Pricing your offerings often invokes emotions of anxiety because one rarely knows with certainty what the cost of delivering that offering will be. Those future costs are impacted by both external circumstances largely outside your control, and internal variables to account for (labor effort, technical maintenance, overheads, etc.).
Smart pricing teams combat external circumstances by controlling for variables that can be hedged against future changes (Forex rates, inflation, scope or product change, delays, etc.). Whether accounted for in the pricing itself or the terms and conditions of each contract, these processes ensure your business can adjust pricing in near real-time for these conditions, or at the least enter discussions with the customer to collaboratively determine the path forward.
Internal variables are far more difficult to control for because most offerings include some aspect of fixed pricing (even hourly based services). The stakes grow in proportion to the timespan in which you deliver your offering- the stakes are far higher for a 5 year services contract starting next quarter than a two-day training starting next week.
Past Performance...
Given how most organizations are swimming in operational performance data, it seems natural to combat these internal variables by relying on past data to inform pricing:
If it took 8 hours per [task] per month on average to provide that service in the past 12 months, shouldn't your pricing reflect that average going forward (may 10 hours to be safe)?
If it actually takes 90 days to complete customer implementation onto your platform, shouldn't your pricing be based on that data, even if the goal is typically 60 days?
If your subcontractors routinely exceed their budgets, shouldn't your pricing include an overage factor going forward?
After all, past data is better than no data, right?
...Does NOT Guarantee Future Results
The problem with relying on past data is that, well, it happened in the past, when:
Your systems and processes were less efficient
Your employees were less experienced
Your management of third parties was less disciplined
Outdated SOPs were in play
Specifications of your product were different
Basing your go-forward pricing on past performance locks in your historical inefficiencies, inexperience, indiscipline, and outdated processes / specifications. Several pernicious results then follow:
the longer the timespan of your offering, the more uncompetitive you become in the marketplace (e.g., the 5-year versus 2-week example above).
you encourage an organizational mindset that fears and resists change and innovation, and doubts the efficacy of continuous improvement.
worst of all- for weeks, months, even years into the future, your operational teams are working towards the metrics of past systems, processes, and organizational objectives.
Why would you price a 5-year contract as though you are working with last year's (or 2019's) systems, processes, and people?
Why would you price a 90-day implementation when the company has newly committed to 60 and is releasing a toolset that makes it achievable?
Why would you build in a pricing buffer for subcontractor overage when your subcontractor agreements now have firm caps and you have a team responsible for monitoring their usage?
Price for the Future, Not the Past
Build your pricing around your new and upcoming processes, expectations, and ambitions.
Create consistency in what your organization is trying to achieve (more efficiencies, better service, better quality, rapid implementation, etc.) and what you tell customers (and your staff) through your pricing.
Raise the stakes within your organization by emphasizing the need to continually improve operations so that pricing can be as competitive as possible to ensure the long-term financial health of the organization.
Price for the future, not the past.
-----
As always, contact me or book a meeting to discuss how these principles can be applied to improve the performance of your business.
