Rainmaker Problem #27: Pricing Work for Friends
A reader has ask for help with pricing work for friends. He writes:
I am finding that I will probably be doing an increasing amount of business with long-time friends whom I have known long before we entered a potential client-consultant relationship. I have found it difficult to pursue value-based pricing in these circumstances. Some of these people work for larger public companies, while others work for private ones.
I don’t let friends walk all over me, but I am not sure if I am in a minority when it comes to both my discomfort and (perceived weaker ability) to charge more premium fees. I have often internally used a concept of “fair” pricing or “customer means-based” pricing (what customer can afford), but I have not seen this widely discussed.
How should I be pricing work sold to friends?
January 13th, 2010 at 12:42 PM
If I suspect that a consultant is charging me based upon what they think I can pay, rather than their marginal cost plus a reasonable profit, I take my business elsewhere and will not refer them. And we probably won’t become friends.
January 13th, 2010 at 5:29 PM
I often find it difficult to even charge market rates with friends … provided a distinction is being made between value-based pricing, what a client can afford, and market rates …
January 14th, 2010 at 12:14 AM
I believe value-pricing is the only fair pricing policy, so this is what I use with friends as well. If they find it too high, we stop and stay friends without doing business.
Pricing is not about the marginal cost plus a “reasonable” profit but about the results the buyers are seeking, and my value of my contribution to achieve it.
What does the buyer want to achieve by using my help and support?
What is the gap of the current situation and the expected new situation?
I say “expected” because as an outsider I can’t control the results. I offer value and buyers have to integrate that value into their businesses to see new results.
Buyers make investments according to their expectations of the results. Some buyers intend to build pig pens and some intend to build castles, and they require different investments.
Investments are about the expected outcomes buyers are seeking not the invested costs and labour the consultant puts in.
I believe when we ask people to invest their own money in their own successes, we quickly learn how serious they actually are.
The message as to whether or not they believe in their own abilities to achieve their goals and dreams becomes crystal clear whether or not they cough up the dough.
My thinking may be simplistic but as a farmer I’ve learnt that I have to plant and no one can guarantee plentiful harvest.
January 14th, 2010 at 9:23 AM
I’m with Bald Dog on this one. If I can help a client earn an extra million dollars with five minutes of my time, why shouldn’t I charge $100,000 for the service?
Three questions:
1> Is there a risk that a client, even if a friend, might devalue our services if we don’t charge adequately for them?
2> If the consultant owns his own firm, isn’t one of the benefits being able to give a special rate to a client from time to time?
3> Does the decision to discount change if the friend owns his own company instead of working for someone else?
Ford Harding
January 14th, 2010 at 10:33 AM
If “friend” discounts are offered, it is probably still important to frame the offer in terms of value- or market-based pricing. That might help to address Ford’s question #1 a bit.
January 14th, 2010 at 11:05 AM
Question #3 raises another interesting thought. Is price discrimination based on size of (customer) firm widely used? If so, what are varieties?
January 14th, 2010 at 11:39 AM
Steve:
I wasn’t seeing Question #3 as a matter of size so much as one of whether you are truly benefiting a friend or the friend’s employer.
Ford Harding
January 14th, 2010 at 12:04 PM
Ford,
Yes. I probably changed the direction a bit. Good catch. Perhaps I was making an imprecise mental shortcut that benefiting the friend’s employer may tend to increase when the firm is larger (whereas the benefits may more likely accrue to the individual when the firm is smaller). Where the benefit accrues is a bit of a subjective measure and harder to price discriminate cleanly on. Probably why I was thinking fees based on size of client firm (e.g., revenues, profits) could possibly help manage the slippery slope …
On whether there is a difference whether one is benefiting the friend or the friend’s employer … the pressure to discount should definitely decrease where the benefits accrue to the employer.
January 14th, 2010 at 5:55 PM
Umm…value pricing means “pricing BASED ON the client’s value,” not “pricing EQUAL to the client’s value.” Presumably it means recovering your costs and then attempting to capture some of the (v-c) difference. Not only does v vary across clients, the proportion you’d try to capture does as well.
Whether you try to capture 100%, 70%, 50%, 30%, 10%, or 0% of this difference is entirely up to you. I don’t see anything that says friends can’t get a better deal, but neither do I see anything wrong with trying to capture SOME of it.