In How to Successfully Implement Value Pricing – Part 1, I discussed the beginnings of my journey to implement value pricing in my practice. In addition, I shared how I resolved my reservations on value pricing with a twofold pricing model. This pricing model is built from a:
- Calculated pricing strategy
- Alongside internal tracking and analysis.
To effectively implement value pricing, further actions are needed to fully understand the effort that goes into what you are pricing.
Here are the steps I go through for each project.
1. Value Pricing – The Discovery Phase
Before a value pricing package can be determined it is critical that you get to know the prospect.
Moreover, this Discovery Phase is where systems around analysis and scoping are used to develop a deep understanding of the prospect. In turn, this will bring further the understanding of the complexity of the work for which you are expected to provide a solution. However, once that understanding has been reached, a value package can be prepared for presentation to the prospect. This preparation is called the Solution Development.
2. Value Pricing – The Solution Development
The Solution Development enables pricing for profit – part of the pricing strategy. To prepare for the Solution Development phase, the scope (activities) around the requirements as understood during the Discovery Phase are documented. Scope analysis requires an understanding of required effort against activity. This clear defining of scope is where the internal business processes commence.
3. Value Pricing – Activity Tracking During Service Delivery
As mentioned in Part 1, there are a number of internal businesses processes that need to be tracked as part of the value pricing model. Let’s get into the detail of these processes.
Delivery and Change Management
With the team executing the delivery clear around scope and the effort permitted in order for them to be able to complete their work, each team member can undertake their role around the job expectations. Moreover, their deep understanding of the client scope of engagement means that they know when the job is no longer within scope. In other words, they are able to be attentive to scope creep and as such, to trigger an alert. After that, this scope creep instigates a Change Management process and should be seen as an opportunity to sell additional value to your clients.
For example, the tracking of effort has thus far enabled our team to be confident in their role and assists management in identifying instances where there is a potential for profit bleed and to quickly stem that flow.
The next internal process revolves around risk and the need to identify the potential for risk. When a practice moves to value pricing, the onus on delivering the agreed scope is entirely on the practice. Risk to an engagement includes issues like client reliability, response time, and commitment – each of which can affect service delivery and engagement profitability.
The measure of risk is understood as Contingency. Think of it this way, Contingency is a buffer of time on items of scope fulfilled by certain team members. Unused contingency is a direct injection of profit to a practice’s bottom line.
The tracking of effort enables management to monitor when effort pushes into contingency. This is acceptable, however not necessarily desirable.
Individual and Team Capacity Monitoring
An understanding of the allowed effort in a client engagement means that capacity can be managed. Capacity Management uses the concept of a full time equivalent (FTE). Essentially, Capacity Management is about both the individual and the team.
Each team member has capacity measured as a partial or full FTE. Being able to associate an engagement back to budgeted effort means that the team members assigned to that client have their personal FTE availability reduced. The available FTE of each team member contributes to the total practice FTE capacity. Tracking the available capacity of a team member enables monitoring of their ability to take on additional work. Monitoring the FTE of the practice as a whole means that the critical point for engaging a new team member can be identified. What can be measured can be managed.
Performance Review Systems: Practice, Price and Team
Finally, the internal processes hinge on the tracking of effort and around performance review systems.
Practice, price and team are all areas that need to be measured and reviewed.
Because, a business with vision and goals is a business geared for growth. To track growth, there must be measurable components. The practice needs to review practice performance against internal growth targets. In addition, you need to understand the profitability of an engagement. Ask yourself, is the client engagement being fulfilled within scope or is the effort required to fulfill the scope greater than expected? Is contingency used? These are all measurable because expended effort is monitored against budgeted effort.
It is critical to perform a pricing review in order to check that your delivery price is in line with scope, changes in CPI, and the value you are delivering to your client. A thorough understanding of the required effort of the engagement is a precondition for a pricing review.
The goal of Team Performance reviews is to measure and enhance work performance and personal development. To judge work performance, it’s necessary to pose and answer the following questions:
- How well has the scoped work been completed?
- Is it completed within budgeted effort?
- Has any of the contingency been used?
If activity is diligently tracked against budgeted effort, you can measure whether the engagement is being met or not. Meeting or coming in under budgeted effort is the cream of good service delivery. How you choose to use this cream within your practice is entirely up to you. Ultimately, you can keep it within the business or give back to the team. However, being able to measure performance means you can make choices based on calculable metrics.
Track Activity and Effort – Not Time
To implement value pricing using timesheets within a practice to track billable activities is definitely not the answer.
A modern practice can be effectively managed by actively tracking activity and effort.
Without this process a practice is only guessing about practice capacity, won’t achieve optimal team capacity, is missing value add opportunities, and will not have the necessary metrics in place to conduct internal reviews.
For many value pricing advocates, timesheets with an emphasis on tracking all available hours may be anathema.
Tracking effort to support business growth, however, is key to a successful practice.
About the Author
Diane Lucas is a multi-award winning bookkeeper who is passionate about helping business owners and industry colleagues simplify their businesses with systems that are effective and innovative. Her business Direct Management advocates the use of cloud-based solutions where ever possible.
As an extension to the services provided by Direct Management, Diane offers advisory and mentoring services to hand-picked businesses who are driven to write the next chapter of their journey. Diane believes that the only constant is change.