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The Value Of Time

November 16, 2009

What’s your time worth? How do others value the benefit they get from the use of your time? These are important questions for professional service businesses that charge their clients by the hour for their services.

The key to success in the professional service business is to deliver value. Your clients are not buying your time, they are buying the benefits that will accrue to them from working with you. Those benefits are both tangible and perceived. If you can’t deliver those benefits you won’t succeed. If you can deliver, you need to establish a pricing strategy to value the services that you are providing.

The pricing of professional services is much more complex than the pricing of a tangible product. The price of a service signals to the buyer the caliber of your skill and competence. The price of your service will impact your clients perceived worth of your service.

Clients will more readily heed advice if they have paid dearly to acquire it. Your clients perception of your ability to solve their problems may be enhanced by charging high prices for your services. Instead of low prices and price reductions having a positive effect on sales, the reverse can often be true when pricing services.

When your professional services require an interactive dialog between you and the client, a higher price will generally have a greater impact on the perceived value of the service. When the ultimate decision maker is involved in the performance of the service, they like to feel they are working with the best. If your service is performed in isolation from the top decision maker, they will be more inclined to look for economy as a measure of value.

The actual estimating of value and the establishment of pricing is a much more complicated task for the intangible service than for the tangible product. Value given by the seller and value received by the buyer must be related to the time and experience invested in developing the skill and expertise needed to provide the service, the time required to perform the service, and the duration that the benefits of service performed are enjoyed by the buyer.

The price for your time calculated from a cost based analysis is a function of three factors, your labor rate, overhead, and a profit margin. To determine your labor rate, decide how much income you will need in order for your service business to be a viable entity and divide by the number of days you will be working. The amount of time spent working should include preparation and marketing time as well as time spent with the client. The result will be your daily labor rate which can be converted to an hourly or weekly rate as necessary.

Your overhead expenses will consist of all those costs that you will incur while marketing and delivering your service. Typical items to consider are office expenses, telephone, stationary, advertising, travel, and staff. Define all the potential areas of overhead expense, estimate the cost in each area, add the total estimated expenses and divide by the number of days you will be working to arrive at the overhead component of your fee.

The cost of your labor and the costs of your overhead comprise the cost component of the pricing formula. Because the labor cost includes compensation for your time, it is not uncommon for the small service provider to stop here. Don’t forget that you are running a business and like every other business, you are entitled to a profit margin above and beyond the direct costs of your service. Your final price should include a reasonable profit margin that reflects your risks and the value that you are delivering to your clients.

Communication with your customers is the key to insuring that your fees and your work are acceptable with your customers. An acceptable fee in the service industry is defined as “being paid happily”. A weekly or monthly status report that indicates the work that has been performed and the progress that has been made will further that communication.

While professional service providers have historically been reluctant to offer their services on a contingency basis, there are situations where a contingency arrangement can be advantageous. A contingency arrangement is appropriate when the service provided will result in an easily quantifiable and substantial economic benefit. In this instance, the customer will see little risk in employing the services and the provider will have an opportunity for a greater fee.

The contingency arrangement will also be advantageous as a marketing tool to overcome the anxiety of a reluctant client. A client who is perhaps uncertain of a professional’s ability to solve a problem will be impressed with the confidence of a professional willing to be compensated for results.

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