I received the following email:
Long time ago you answered my Carthage question and with my current company we tried a few times to sell fixed price packages.
Some clients bite it although many ask us to switch to the hourly rate. What I observe is that it's easier (read, they're used to) for the clients to get quotes and compare hourly rates than match and analyze various criteria from different service providers. Sometimes it gets even worse: the client wants an hourly rate but at the same time to cap the SOW [Scope of Work] with the total allowed maximum sum.
That leads to the very same ethical issue when project managers effectively get the red line and mentally the mission to bill the client as close from the bottom to the limit as possible. I tried to put all the cards on the table: propose the hourly-based project plan, come up with the estimation and then bid with the fixed price which is lower? Surprisingly even in such cases some clients ask for the hourly rate motivating that they can easier pass it through the budgeting group and legal.
I'm ready to accept the hypothesis that we run into the clients that don't understand the value-selling benefits, maybe we don't articulate enough, maybe they don't trust the approach for some reason but certainly in our case such clients are majority in our pipeline.
What do you advise to undertake?
Thanks, [Name Withheld]
Hi [Name Withheld],
I think the last part of your fourth paragraph answers your question.
It's obvious the firm isn't doing an effective job articulating its value proposition--by that I mean, comprehending, communicating, and convincing the customer they must pay for value.
Don't despair, this is common, though not to the level your letter seems to suggest. It's usually a minority of customers, not a majority as you say.
You need to stop talking about hours completely, and just tell your customers you don't price that way. It's unethical.
No client can tell you how to price--that is your decision. Also, your firm doesn't do timesheets or track time. You have better things to have your knowledge workers do--such as add value and provide outstanding customer service to customers. Then what will the customers say who want to see hours? Force you to do timesheets? Then they aren't the right customer.
If you're not willing to do the above, Pricing on Purpose will never become a core competency in your firm. There's simply too much empirical evidence from all the firms out there that customers love this approach. The push back we get is from firms, not customers. I know this for an absolute fact, since I've spent the last four years speaking to customers across all professional firms and they all say the same thing: they want certainty in price, period. It's how they buy everything else.
Do you have people pricing and selling who aren't good at it? Then upgrade their skills or remove them from pricing.
Blaming it on the idea that your customers don't prefer fixed pricing is a cop out and simply doesn't comport to human behavior and the laws of economics.
The only other thing I can think of is your customers do not trust you; and that's not a pricing problem. That's much deeper. I hope this is wrong?
Either you want to do this or you don't. Your customers are not an excuse.
I hope that helps.
Of course, we welcome the thoughts from other firms that have made the transition from hourly billing to Value Pricing.