Price for Income, or Price for Fairness?

By Herman Holtz and Peter Meyer, for The Independent, the ICCA magazine

Ellen L sent us an E-mail asking whether consultants price to maximize income or to maximize fairness. This is something to consider between now and your workshop at the annual conference, including the idea that pricing should be for more  than just recovering your costs with a profit.

"Is it What or Whom?"

Although you get to decide for yourself, this comes down to the question of towhom  should the price be "fair?"

Herman tells audiences the story of a government executive who asked for a quotation for an audiovisual script and story board. Herman quoted him $3,000. The client then asked if that was the price Herman would charge to a non-government client. Herman told him that he would charge a commercial client far less.

Now the client was a bit indignant and demanded to know why Herman would "gouge" a government agency. Herman explained that the client's bureaucracy would require him to attend meetings that weren't necessary, would make him redo work that was not improved by being done over, and would be a general distraction from production.

The client agreed that they would undoubtedly do all these things, and that Herman was, indeed, entitled to be paid for it. They went on immediately to the paper work and the job.

Do You Perform a Task or Provide an Effect?

Start with what you are providing. If you are providing a task (such as programming, DB design, project management, specification writing and so on)? Or are you providing an effect (such as more transactions per hour, lower cost per sale or invoice for your client, faster time to market)?

If you are selling a task, you will tend to charge less than if you are selling the effect of that task. This is probably fair. We all expect to pay more for results. Perhaps more importantly, clients often know what those results are worth before you start.

Selling a task is often easier than an effect, but that does not mean that it is more fair.

If you are willing to charge by effect, this means that you may be charging less  than what you feel is comfortable. You may feel that you are worth more. However, if the client feels that he or she will not get that result, is it fair to charge more than the job is worth?

In Herman's story, the effect included providing a great deal of comfort to stakeholders in the agency. Herman and the client felt that it was an effect worth the price. That counts as an effect, and one that the agency agreed to fund.

What about the reverse? If you feel you are worth $5,000 on a particular job, do it for $3,500 but the client gains $50,000 in benefit from your work, is that fair to you? We suspect that the vast majority of independent consultants are more "fair" to the client than they are to themselves in their pricing. The key to equity here is that both parties know what those values are. We will discuss how to get to that knowledge in St. Louis, but remember that price is more than a way to recover your costs.

Beyond Simple Fairness - Using Price as a Tool for Both of You.

Your price is a market segmentation tool. When you price at a level, you are eliminating some clients from your base and adding others.  Which clients do you want? Which clients would you prefer to avoid? Price helps you choose with whom you will work.

Your price can help transfer risk. Fair pricing can include an allowance for who takes the risk of running over. Government contracting officers allow a higher fee on a fixed-price job because you are taking more risk than in a cost-plus job. If you work by the hour, open-ended, your risk is reduced. If you agree to deliver an effect for a fixed price your risk increases. Either way, your price ought to reflect the risk.

Price is a deal maker. You can buy some deals with price. You may not like what you bought, but you can get the work.

Price is a control tool. If you price by the hour, you may be at the beck and call of managers at the client. They often feel that they have a right to control you. If you price by project, on the other hand, you can more easily say no to the add-on tasks and meetings that will come your way.

Price is a development tool. Before either Peter or Herman will take a contract, we price to the work we will do and to the effect that we will be causing. That means that both we and the client have to understand the application well, much better than we would if we were going hour to hour. If you do this, two things will happen. One, you may charge to develop that understanding for both you and your client. Two, you will probably wind up knowing more and doing a better job with that knowledge.

Fairness is in the eyes of the beholder, but being fair to both requires getting into your client's business needs before you quote a price. In your Annual Conference, we will talk about ways to do this. Until then, ask yourself: Are you are pricing an effect or a task?