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Are you Leaving Money on the Table? The secret to Value-based Pricing

I almost left the table.

It was one of those lunch meetings where I was meeting a client for the first time. And I almost got up and walked away. But at the last minute I decided to ask one more question: what brought you to me?

It wasn’t like I was getting up angry. I had heard his story, understood his needs, knew what I needed to do, and now it was time to head home and create a proposal. But for some reason, I decided to ask that last question. And when I did, everything changed for me.

Our Human Tendency

I recently read the latest book by the Heath brothers, Decisive. As a guy who’s read every book on decision science since 1999 and written a patent on decision science and the web, I wasn’t sure I was going to get anything from it. But I know better than to assume. So I read it on vacation a couple weeks ago.

It opens with a story that highlights our human tendency when it comes to decision making. We all make decisions quickly, even before we have enough information.

As I read the story of an employee, and as the Heath brothers asked if the employee should stay or get fired, I knew my answer. Then I kept reading and noted their observation that we didn’t have enough information. This matches the experience I had so many years ago at a cafe with a new customer.

Value Based Pricing

When you stop trading dollars for hours and start moving towards value-based pricing, even in your consulting work, the challenge is to know how much someone else will value your work.

The problem in discovering this “value” is that no one talks about the process for figuring this out. So some people know how to do it and others just look on from a distance and wonder how this “magic” is happening.

Today, however, I’m going to tell you the secret. And it relates to that cafe visit with a new customer. And it relates to our decision making ability. But it also relates to one last framework we need to grasp.

Problem & Solution Spaces

You may have never heard the terms, “problem space” and “solution space” before. That’s ok. They’re not difficult concepts to grasp.

The Problem Space is defined as the context where the customer lives, where they’ve been dealing with their challenges. Those challenges, and the entire history of how they’ve tried to solve them, is the problem space.

The Solution Space is defined as the context where you and I live, where we’re designing approaches to solve our customers’ problems. The designs, technology and tools we use are all part of the solution space.

Bringing It All Together

If you think about the last time you spoke with a customer during an initial meeting or consult, you’ll likely remember that moment where you stopped listening to what they were saying and you started designing the solution you would use to meet their needs.

It likely told you how hard it would be. It likely told you how much it might cost you. It likely influenced how much you thought you’d charge for it.

For some of us, it’s about 3 minutes after someone starts talking. For others, it’s 15 minutes. But unless you have some serious discipline, it’s unlikely you were able to completely focus on the problem without thinking a bit about the solution.

That’s because our tendency is to make decisions before we have enough information. We like to make snappy judgements.

This results in a problem for us though. And that’s that we’re so quick to jump into the solution space that we don’t spend enough time in the problem space. And if we don’t spend enough time in the problem space, we can’t discover someone’s value for solving the problem.

Marinating in the Problem Space

There’s a beautiful thing about marinating steaks, if you do it right. They come out so great when you pull them off the grill. But here’s the thing – you can’t rush the marinating. You can’t shove a steak into a plastic bag 5 minutes before putting it on a grill and hope that it will work. It won’t.

In the same way, you can’t spend 10 minutes in a prospect’s problem space and soak up the entire challenge and then expect to be able to determine value.

You need to invest time just marinating in the problem space. That’s how you make sure you’re not leaving money on the table.

My Cafe Visit and my last Question

So that day I asked the extra question changed everything for me, as I listened to my prospect talk about all the various things they’d tried before they found me. They had tried to create a solution on their own. They had tried to outsource the project. They had tried to do the work manually. And they had bought a system that hadn’t worked.

With each description of time and investment that he shared, I became more convinced of how important this project was to them. By hearing all the investments they’d already made, I was hearing the information I needed to price the project correctly. And even more importantly, the longer he spoke, the more nuances I heard.

There were details in his story that highlighted features I’d never considered. Thankfully I now knew more about them.

Finally, they told me how they’d heard of me, and what they’d heard. And that reinforced, even more, that they had a value on a “rush” job – even if it meant paying more.

Stop Leaving Money on the Table

Without the extra time to marinate in the problem space, I couldn’t have designed the right solution. I couldn’t have protected myself from features I’d missed. I couldn’t price the project to match their value. But with the time, I knew I wasn’t leaving money on the table.

I went home and put together a quote. They approved the same day. And I learned to marinate in the problem space a lot longer than felt natural.

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