Implementing Value Pricing: A Radical Business Model for Professional Firms

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 studies?everything. This is a must-have and a terrific book." ?Reed K. Holden founder and CEO, Holden Advisors, Corp., Associate Professor, Columbia University www.holdenadvisors.com "We've known through Ron Baker's earlier books that he's not just an extraordinary thinker and truly brilliant writer?he's a mover and a shaker on a mission. This is the End of Time! Brilliant." ?Paul Dunn Chairman, B1G1® www.b1g1.com "Implementing Value Pricing is a powerful blend of theory, strategy, and tactics. 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 me?and to my customers?have been immediate, significant, and ongoing." ?Brent Uren Principal, Valuation & Business Modeling Ernst & Young® www.ey.com "Ron Baker is a revolutionary. 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