Call to Action: Shift Your Mentality

It is time to shift your business mentality from that of selling hours to selling value. Now, more than ever is a great time to redesign your fee structures to gain a stronger footing in your niche. Now is the time to take small, calculated risks that will give you a larger return on investment.

What am I talking about? The call to action is a paradox shift and for some,  it may be extremely hard while others grasp onto it and blaze a new trail. The idea that service-based companies sell their unique services hourly is a practice that has resulted in low profit-margins, and has reinforced the client perception that services are simply commodities to be purchased based on the lowest price.

This Has To Change

The simple fact is that these fee structures result in insufficient returns. This causes companies to starve financially, making it nearly impossible to have the resources needed to grow. They end up having a survival mentality that shuts down their willingness to apply their unique expertise, dedication, and vision to the complex challenges that confront clients, communities, and society.

The Solution: Alternative Pricing Strategies

So what are these alternative pricing strategies? Design Intelligence has outlined five fee structures that could be applied to service-based companies such as design firms. However, any service based company can benefit from these fee structure strategies. In fact, in my opinion, every service based company should be looking into these strategies and thinking and researching about other strategies that can be implemented as well. Highlighted below are a few of the different approaches that are found in this article.

Value-Based Pricing

When thinking about the services your company offers, do you first think of the number of hours times a percentage to then equal your total cost, or do you think about the over all value that the company is delivering to their client. Design Intelligence defines value-based pricing this way:

Value-based pricing strategies set fees in relationship to the benefits that accrue to clients as a result of the firm’s efforts, not on the basis of the costs a firm incurs delivering services.

A good way to think about value-based pricing is to think about a keynote speaker or a heart surgeon. These types of services are not paid by the hour, but by the value that they bring. A keynote speaker is sharing their knowledge and insights to motivate and inspire their audience. Bill Clinton reportedly receives $1 million per speech- this shows the value of Clinton and what he has to offer his audiences.

Similarly, a heart surgeon is not paid on an hourly basis, rather they are paid for the value of their service. How much monetary value would you place on having a heart valve replaced? And would you be likely to trust a heart surgeon who comes in with the lowest price? Probably not.

Outcome-Based Pricing

Built upon the value-based fee structure, outcome-based pricing focuses on the performance of the services provided. This adds another level of risk to the service company’s shoulders, but can yield a higher profit if successful. There is risk in anything you do, it is a matter of how you manage that risk that will determine your success and outcome. Design Intelligence defines outcome-based pricing as:

Performance incentives, structured into the contract between client and professional, are triggered by the extent to which the professional actually meets specified performance requirements.

Investment-Based Approaches

Again, the risk is increased in this approach, however the return on investment can be significant if done correctly. I particularly like this approach because it is a form of having income-producing assets that the company manages. As I have mentioned earlier, income-producing assets help to create value for the company should the entrepreneur want to sell it.

Investment-based approaches shift the design firms away from a position of limited risk and reward as the designer of a project and into a stance where they are also bringing financing to the project. It is important, with this approach to have a team of advisers and in-house employees who specialize in the appropriate fields to make these types of investments profitable and successful. Design Intelligence gives a couple examples of firms who demonstrate their success in this approach. Here is an excerpt:

Cambridge Seven Associates, a 65-person design firm (urban planning, architecture, and graphic and exhibit design) based in Boston, has pursued investment-based pricing opportunities throughout its history.
In the mid-1970s it took ownership of a multimedia show it had produced for Prudential Insurance, called “Where’s Boston,” which it subsequently managed as a money-making enterprise for 13 years. In the ‘80s, the firm was a co-developer of a $64-million mixed-use project in Cambridge, Mass. More recently, it has proposed a turnkey development for a new aquarium in Lisbon, Portugal.

Pricing Strategies For New Products and Services

This is another of my favorite approaches to the service industry. This approach is taking an idea and turning it into a product or service and then taking it one step further by patenting it and or trademarking it to make it an asset to the company. Examples of this could be specific software or database applications. Here are great examples of design firms utilizing this approach:

Some design organizations, like the industrial design firm IDEO, actively seek patents on new products designed as in-firm ventures. Gensler, the large architecture and interior design firm, protects its furniture designs as intellectual property and then licenses the designs to manufacturers for production and marketing. MATx, the materials research subsidiary of the Boston-based architecture firm Kennedy & Violich, negotiates royalty payments from manufacturers that contract with it for the development of new products or materials. The royalties provide downstream cash flow to the firm as new product designs move into production. In each case, the value of the intellectual property is commensurate with the potential sales of those products or furniture and is largely decoupled from the labor costs that went into creating them.

The Bottom Line

It doesn’t matter what industry you are in, what services you provide, these approaches can be applied to any niche you are in. The trick is having the business mindset and creative passion to think up new strategies, test them, and use them to increase your profits. The more that your approach differs from your competition, if successful, the better you will be positioning your company.

An example of this that sticks out in my mind is the WWE. The story goes that when Ted Tuner bought WCW, he called up Vince McMahon and said something to this effect, “Vince, I’m now in the wrestling business!” McMahon’s reply was simply, “That’s great Ted, but I’m in the entertainment business.” That mental shift has made the WWE the top professional wrestling company the world over. WCW is non-existent and was purchased for pennies on the dollar by the WWE. The companies’ approach was different than their competitors and in the end, came out on top.

A Must Read Article

When I started researching on how to develop stronger business strategies for the service industry, I stumbled upon this article by Design Intelligence. I immediately bookmarked it and have referenced it multiple times. Fast forward three years later, and I would like to share it with you now. While it was important three years ago, it is abosultely crucial in this economy. You can read the article titled, Redesign Your Profits, Value-Based Fee Structure.