Ron Baker is the author of six books, including Implementing Value Pricing. He's the founder of the VeraSage Institute and a Graduate of Disney Institute. He's on the faculty of the Professional Pricing Society and a host on a talk radio show, The Soul of Enterprise. He's a LinkedIn Influencer blogger and a recovering CPA.
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All Value Is Subjective
- What is the most important thing you can share about pricing?
- Prices are ultimately set by value, not by the competition or supply/demand, but by value.
- Value is subjective. It is a feeling, not a number.
- The technical definition of value is the maximum price a consumer will pay for an item.
- If you willingly pay a certain amount for something, it is worth more than that to you.
- The customer has to make a profit too.
- The value graph:
- Customers don't care about the cost to the business.
- The price set has to be above the cost or the business makes no profit.
- The value has to exceed the price or the customer makes no profit.
- Both the seller and the buy want to maximize value and that's the one area where our interests are aligned.
- Inputs are irrelevant; the results are what matter.
- What was your first exposure to value pricing?
- He left his Big 8 firm and started his own firm with Justin Barnett.
- He learned quickly that his customers were not buying his time.
- Ron switched to value pricing to enhance the customer experience.
- The billable hour is a lousy customer experience.
- Offer the customer a money-back guarantee to assure the customer you aren't gouging them.
- If any customer complains loudly enough, you are going to write it off anyway.
- Of your six books, which is your favorite?
- Ed Kless says Professional's Guide to Value Pricing compared to Ron's most recent book is the Old Testament vs. the New Testament.
- Firm of the Future with Paul Dunn has stood the test of time.
- Measure What Matters to Customers was one of the books that Ron has the most fun writing.
Learning to Discover Value
- How long should the consultant talk during a value conversation?
- The customer should talk 80% of the time; consultant only 20%.
- Usually, the professional ends up talking 60-70% of the time.
- The purpose is to determine the customer's desired need.
- Ask open-ended questions and let the customer talk, while you take notes.
- When someone sees you taking notes, they tend to provide you with more detail.
- Ask open-ended questions such as:
- Why do you get out of bed in the morning?
- What are your biggest challenges?
- How do you feel about that?
- The way you sell is indicative of the way you solve.
- The art of questioning can differentiate you from the competition.
- If your customer won't talk to you to help you understand the value, they are probably not a good fit.
- When you take a step back from a customer, they usually take 3 steps toward you.
- The customer's needs must be met.
- A customer's wants set an anchor price to allow the price of his needs to rise a bit.
- What is your favorite question to ask during a value conversation?
- Ron's favorite opening question is, “We will only undertake this engagement if we can agree, to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”
- Now the conversation can go off on a value quest.
- Every customer wants reassurance that the value they are receiving is greater than the price they are paying.
- The awkward feeling of asking the question comes from not being used to having a value conversation, taking you out of your comfort zone.
- The art comes in as to where and how you work the question in.
- What art means is that it is also a skill – the more you do it, the better you will get at it.
- Ron's question is plagiarized from McKinsey & Company, one of the most successful professional firms ever.
- What is the distinction between pricing the customer vs. the service?
- Since value is subjective, different customers will place different value on the same product.
- Airlines, hotels and rental cars price based on the price sensitivity of the customer.
- Price the customer, not the service.
- Airlines are a great example of pricing the customer.
- The airlines changed their prices based on yield management and did it within 2 years.
- You can't wait on customers to innovate your business model.
- Your business model is how your firm creates its value for the customers and how it captures that value.
- Every business model change comes with a pricing change.
- Never has a customer changed the business model.
All Pricing Is Contextual
- What are some questions to ask internally before setting a price?
- Think about the price sensitivity of the customer.
- What would happen if the customer did nothing?
- How will this project further them, their business goals, their job?
- There are about 20 questions to go through to get to a price, trying to judge and assertain how price sensitive the customer is.
- Ron explained setting three prices for a customer: Reservation, Hope For and Pump Fist
- Reservation Price is the walkaway price, the minimum you will take to accept a customer. (You wouldn't cut this price a nickel for your own mother.) It will turn a normal profit.
- Hope For Price is the “should get” price. It will turn a supernormal profit.
- The Pump Fist Price will throw off a windfall profit. If a company never asks for this price, they'll never get it.
- Consider what value a company has to create to get a Pump Fist Price.
- Profit is an index of your company's altruism – how good you are at serving others.
- The three prices make you look at your customers as a portfolio.
- Why are options so powerful in pricing?
- Empirical evidence shows that customers like having choices.
- In his first book, Ron said that offering options was not the best for the customer.
- But, once he saw the empirical evidence, he changed his mind.
- Two laws of marketing (pricing):
- All value is subjective.
- All prices are contextual.
- By giving the customers options, you get the customer to compare you to you: How should I work with you? vs. Should I work with you?
- Options also take advantage of heuristic or mental shortcut to choose the middle choice.
- What are some of your favorite options to offer?
- The airline has to land safely whether you are a Priceline customer or first-class customer.
- You have to deliver quality no matter what option your customer chooses.
- You can differentiate on service, based on 6-8 Ts. For example:
- Timing.
- Payment terms.
- Technology.
- What is the concept of “concentric circles” by Chris Marston?
- The concept was created to answer, “how do you price a law suit since there are so many unknown unknowns?”
- Chris has a conversation with his customer, drawing a circle with a “YES” in it – this is work that must be done.
- Another circle around it shows the work that is likely to be done.
- A third circle shows the maybe work and the final circle is the “who the hell knows” work.
- He provides options to work on each of the circles.
- By presenting this concept to your customer, you convey that you know what you're talking about as a professional.
- How do you price intangible or spiritual value?
- Value is holistic.
- You can't separate the person sweeping the floor and the person making the food in a 5-star restaurant.
- Split value creation into materialist (can be measured or conjectured) vs. spiritual (can't be measured) value.
- Spiritual value is about 2/3 of your total value, becuase it is impossible to replicate.
- The materialist value can be easily replicated by a competitor.
- What is The Soul of Enterprise radio show?
- Voiceamerica.com has 7 different channels and the show is on the Business channel.
- It runs live on Fridays at 4pm EST.
- Ed & Ron have a conversation about one specific topic per episode.
- Rory Sutherland, the Vice Chairman of Ogilvy & Mather in the UK, has done 2-3 Ted talks, but his Zeitgeist talk for Google is one of the most astounding talks Ron has ever seen. He was on Episode 9.
- What is one of your best stories about creating value for a customer?
- Ed & Ron worked with a law firm and were brought in to help them get rid of their timesheets.
- They created enormous value because the firm was better able to retain and attract talent.
- Plus, they created a legacy for the Managing Partner.
- A good pricer lays in bed and asks how much money they left on the table that day – you'll never get the price right.
- After the first phase of work with a customer where they chose the least expensive option, Ron presented 3 more options to the customer and they chose the highest priced option.
About Ron Baker
- Twitter: @ronaldbaker
- Website: verasage.com and voiceamerica.com
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