Implementing Value Pricing

RONALD J. BAKER is the author of Professional's Guide to Value Pricing, Sixth Edition, The Firm of the Future, Pricing on Purpose, Measure What Matters to Customers, and Mind Over Matter. He is founder of VeraSage Institute, the leading think tank dedicated to teaching value pricing to professionals around the world.

• Foreword xviiPreface xxiAbout This Book xxiiiAbout the Web Site xxivAbout the Words Used in This Book xxvAcknowledgments xxviiAbout the Author xxxiPART I A RADICAL BUSINESS MODELCHAPTER 1 The Firm of the Past 3CHAPTER 2 The Firm of the Future 7The Business Model of the Firm of the Future 8Revenue Is Vanity—Profit Is Sanity 8Businesses Have Prices, Not Hourly Rates 8Why Intellectual Capital Is the Chief Source of Wealth 9Negative Intellectual Capital 11Why Effectiveness Trumps Efficiency 11What, Exactly, Is Productivity? 12There’s No Such Thing as Generic “Efficiency” 13Where Do Profi ts Come From? 15If Only I Knew Then What I Know Now 17Summary and Conclusions 18PART II FOUNDATIONS OF CREATING VALUECHAPTER 3 Why Are We in Business? 21The Economist’s Definition of Profit 21The Marketing Concept and Total Quality Service 23Summary and Conclusions 24CHAPTER 4 A Tale of Two Theories 25The Labor Theory of Value 26Karl Marx, False Prophet 26The Marginalist Revolution of 1871 28Why Are Diamonds More Expensive Than Water? 29Wrong Theory, Suboptimal Results 30CHAPTER 5 Four Ps and Five Cs 31The Five Cs of Value 34You Are What You Charge 36CHAPTER 6 What People Buy 37The Dynamics of Customer Expectations 38CHAPTER 7 How People Buy 41Relative, Not Absolute, Price Matters 42Price Psychology 43Search, Experience, and Credence Attributes 44Understanding Customer Risk 45The Four Ways to Spend Money 47CHAPTER 8 Your Firm’s Value Proposition 49Moments of Truth 51What Is Beyond Total Quality Service? 52CHAPTER 9 The Consumer Surplus and Price Discrimination 55Price Elasticity 56Consumer Surplus 57Price Discrimination 58Requirements to Price Discriminate 59CHAPTER 10 Macro Pricing Strategies 65Skim Pricing 66Penetration Pricing 66Neutral Pricing 67Two More Curves for Value 67Implications of the Curve 71CHAPTER 11 Price the Customer, Not the Service 73Ten Factors of Price Sensitivity 73CHAPTER 12 There Is No Such Thing as a Commodity 77The Perils of Benchmarking 80Purging the Commodity Word 80CHAPTER 13 Baker’s Law: Bad Customers Drive Out Good Customers 83Customer Grading Criteria 83The Adaptive Capacity Model 87Firing Customers 89The Forced Churn 90CHAPTER 14 Value Pricing and Self-Esteem 95There Is No Standard Price for Intellectual Capital 98CHAPTER 15 Ethics, Fairness, and Value Pricing 101The Morality of Price Discrimination 106Prospect Theory 108Is Hourly Billing Ethical? 109PART III THE GENESIS AND CONSEQUENCES OF HOURLY BILLING AND TIMESHEETSCHAPTER 16 A Brief History of Hourly Billing and Timesheets 113The Father of the Billable Hour and Timesheet— in the Legal Profession 115Summary and Conclusions 117CHAPTER 17 The Deleterious Effects of Hourly Billing 119The Advantages of Hourly Billing 119What about the Customer? 123The Disadvantages of Hourly Billing 124Summary and Conclusions 138PART IV WHAT REPLACES HOURLY BILLING AND TIMESHEETSCHAPTER 18 Why Carthage Must Be Destroyed 143What, Exactly, Replaces Hourly Billing and Timesheets? 147CHAPTER 19 Price-Led Costing Replaces Hourly Billing 149Wisdom Is Timeless 151Summary and Conclusions 153CHAPTER 20 The Wrong Mistakes 155The Almighty Hourly Rate 156Making the Wrong Mistakes 157CHAPTER 21 Who Is in Charge of Value? 163The World’s First CVO 164Leadership 167Attitude 168Commitment 168Experimentation 169Youth 170Not Final Thoughts 170CHAPTER 22 Measure What Matters to Customers 173The McKinsey Maxim 174Developing a Theory 175Pantometry versus Theory 176A Gedanken 177CHAPTER 23 Firm-wide Key Predictive Indicators 181KPIs for a Professional Knowledge Firm 181KPIs Equal Customer Accountability 188CHAPTER 24 Knowledge Worker Key Predictive Indicators 191A Model for Knowledge Worker Effectiveness 192Key Predictive Indicators for Knowledge Workers 196CHAPTER 25 After Actions Reviews 205We Know More Than We Can Tell 206The Economics of Structural Capital 207Knowledge Lessons from the U.S. Army 210Summary and Conclusions 214CHAPTER 26 O’Byrne & Kennedy: A Firm of the Future 215PART V EIGHT STEPS TO IMPLEMENTING VALUE PRICINGCHAPTER 27 The Eight Steps at a Glance 231Three Different Kinds of Problems 232Eight Steps to Implementing Value Pricing 233CHAPTER 28 Step One: Conversation 235The Conversation 236Naïve Listening 236Focus on Wants, Not Needs 238Starting the Conversation 238Conversations Lower Asymmetrical Information and Adverse Selection 240Questions You Should Ask the Customer 241Ordinal Value, Not Cardinal Value 243Discussing Risk with the Customer 243Summary and Conclusions 244CHAPTER 29 Step Two: Pricing the Customer: Questions for the Value Council 245Questions to Ask before Establishing a Price 246Factors of Price Sensitivity 250Pricing Questions 251CHAPTER 30 Step Three: Developing and Pricing Options 257The Psychology of Price 258Seven Generic Customer Segmentation Strategies 259Pricing Options 263Pricing Complex Projects 264FORD—A Model for Consulting 273Dipping Your Toe in the Water 275Formula for Calculating Reservation Price 276Summary and Conclusions 278CHAPTER 31 Step Four: Presenting Options to the Customer 281Handling Price Objections 282Summation: Presenting Your Price to the Customer 287CHAPTER 32 Step Five: Customer Selection Codified into the Fixed Price Agreement 289Date of the FPA 289Professional Services 291Unanticipated Services 295Service and Price Guarantee 295Payment Terms 296Revisions to the FPA 296Termination Clause 297Other Issues Regarding the FPA 297CHAPTER 33 Step Six: Proper Project Management 299CHAPTER 34 Step Seven: Scope Creep and Change Orders 311CHAPTER 35 Step Eight: Pricing After Action Reviews 317PART VI INFLECTION POINTCHAPTER 36 No One Can Forbid Us the Future 321Business Model Innovation 322The Diffusion of Theories 325Firm of the Future or Firm of the Past? 328CHAPTER 37 Declaration of Independence 331Bibliography 337Index 351

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