After discussing the limitations of hourly rates in a Facebook group, Matthew Habuda decided to give value pricing a chance. He started with a small project and progressed to a Fortune 500 opportunity. Along the way, he had to convince the customer and subcontractors it was the right decision. He shares his results and why he will never bill by the hour again.
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Top of Show Resources
- Without the Conversation, There is No Value Pricing, by Ed Kless
- Kansas Supreme Court Says It’s Unethical Not to Track Your Time
The Switch to Value Pricing
- What is the most important thing you can share about pricing?
- Embrace what you are worth.
- Give yourself credit for what you bring to the table; do not devalue it.
- Most people tend to price themselves below market value.
- You are more likely to be accepted and engaged by your clientele if you put the real value on the table.
- What is the story of your switch to value pricing?
- He came from traditional consulting firms where everything was done by the hour.
- He adopted it because he saw it as the industry standard.
- His potential customers always led with, “What is your hourly rate?”
- He hit the top end of the hours he had available to trade.
- He was getting faster and his product was getting cheaper every day.
- The projects were getting bigger and that raised the question.
- The size of a new initiative was completely out of his pricing model.
- He could not do all the work alone and the client did not want to accept the hourly rate for the subcontractors because they were not as experienced.
- A bundle of services was required to offer the real value.
- It is more challenging to use an hourly model with a virtual business than an onsite model.
- Did the customer embrace or resist the switch to value pricing?
- Initially, the customer was hesitant because of hidden costs.
- The conversation naturally moved from people to deliverables.
- The customer was glad he didn't have to track hours. It saved the accounting team a lot effort to review the invoices.
- His invoice was reduced to 6 line items with a fixed fee.
- The support work was simplified for both.
- A results-based compensation model was added to the deal based on reaching a specific due date.
- Value pricing incentivizes finding wins for the customer.
- The ongoing relationship is one of the biggest benefits.
- The customer understood he wants to take care of their needs and his team.
- It has led to a lot of referrals.
- His take home was about 7% higher than it would have been otherwise.
- The real win was the fact that his subcontractors made 15% more.
- Each sub had a fixed dollar figure they were awarded based on the number of courses they facilitated ahead of schedule.
- Did your subcontractors embrace or resist value pricing?
- Tracking hours is the biggest nightmare when you are a consultant.
- It turns into 3-5 extra hours of work at the end of each week.
- The subs enjoyed the change and asked if they could work on more projects like this in the future.
- Nobody went to college to learn to fill out a timesheet.
- Some firms allocate 5 hours per person per week to fill in timesheets and expense reports.
- In a consulting world where 70-80 hours per week are common, giving those hours back makes it easier to retain good employees.
- By 2025, it is expected that 50% of the employment base in the accounting industry will be contract-based employees.
- Gen 20/20 is playing by a different set of rules. They want to be rewarded based on the quality of the work, not the number of hours.
- How has your business evolved since the switch to value pricing?
- After 18 months, it has been a huge success for the larger projects.
- Smaller customers struggle to make the mental transition of value for money.
- He explained to customers who wanted the hourly model, that it would take longer and cost more to deliver the same thing.
- Some of the smaller companies feel they need “control” by monitoring the hours.
- Customers have embraced the upfront payment because they feel they are invested together.
- Once customers see his vision and values being aligned with their objectives, they are comfortable paying 100% up front.
- They understand he can operate at the highest level efficiencies by not waiting for a check.
- It is OK to negotiate payment terms based on the budgetary constraints of a customer.
Using Performance-Based Compensation
- Do you use results or performance-based compensation?
- 90% of his contracts have a results component.
- For new developments, reward-based compensation kicks in when they achieve the goal of the customer being fundable.
- Additionally, by reducing a company's overhead, they are rewarded based on a percent of the savings.
- You are willing to work very hard to achieve reward-based compensation.
- Selling into organizations, who want you to be as invested as they are, opens the door for this type of compensation.
- Competitors are still using fixed time and materials compensation with no guaranteed results.
- Deliverables and scope are clearly defined in the proposal.
- Objectives can be beyond the control of the consultant, so they require metrics to measure the results.
- Cultural adoption and other objectives are harder to develop metrics for compensation.
- What pricing experiments have you tried that worked or not?
- Post-implementation surveys gave vague numbers so it was hard to tie compensation to it.
- Working with supervisors to capture champion moments worked better, allowing them to earn a certain percent based on each moment.
- You have to trust the customer to pay with that method.
- To implement the champion moments, they had to work closely with the front-line supervisors, who are learning how to participate in and supervise it.
- They are able to highlight their personnel, putting both in a positive spotlight on a weekly basis.
- There are also rewards given to the manager and the employee to incent them to report it.
- This method allows you to develop a long-term relationship.
- What changes have you made to your project management style?
- They needed a little more flexibility.
- Deliverables with deadlines drive where they put the efforts, allowing for more flexibility, as opposed to how many hours are worked.
- The whole team might work late when necessary, but they can leave early on Friday if they want.
- The team appreciates it and has become a unifying goal among the members.
- The unity demonstrates to the customer when can happen in their organization.
- What is one of your best stories about creating value for a customer?
- A non-profit organization runs conferences for adopting or fostering mothers.
- Not one penny was earned – their success was his success.
- The faith they put in Matt allowed them to completely fill their conference.
- Since he had structured other deals to make his company financially stable, he was able to do pro-bono work to achieve something significant.
About Matthew Habuda
Matthew Habuda is the founder of Habuda Consulting, specializing in strategic planning, culture and effectiveness for executives and middle management. He was previously a consultant at one of the Big Four accounting firms. He is a graduate of Oral Roberts University.
- Matt's Website: HabudaConsulting.com
- Matt on Twitter: @HabudaConsult
- Email Matt: matt@habudaconsulting.com
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