How to Maximize Profits With Value Pricing

Frank Stasiowski, FAIA
Posted on: 11/27/18
Written by: Frank Stasiowski, FAIA


photo-1457685373807-8c4d8be4c560.jpgThe best way to fight commoditization? Sit down, look your client right in the eye and say: “Of course we cost 
more.” 

Consider the fees that your firm has paid out to other professionals in the last six months. How much does your accountant charge per hour? Your outside counsel?

Maybe you contracted for some training on your building information management system. The trainer may cost you $200 per hour, plus another $50 per attendee per diem; for five trainees and eight hours, that’s $1,800 for one day— minimum. That trainer likely charges for travel as well, and maybe ancillaries like a print manual.

Architects and engineers are willing to pay good money for professional services. Why, then, is it so difficult for them to charge more for their licensed, professional services? 

Design professionals must close the gap between their fees and those of other professionals. Fees must adequately cover training, professional development, ample profit, and future liability. The productivity improvements from BIM, 3D CAD or 4D CAD have tended to benefit the client, with lower price and speedier delivery, more than they have benefited design firms. In order to stay competitive in today’s marketplace, design professionals must price their design services according to value, not cost.

There are several ways to change the way you’ve traditionally approached pricing, including:

• Cost pricing;
• Parity pricing;
• Sociopolitical pricing;
• Strategic pricing;
• Negotiated; and finally,
• Value pricing.

In value pricing, price is determined partly by the value the client perceives in the service to be delivered, and partly by your cost and profit considerations. Ramsey Fayad described true value pricing this way:

The concept of value pricing is relatively simple. Value resides in the eye of
the beholder and when, in the eyes of the beholder, it is delivered, a premium
may be charged. In essence, value pricing demands only a better understanding of client needs, constraints, and competitive threats.

Why then is value pricing not broadly accepted and practiced? Because it demands shifts in attitudes, perspectives, and effort, all of which challenge the natural inertia of wanting to continue doing what has always been done. In the professional design arena, it is typically perceived to be safer to follow clearly defined existing procedures than to adopt new and untried ones for fear of offending clients. Any proposal that makes the project easier, safer, faster, or cheaper to achieve client objectives should include a value premium. From the client’s point of view, the extent of the value premium in question will depend on:


• The clarity with which the design professional defines his or her proposed contribution.
• The extent to which the proposal appears to reflect an understanding of current client needs.
• The extent to which the proposal convincingly contributes to the nominated objectives in the judgment of the client.
• The relative importance to the client of the nominated objective(s).

Don’t fall into the commodity trap—value price your way out of it.

 

VPInew_2013_proper-1About the Author: In his 40+ years leading PSMJ, Frank Stasiowski, FAIA has authored dozens of books and manuals serving the business needs of the A/E industry, including eight best sellers on management. In addition to being the Founder and CEO of PSMJ, he is a frequent speaker at numerous prestigious A/E industry events on matters such as project management, marketing and business development, strategic planning, and more. This article is an excerpt from The Value Pricing Imperative for Design Firms. This book provides practical advice on managing cost, contract types, pricing change orders, cost accounting techniques, negotiating methods, liability considerations, bidding approaches and much more. 

 

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