“We’ve made a lot of money from your advice over the years.”
It was early 2013 and the voice on the phone was an advertising agency president who was signing up for a training program. I knew him only a little from a seminar he attended years earlier and a few emails we had traded since. I also knew that he had purchased annual subscriptions to my webcasts, but I knew little of his business or of his success.
“That’s great I replied,” and I meant it. But he needed to be sure I understood.
“No, we’ve made a lot of money from your advice.”
[If you want to skip my heartfelt, coming-of-age story of how I overcame years of ignorance to educate myself on the subjects of value and pricing, simply scroll down to my recommended reading list or my own WWP pricing resources which includes information on a seminar next month.]
“Oh?” I casually intoned. I gathered there was more to be said. He went on to list a handful of multi-million dollar, multi-year engagements he had closed by derailing standard procurement processes imposed by the pharma companies that were his clients. As I did the math I was overcome by multiple feelings simultaneously.
First, I was thrilled for him. I live for these success stories. Second, I was proud to have had such an impact on someone’s business even if he was graciously under-weighting his own hard work and courageous decisions that transformed my advice into dollars. My last thought though – and I’m a little embarrassed to admit this – was to estimate how little money he had paid for that advice (less than $3k at that point) and think, “That’s not fair!”
My Education Begins
I knew of course that there was nothing unfair about this exchange of money for advice. Others had paid me many times more and not received the same economic return. Was that unfair to them? This incident however was the final provocation for me. For some time I had been questioning my own ideas of value and the notion of fairness in pricing. In that moment I resolved to learn what I did not know. I ordered three books.
My new reading pile looked pretty depressing. All three reminded me of university textbooks I could never bring myself to read (which may have contributed to my academic expulsion. I love reading; I've just never liked being told what to read).
The first was a little dry but I found one breakthrough idea in it. Things changed for me with the second book however. Ronald Baker’s Pricing on Purpose. It was the most textbook-like so I began it apprehensively but found myself hooked within a few pages. At the end of the first chapter (Why Is Movie Theatre Popcorn So Expensive?), I was riveted.
Clearly, the field of pricing theory was as broad, deep and fascinating as the fields of judgement & decision-making and all of human behaviour. I saw the task before me as even more sizeable than I had previously realized but I now relished the challenge. In Baker’s hands, the topic was fascinating. I ordered more books.
I went back to the beginning of modern economic theory and read (listened to, actually) much of Adam Smith’s tome The Wealth of Nations, first published in 1776, just to get a sense of how the concepts of value have so dramatically changed over the years. Then I jumped forward 110 years and read forward from there, largely chronologically, to the present.
Your Pricing Model is Your Cage
One of the first lessons was that pricing is highly personal. Value may be in the eye of the beholder (the subjectivity theory of value) but the ability to uncover that value and ask for a share of it differs from salesperson to salesperson as much as the valuation does from client to client. With such ranges on both sides of the buy-sell divide it’s no wonder one firm can charge two, three or even ten times what another firm can charge for largely the same work. And still, each firm tends to get stuck in a narrow band from which they find it difficult to break out. I started to see a firm’s pricing model as a cage of its people's own making.
Over the next months, I consumed numerous books, papers, podcasts and lectures on the topic. As I began to apply the learning in my own work people kept asking if I would publish a reading list of the ones I most recommended. (It’s below.)
I’ve since written some articles, done some webcasts, delivered some speeches and conducted a small number of seminars on the topic. (Also listed below.)
Now, when I stand at the head of a room where we are going to talk pricing for the next few hours I’m pretty confident we can increase the profit in the room by at least 50%. If you think that’s an unrealistic return, consider that the average firm need only raise their prices by 10% to achieve it. If you don’t think your clients will accept a 10% price increase it’s because you’re thinking about an increase within your existing pricing model. You need to change your thinking about pricing and value, as I did, and learn how to apply a few basic principles.
Blair’s Pricing Reading List
Of the more than a dozen books that I’ve read on the topic, here are my reviews of the six that I found most helpful.
Pricing on Purpose & Implementing Value Pricing, by Ronald J. Baker
Baker was an accountant who realized he was looking at the subject of pricing from the wrong side of the equation, always focusing on cost instead of value. He began to research the subjects of pricing and value and was transformed. Today he is a man on a mission (to eliminate the timesheet from professional firms) who leaves no stone unturned in combing the work of the masters and applying it to the professions. Beyond his deft treatment of the work of those who have gone before him, Baker has made meaningful contributions himself to the field of value pricing in particular. His suggestion that firms should have a Chief Value Officer and a value council are especially interesting, as is his likening of a pricing strategy to a portfolio made up of investments of different risk levels that average out to an overall risk profile suited to the investor.
Baker’s second book, Implementing Value Pricing, contains much of the foundational information from his first so you could probably skip Pricing On Purpose but I’m glad I did not. I appreciated its thorough treatment of pricing theory and the history lessons on the progress in the field. I also found Baker to be eminently readable. As an author he strikes an impressive balance of thoroughness and efficiency, explaining everything while rarely wasting a word. Many times I found myself re-reading paragraphs in admiration of how he had crafted them.
The beauty of Value-Based Fees is its brevity. Where Baker is thorough and patient, Weiss is succinct and impatient. If you need to understand more of the why behind the what on the subject of value pricing, read Baker’s Implementing Value Pricing. If you want to get right to what to do, read Weiss’s Value-Based Fees. (Weiss himself says that if you’re in a real hurry just read chapter five.) Weiss’s track record as a consultant, author, speaker, and foremost of all, advisor to some of the world’s top consultants, allows him to skip over the theory and just tell you what works. If you haven’t previously read any of his dozens of books you may be taken aback by his head-on, what some might call arrogant, approach. Trust me when I say trust him – the man has the creds.
