Motto: People do business with professionals they trust. Time-based fees destroy trust. Complete the equation.
Most service professionals still use time-based fees. This works both against clients and professionals. You try to maximise your prices, whereas your clients try to maximise the value they receive. Soon you end up arguing over number of hours and items of deliverables. Value received goes down the drain, and the subject is about performing certain tasks at a certain price as an outsourced labourer.
Time-based fees betray effectiveness and creativity. Clients are anxious to get their problems solved in the shortest possible time, but your incentive is to drag out the time frame to get paid more. It also encourages extra tasks, regardless of whether or not those tasks improve the clients’ condition. Often this engagement is not real consulting but “outsourced labour” done for, to or at clients, but not with clients.
The lose-lose aspects of time-based fees
1. There is an incentive to work ineffectively. The more time professionals take to solve problems the more they earn.
2. Many firms reward their people for the highest number of billable hours. This forced emphasis on time destroys the quality of client service. The focus is more and more, not better and better.
3. Professional service firms put a limit on their earning potentials. There are only so many people and they can work only maximum 24 hours per day.
4. Clients know how professionals can maximise their fees - see point 1 - and that can undermine trust.
5. In this model clients actually give an open cheque to professionals who send the full invoice at the end of the gig. This approach also has a high level of “shock factor” for clients.
6. Since the main chunk of the payment takes place after the engagement, clients not as committed as clients who make upfront investment in their projects.
The Alternative - Value-based fees
The best way of charging for professional services is when you base your fees on perceived value your clients receive. Message for clients: “You get what you pay for.” With this arrangement clients can put value on your contribution, based on what they want to achieve.
Also, this is an investment in clients’ futures with clearly defined qualitative and quantitative return: The more clients put in the more they get out, so clients decide what they want to get out and invest accordingly. The problem is that only an amazingly few clients have the courage to invest in their own businesses.
They have nice cars, lovely houses, etc., but when you say: “I can help you to eliminate the $1,000 per day production loss in your manufacturing process. It will take about a week and your investment will be $50,000”, responses differ. Smart people calculate that this problem costs them $365,000 per year, and find the investment fair. Most people will gasp: “You’re crazy. You want me to pay you $50,000 for one week of your time?”
Summary
The old saying that “I am a professional and this is my price” is long gone. Smart clients want to hear about value they receive, not merely tasks you perform. In spite of your degrees and experiences you are worth exactly dick, until and unless you can articulate the value clients receive from you. Performing tasks is a mere commodity, is traded like sacks of potatoes and fetches pretty much the same price. Clients have grown sick and tired of paying for tasks, reports and analyses that have no value for them. However, smart clients are willing to invest in their own futures, if you can help them to get there.
Article By: Tom "Bald Dog" Varjan - Organisational Provocateur, Go MAD (Make A Difference), Dynamic Innovations Squad - www.di-squad.com
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For more on Value-based fees you can order the author’s FREE booklet: Why Most Service Professionals Consistently and Persistently Undercharge For Their Services And What To Do About It...Request your free copy at booklet@di-squad.com
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