Why You Must Price Based on Your Value

Uncategorized Sep 27, 2020

In my first years as founder/CEO of a contract research organization, I tried to figure out the best way to price what we could do.  My lab manager and I took a detailed look at several projects, tracking hours and materials, and developed a spreadsheet for calculating our costs based on scope.  We added what we thought was an appropriate profit margin and used that model for the next couple of dozen projects. 

What we found was that 1) we were not good at estimating the time requirement for projects ahead of time; 2) our staff was not good at tracking their time with multiple projects going on at the same time; and 3) our clients were often willing to accept our pricing no matter what we asked.

I started to ask prospective customers more questions:  "What will happen if you don't get results on time?  What will these results allow you to do?  If we tried this extra experiment would that give you more to work with?"  By doing this I learned to develop proposals and contracts on the value realized by our clients.   

There are two very important reasons you should learn to do this:

1. If you connect with your client by understanding their need, you've made a much deeper connection than one based only on your offering.  They will come back because you "get" them, not because of your capabilities or price.  Knowing exactly where they measure value gives your product or service greater impact.

2. If you don't take low value projects, and you focus your work has the most impact; your clients will advocate to use your company more often.  They will be fans and champions for you both internally and externally.

Recently I got a great recommendation from a top scientist I worked with a few years ago, Dr. Mark Hayward [formerly with Lundbeck Pharma].  What Mark said reminded me of and learning this lesson.

"Jeff and his team put in the effort at the beginning to know the project the way we knew the project, and fully understand our target times and quality expectations.  Occasionally, they would even point out a thing or two that we had not thought of to make sure it was addressed.  The result was that we got the quality we needed at the time it was needed - like clockwork.  But senior management wanted us to use [a lower priced competitor].
 
With [the competitor], it was hard to get much more substantive discussion than "we can do that" and a picture of their instruments.  Quality and timing were all over the map.  In the worst cases, the results were unusable, and the work had to be sent out a second time, which was costly.  We had to pay for the same milestone twice - not well received by the senior management, who blamed their own team for the results, extra costs, and missed timelines. Sometimes results were so slow that they were received after the project had been shut down, which angered the senior management even more. 
 
We finally convinced senior management to stop forcing us to use [the competitor] and allow us to use higher priced but preferred alternatives like Jeff's.  We could execute the projects in the predictable way expected by the big guys.  After a little time our outsourcing efforts were well-regarded and cited as something that was working well within the company.  Senior management got their bonuses, and that trickled down and had positive impact on us too."
 
Your sales team can learn more about value pricing with our workshop on Mastering the Technical Sale.  Find out more here.
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