Implementing Value Pricing: A Radical Business Model for Professional Firms

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