profit 21
The Marketing Concept and Total Quality Service 23
Summary and Conclusions 24
CHAPTER 4 A Tale of Two Theories 25
The Labor Theory of Value 26
Karl Marx, False Prophet 26
The Marginalist Revolution of 1871 28
Why Are Diamonds More Expensive Than Water? 29
Wrong Theory, Suboptimal Results 30
CHAPTER 5 Four Ps and Five Cs 31
The Five Cs of Value 34
You Are What You Charge 36
CHAPTER 6 What People Buy 37
The Dynamics of Customer Expectations 38
CHAPTER 7 How People Buy 41
Relative, Not Absolute, Price Matters 42
Price Psychology 43
Search, Experience, and Credence Attributes 44
Understanding Customer Risk 45
The Four Ways to Spend Money 47
CHAPTER 8 Your Firm’s Value Proposition 49
Moments of Truth 51
What Is Beyond Total Quality Service? 52
CHAPTER 9 The Consumer Surplus and Price Discrimination 55
Price Elasticity 56
Consumer Surplus 57
Price Discrimination 58
Requirements to Price Discriminate 59
CHAPTER 10 Macro Pricing Strategies 65
Skim Pricing 66
Penetration Pricing 66
Neutral Pricing 67
Two More Curves for Value 67
Implications of the Curve 71
CHAPTER 11 Price the Customer, Not the Service 73
Ten Factors of Price Sensitivity 73
CHAPTER 12 There Is No Such Thing as a Commodity 77
The Perils of Benchmarking 80
Purging the Commodity Word 80
CHAPTER 13 Baker’s Law: Bad Customers Drive Out Good Customers 83
Customer Grading Criteria 83
The Adaptive Capacity Model 87
Firing Customers 89
The Forced Churn 90
CHAPTER 14 Value Pricing and Self-Esteem 95
There Is No Standard Price for Intellectual Capital 98
CHAPTER 15 Ethics, Fairness, and Value Pricing 101
The Morality of Price Discrimination 106
Prospect Theory 108
Is Hourly Billing Ethical? 109
PART III THE GENESIS AND CONSEQUENCES OF HOURLY BILLING AND TIMESHEETS
CHAPTER 16 A Brief History of Hourly Billing and Timesheets 113
The Father of the Billable Hour and Timesheet - in the Legal Profession 115
Summary and Conclusions 117
CHAPTER 17 The Deleterious Effects of Hourly Billing 119
The Advantages of Hourly Billing 119
What about the Customer? 123
The Disadvantages of Hourly Billing 124
Summary and Conclusions 138
PART IV WHAT REPLACES HOURLY BILLING AND TIMESHEETS
CHAPTER 18 Why Carthage Must Be Destroyed 143
What, Exactly, Replaces Hourly Billing and Timesheets? 147
CHAPTER 19 Price-Led Costing Replaces Hourly Billing 149
Wisdom Is Timeless 151
Summary and Conclusions 153
CHAPTER 20 The Wrong Mistakes 155
The Almighty Hourly Rate 156
Making the Wrong Mistakes 157
CHAPTER 21 Who Is in Charge of Value? 163
The World’s First CVO 164
Leadership 167
Attitude 168
Commitment 168
Experimentation 169
Youth 170
Not Final Thoughts 170
CHAPTER 22 Measure What Matters to Customers 173
The McKinsey Maxim 174
Developing a Theory 175
Pantometry versus Theory 176
A Gedanken 177
CHAPTER 23 Firm-wide Key Predictive Indicators 181
KPIs for a Professional Knowledge Firm 181
KPIs Equal Customer Accountability 188
CHAPTER 24 Knowledge Worker Key Predictive Indicators 191
A Model for Knowledge Worker Effectiveness 192
Key Predictive Indicators for Knowledge Workers 196
CHAPTER 25 After Actions Reviews 205
We Know More Than We Can Tell 206
The Economics of Structural Capital 207
Knowledge Lessons from the U.S. Army 210
Summary and Conclusions 214
CHAPTER 26 O’Byrne & Kennedy: A Firm of the Future 215
PART V EIGHT STEPS TO IMPLEMENTING VALUE PRICING
CHAPTER 27 The Eight Steps at a Glance 231
Three Different Kinds of Problems 232
Eight Steps to Implementing Value Pricing 233
CHAPTER 28 Step One: Conversation 235
The Conversation 236
Naïve Listening 236
Focus on Wants, Not Needs 238
Starting the Conversation 238
Conversations Lower Asymmetrical Information and Adverse Selection 240
Questions You Should Ask the Customer 241
Ordinal Value, Not Cardinal Value 243
Discussing Risk with the Customer 243
Summary and Conclusions 244
CHAPTER 29 Step Two: Pricing the Customer: Questions for the Value Council 245
Questions to Ask before Establishing a Price 246
Factors of Price Sensitivity 250
Pricing Questions 251
CHAPTER 30 Step Three: Developing and Pricing Options 257
The Psychology of Price 258
Seven Generic Customer Segmentation Strategies 259
Pricing Options 263
Pricing Complex Projects 264
FORD - A Model for Consulting 273
Dipping Your Toe in the Water 275
Formula for Calculating Reservation Price 276
Summary and Conclusions 278
CHAPTER 31 Step Four: Presenting Options to the Customer 281
Handling Price Objections 282
Summation: Presenting Your Price to the Customer 287
CHAPTER 32 Step Five: Customer Selection Codified into the Fixed Price Agreement 289
Date of the FPA 289
Professional Services 291
Unanticipated Services 295
Service and Price Guarantee 295
Payment Terms 296
Revisions to the FPA 296
Termination Clause 297
Other Issues Regarding the FPA 297
CHAPTER 33 Step Six: Proper Project Management 299
CHAPTER 34 Step Seven: Scope Creep and Change Orders 311
CHAPTER 35 Step Eight: Pricing After Action Reviews 317
PART VI INFLECTION POINT
CHAPTER 36 No One Can Forbid Us the Future 321
Business Model Innovation 322
The Diffusion of Theories 325
Firm of the Future or Firm of the Past? 328
CHAPTER 37 Declaration of Independence 331
Bibliography 337
Index 351
