For most companies offering professional services, the business model is based on cost plus billing. This includes people like lawyers, consultants, accountants, marketing agencies, etc.
This is fine for starting up and getting the $ rolling to keep the lights on. However at some point you realize that that was fine for starting out and that it is completely flawed and doesn’t make any economic sense in the long run.
I’ll start with one issue with this model, basically you are capping yourself – I cannot generate anymore revenue than:
Number Of Hours I can reasonable work per year X my hourly billing rate
You work an hour, you earn an hour. Growth is extremely tough because for professional services, you end up doing two things:
- Hire more people to effectively generate more hours per day to sell (ex. just like a manufacturing company would build more and bigger factories)
- Improve and automate certain processes so that you focus on tasks that add the most value. (ex. just like a manufacturing company invests in better technology like robotics to increase throughput)
Number 1 is bad. Number 2 is great.
But the biggest problem is that you are now distracted. You are doing everything you can to generate more hours because that is what your business model is telling you need to do to make money. You are now faced with a dilemma with your customer because your business model has put you in a position to choose quantity over quality in order to be profitable. You then get into the argument of convincing your customer some task will take that many hours, while they try to convince you it will take less. This wouldn’t happen if you focused on selling and delivering value.
Nobody gets into the professional services business to sell time. They want to sell value. Not hours. A salesperson can talk you into buying a Hyundai. They can’t talk you into buying a Ferrari. People who buy Ferraris say “I’m buying that”. People who buy Hyundais say “I need a car”. There are many providers for the Hyundai class of cars, you don’t want to be in that ruthless, volatile, price based market. Just like the whole Mac vs. PCs. Apple isn’t in the $500 computer market for a very very good reason. You don’t want your competitive advantage to be your price or hourly rate. Just like driving on the highway there is always someone behind you driving faster; there will always be someone who can do it cheaper or quicker. And with a global economy that is a fact.
So what is one to do? Don’t tie your price to effort – easier said than done of course. Its hard because you are selling something mostly invisible, something customers will not see until “it” has been delivered. But people usually like to see what they are getting for their investment. I don’t want to just give money away, but since I can’t see “it” I’ll settle for seeing hours. Then you fall into the trap of believing that more hours equals more of “it” or better of “it” – which we all know is not the case.
You can’t stop tying your price to effort if you are delivering the Hyundais . You need to have the Ferraris of whatever service you are providing. Take an accountant. At first you’ll charge an hourly rate. After some time you realize you are consistently providing your customers a better tax return than other accountants in the area. Now you can step out of that ruthless, price based market and start charging a premium or a percentage around a service that kind of looks like a product. Now if customers want cheap, they can go to Joe Blow and Co for their tax needs. Why? because you don’t deliver cheap. You deliver value, and you have the numbers to prove it.
So now you got rid of your hourly rate, and are focused on delivering value. What can go wrong? You could still get distracted about what value is. Your perception of value may not be shared by the customer. Here’s an example. I did my taxes an H&R Block when I was a student. I loved it because I got my tax return right there, and it only cost me $50 or so. Why wouldn’t I love it, I pay them $50, and they give me a cheque for a $1,000 on the spot. A couple of years ago, I went to do my taxes there, and their printer was broken; they couldn’t print the cheque. They then sold me on taking my return on their H&R Block
debit disaster card. They thought it was an added value, I can use it just like a debit card; and it will charge me a fee per transaction just like a debit card. I was livid. But it didn’t end there. The bank that sponsored this debit card, wasn’t the bank I use. That bank also stopped issuing bank drafts to non-customers, so I couldn’t easily transfer my return to my own bank account. I was left with one option, go to my bank’s ATM machine, withdraw the limit I can withdraw, walk to the teller, and deposit it. Rinse and repeat until my tax return was in my account. So here we have a typical case were one’s “value add” idea wrecked havoc on a customer of at least five years.
Understand your customers’ needs. Understand how to add value. Don’t confuse value with effort, then learn how to charge for that value add. Don’t be the “cheaper” or “quicker” service, its only a matter of time before someone else figures out how to do it for less or faster.