Before we can set out to answer this question of how knowledge workers should price their product, let us first establish what is meant by the term, “knowledge worker”. Peter Drucker, coined the term “knowledge workers” in 1959. He defines knowledge workers as formally trained high-level workers who apply theoretical and analytical knowledge to develop products and services. In other words – their true service or product is their knowledge!
But how do we price knowledge? Raw material used in the manufacturing of a product has a cost… but the true cost of one’s knowledge is an accumulation of formal training, experience and expertise… and that is not as easy to ‘cost’. Traditionally, knowledge workers have used time as a measure of cost. And while this model has served its purpose in the past, the world of work is being disrupted and I believe knowledge workers are not exempt from this upheaval.
Consumers’ purchasing habits have changed and they have more power now than ever before as a result of increased accessibility and choice. Let’s consider supply and demand as a model for price determination … have you ever wondered what happens when technological advancements suddenly enables your market to expand exponentially?
In this age of connectivity and ‘all things cloud-based’ you need to realize that you are no longer competing against other knowledge workers in your industry in your city or even in your country, in some instances! If knowledge is your capital and you are able to connect seamlessly to anyone, anywhere… why would inhibitors such as geography continue to limit your supply of such knowledge? While this might be a terrifying thought… that suddenly the supply of whatever it is you’re selling has just exploded, the converse can also be true. If you’ve remained innovative and adapted your business, you should be in the position to capitalize on the increased demand for your services also!
We are starting to see the first accounting firms claiming to be online digital accountants and I’m sure there are knowledge workers in other industries who also offer services across invisible geographical borders. In this global market of seemingly disconnected connectedness, how are we to differentiate ourselves? VALUE! We need to start thinking about the services that we offer in terms of the VALUE that our clients and potential clients derive from these services.
We at Kael Consulting are in the very early stages of adopting a value-based model for our accounting services. And I am deeply challenged by the shift in thinking that it necessitates. When you start focusing on VALUE – it affects every aspect of your business. From how you talk about the services that you offer; to how you price your services; how you track, monitor and even evaluate the deliverance of your services; to how you think about your client – and more importantly, how your client thinks about you!
The traditional pricing model utilized by knowledge workers has been to track their time and bill clients for the time taken to provide a service. However, as a client… do I really care how long it takes you to do your work? Why would I pay you more for taking more time to do something for me??? The idea is truly ludicrous if you take a step back and really think about it. In today’s rapidly evolving and disrupted world, we also have the opportunity to invest in innovative solutions and software that can make us more efficient. However, if we are billing time, what would incentivize us to invest money into technology that would ultimately reduce our billings through improved efficiencies??? We cannot create more time in a day and so we are limited by the hour hand of the clock which, for all intense purposes, has absolutely nothing to do with the services that we provide AND the value that our clients place on these services.
So, what is this value-based model all about? The value-based model focuses on the VALUE that we provide to our clients through our services. It is a much more client-centric approach as it necessitates understanding the client and their perceived value of what it is that we are offering. Services are discussed with the client and a fixed value-based price is then agreed upon – and measured, not by time, but by the value it creates for the client. An example of this model is being implemented by Uber, who has disrupted the industry norm of time billing. They have taken the traditional ‘time based’ billing of taxi’s and have implemented value-based pricing by setting a price for the trip up front.
Think about legal or accounting fees. When you receive an invoice from such knowledge workers… does the mystery of what you are to pay for their services not fill you with absolute dread? As a business owner, I know how awful it is to have an unexpected invoice wreak havoc with my cash flow. And all the while, I think, “if only I could have known how much to budget!”
Clients aren’t interested in how many hours it takes to deliver a service. Value-based pricing changes the conversation to “what is the value for the client?” If we focus on the value added to the client and provide an agreed upon fixed price, it improves client confidence. Our clients don’t buy our hours – they engage with us for our knowledge, innovation and solutions. This paradigm shift also encourages us to better manage expectations around our service delivery. Because we are no longer selling time, we start to have very different conversations with our clients. We start to explain what it is that they need from us and the risks associated if they decide not to consume these services. We start to define the relationship better and manage expectations around what it is that we are delivering. Suddenly the relationship starts to look and sound a lot more like a partnership!
Internally, there is also a shift in the office. People want to know that what they do matters. When we feel as though we are providing true VALUE to our clients rather than tracking how many hours we’ve worked on a specific task – we will experience more satisfaction and fulfillment in our work. The conversations around the office also starts to evolve. Once again, the focus shifts to service delivery and value as oppose to time – and this can only boost morale.
So, how should knowledge workers price their product? Well, we believe that the services provided by knowledge workers should be priced in terms of VALUE and not time! What do you think?