Where Baker’s value pricing book feels as though it’s written for the larger firm, Weiss's feels like it’s targeted to the individual, but the advice in both surely applies to firms of all sizes.
If you do any paid public speaking, Weiss’s book Million Dollar Speaker is a good application of the value pricing principles to the topic, and probably the best book there is on getting paid well to speak. I highly recommend it along with his all-time best-selling book Million Dollar Consulting.
Priceless, by William Poundstone
The force that most changed pricing theory was probably set in motion by Sigmund Freud. At Freud’s prominence, at the cusp of the 19th & 20th centuries, “the Austrians” were dominating the field of psychiatry and some countrymen felt sufficiently inspired to try to infuse some of the “soft science” of the related field of psychology into the dogmatic field of economics. It was more clash than infusion. The first attempt to breach economics by the psychologists went by the term the Austrian School, then psychophysics and finally, around 1985 the field of behavioural economics was born and went on to challenge the reigning doctrines of rationalism put forward by the Chicago School.
Where previously it was held that people and markets are rational and therefore predictable, the behavioural economists have proven that people are predictably irrational. Debates still rage between the camps but there’s no debating the impact behavioural economists and their predecessors have had on how we think about pricing.
In the last ten years or so Dan Ariely (whose first book is titled Predictably Irrational), Daniel Kahneman (Thinking Fast, Thinking Slow), Steven Levitt (Freakonomics, co-written with Steven Dubner) and others have written popular and even best-selling books on their work, many of which include much ground-breaking research on pricing.
If it’s their pricing wisdom you’re after however, you can forget all those books and just read William Poundstone’s Priceless, which catalogs the behavioural economists’ contribution to pricing theory in numerous, expertly told and entertaining stories.
This book, more than any other, opened my mind to how personal and malleable pricing and value truly are. It’s also the most readable – almost Gladwellesque. If you’re only going to read one book on pricing and you want inspiration in more than 50 fascinating stories, read Priceless. There’s little “how-to” in it, so it’s not a practical guide, but it will get you to think about the topic differently.
Holden is a coauthor on some of the later editions of one of the seminal books on pricing theory, The Strategy & Tactics of Pricing by Thomas Nagle, et al. I found it a dry read, however, preferring others' treatment of their work.
Holden’s solo efforts, however, are short and easy to read. They also carry some powerful ideas including one that let me finally come to grips with what was troubling me with the pricing gurus’ favourite model, value pricing.
Value pricing is hard to do. If it wasn’t, more firms would be doing it. My own experience is that most firms that claim to be implementing value pricing are not – they’re guessing at value rather than asking their clients to define it. Having the client articulate the value of your solution reflects the core principle of value pricing that value is subjective. Only the client can define it. Your job, as a salesperson, is to facilitate that conversation.
Proper value pricing requires a strong value proposition and the ability to get to and hold your own with senior decision makers, which requires no shortage of self-esteem. It also requires practice. All of these are requirements of successful selling and should be developed, and value pricing is indeed the pinnacle of pricing approaches that everyone should pursue, but I knew how much creative professionals struggled with these topics already. I was in search of an approach that allowed for value pricing but also easy enough that anyone could implement.
I found the final piece of the puzzle in Holden’s work. Pricing With Confidence helped me put value pricing in its place (still the ideal) but allowed for other strategies by making the distinction between buyer types (there are four in his model) and how they value different things. His notion of the “poker player” type I find particularly relevant to the sales situations in which creative firms often find themselves.
Where the value price gurus think it’s a crime to sell time (cost-plus pricing), Holden's ideas led me to see that in some situations and for some buyer types, selling time can be an elegant and surprisingly profitable solution – when done properly.
It’s almost impossible to separate the trinity of selling, negotiating and pricing and while Allan Weiss handles all three well, his guidance is tied to the sometimes intimidating value pricing approach. Reed Holden is the pricing expert that's made the most powerful connection to negotiating in Negotiating With Backbone, his excellent companion piece to Pricing With Confidence. I recommend reading both in the order they are presented here.
The Best of The Others
My honourable mentions for pricing books go to Rafi Mohammed’s The 1% Windfall, Value-Based Pricing by Harry Macdivitt & Mike Wilkinson (for its value triad concept), and Dan Ariely’s books, particularly his first, Predictably Irrational.
Kahneman’s Thinking Fast, Thinking Slow is a longer, meatier read on larger topics of the different ways the brain works and the sometimes surprising outcomes produced by the different systems. You can find good synopses of his work online, including talks and interviews were given by the author and his research partner Amos Tversky, who would have shared in the Nobel Prize Kahneman won for their work in anchoring had he not died before it was awarded. (It is never given posthumously.)
If you want to geek out even further into the neuroscience of it all, Ray Kurzweil, in his most recent book How to Create a Mind, offers a theory of how the neocortex – the most “human” part of the brain – works (Pattern Recognition Theory of Mind) that fully supports one of the behavioural economists' principles that people cannot subjectively perceive absolute values – they can only make comparisons. He does so without ever getting anywhere near the topics of pricing or behavioural economics. It’s a mind-expanding work for serious neuro geeks only.
Finally, Hermann Simmon, retired chair of global pricing consultancy Simmon Kutcher, has coauthored some books but most of his material is written for manufacturers and other large corporations. I still found many of his interviews and speeches to be interesting and helpful. You can find them online.
Win Without Pitching Pricing Resources
If you want to benefit more directly from my own education on the subject of pricing and its application to creative firms then consider the following Win Without Pitching seminars, webcasts and articles.
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If you want to know what the “market value” of your design work is in your part of the world, the French organization Money Design, publisher of The Win Without Pitching Manifesto French language version has an online calculator that helps you set prices based on what others are charging in your region. You can find it here.