The first rule of any business is simple: Add Value. It ought to follow that the second rule should be to properly charge for it. Unfortunately many Integrators struggle mightily with this seemingly basic tenet. Instead of taking the time to think critically about our how we price our services, we rely on the basic cost-plus model.
The problems with this pricing model are numerous. Put in its simplest form, cost-plus often leads us to underpricing our services. But on a philosophical level, the problem can be even more malicious. It makes us lazy.
Cost-plus pricing doesn’t challenge us. We do some basic math: Providing the parts and labor to make execute this system will cost us X, so we sell it for Y. The difference between X and Y reflects the Value we are providing. What could be more simple that that? The problem is that this math is exactly backwards.
An article I came across recently on ThoughtLegion.com illustrated this concept beautifully (The First Law of Marketing – All Value is Subjective - give it a read here). I could try and say it myself, but why bother when someone else has already done it so perfectly:
The costs do not determine the price, let alone the value. It is precisely the opposite; that is, the price determines the costs that can be profitably invested in to make a product desirable for the customer, at an acceptable profit for the seller.
It reads like something out of an economics course, but the underlying principle is simple. The ultimate arbitrator of price is not the cost, but rather the value as perceived by the customer.
When it comes to increasing our profitability, the cost-plus model turns us into bean counters, focused solely on driving our costs down. So-called “Pricing on Purpose”, or value-based pricing, does something quite different. Instead of dealing solely with costs, pricing on purpose challenges us to raise our perceived value, a sure path to driving our price up. And who wouldn’t want that?
So how do we raise our perceived value you ask? Well, you’re in luck. This is part 1 in a 5-part series titled “5 Ways Integrators Can Charge More for Their Services”, the series will be a primer for those interested in implementing Value-Based pricing in their Systems Integration business. Stay tuned for post number 2: “Living Spaces First, Technology Second”…
As always, happy integrating!
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