Stop Costing and Start Pricing

John Tabita

In a recent SitePoint article, Why Track Your Hours in Real Time?, Kelly Drill gives some compelling reasons why you ought to track your time as you work—such as measuring productivity and accurately estimating project costs. These are key metrics to observe. But as Admiral Ackbar realized when he came out of hyperspace and exclaimed, “It’s a trap!”, time-tracking can deceive you into using its results as the basis for setting your prices.

Calculating hours spent tells you if you’re making a profit or if you’d be better off working a McJob. But costing is an internal function that has no bearing on the value you create or what a client is willing to pay for that value.

Tim Williams, founder of Ignition Consulting Group, whose mission is to help professional service firms become more valuable and relevant to their clients, admonishes agencies to “stop costing and start pricing.”

Costing, according to Williams, is a science. But pricing is an art—one that needs to be a “core competency” of every business. Determining the value your work will create requires that you use value factors, not just cost factors, to price your services. Five key value factors relevant to our discussion are:

  1. Financial Impact: What is the economic value to the client of a successful outcome?
  2. Strategic Importance: Is this of strategic value to the client organization, or is this a tactical assignment?
  3. Value Horizon: Will this help create long-term value for the client or brand?
  4. Unique Qualifications: Are you uniquely qualified to complete this assignment?
  5. Degree of Risk Sharing: Are you willing to take risk in some way?

Lets’s examine the first two, in reverse order:

Strategic Importance

“Is this of strategic value to the client organization, or is this a tactical assignment?”

In the humorous comic, How a Web Design Goes Straight to Hell, what begins as a high-level, strategic redesign concludes with the designer becoming “a cursor inside a graphics program which the client can control by speaking, emailing, and instant messaging.” Sadly, many projects start out this way.

Which is why it’s important to ask the right questions—including, “Is this project mission-critical or a back-burner issue?” If your prospect doesn’t perceive your services as strategic or mission-critical, you need to figure out how to change that perception or be prepared to move on.

Strategic thinking is creating the vision; whereas tactical thinking is its implementation. Unfortunately, most client’s vision is very small (“Please redesign my website so I’m not embarrassed by it”). That leaves you with two choices: take a tactical assignment and be a client-controlled cursor inside Photoshop; or add strategic value by taking the client up 30,000 feet to gain a broader perspective of what’s possible. This might mean expanding your offering, because as the web has evolved, it’s harder to be an expert in everything your client might need.

Financial Impact

“What is the economic value to the client of a successful outcome?”

It didn’t take me long to figure out that positioning myself as a “web designer” was a liability. I’d done so because it’s what I was good at. But I came to realize that a website has little economic value. It’s online marketing in the form of paid or organic search, and social, local, mobile, or email marketing that drives buyers to the client’s website and financially impacts their bottom line. Building a website is merely a tactical assignment. Which is why clients never seem willing to pay your asking price. Or turn to crowdsourced design.

Strategic importance is driven by financial realities. Vision doesn’t keep the lights on. Having a “financial impact” means increasing revenue or decreasing expenses. Helping your client accomplish that is the first step to creating value.

Next week, I’ll talk about the remaining Key Value Factors in The Art of Pricing.

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  • http://www.mattearly.com Matt Early

    Price is part of the marketing Ps… and so then is determined by many factors, like you put in the post. The way I look at it when I come to costing is, how much do I value this product / service. Thanks, Matt x