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Alastair McDermott, Ron Baker
Ron Baker 00:00
Problem is from the customer standpoint, I don’t give a crap about his inputs, right? In fact, now I’m sitting there thinking, well, $40 an hour is that for every person you send out here, what if you guys just decide to take breaks every three minutes? And is am I gonna pay for that too? So it leads to more questions than answers.
Welcome to The Recognized Authority, a podcast that helps specialised consultants and domain experts on your journey to become known as an authority in your field. So you can increase your reach, have more impact and work with great clients. Here’s your host, Alastair McDermott.
Alastair McDermott 00:35
Today, my guest is Ron Baker. Now, I do have Ron’s bio here in front of me, but he told me before the pre show that his bio actually bores him. So let me give you my version of his bio. Ron is a legend in the world of value pricing. If you ever see in NFL they talk about the coach and who the coach learn from and they have this chain going back. So I’ve learned about value pricing from people like Jonathan Stark, and Christo and Blair Enns. I think that everybody can can trace a chain going back to Ron, where Ron has been writing and talking about value pricing for four decades. And so Ron, I think that like you’re you’re known as the godfather of value pricing, is that is that true?
Ron Baker 01:15
That makes me feel old? But yes, I, some people do call me that.
Alastair McDermott 01:21
Yeah, yeah. So value pricing. And the reason I really wanted to talk to you about this is something that I’ve spoken about before on the show, with a lot of different people like Michael Zipursky. And Brad Farris, and lots of others, is that it’s almost like a mantra when I’m talking to my clients that I recommend that people raise the prices. And quite often they say, you know, how do I raise my prices? You know, it’s difficult to do that. And I think that one way, one really important way to do that is to look at value pricing. But value pricing is not easy to understand. And it’s not easy to implement. Maybe it is easy to understand, actually. But it’s certainly not easy to implement. Can we talk about value pricing? Well, can you just explain what value pricing is?
Ron Baker 02:05
Sure, a value pricing is essentially charging for the value that you create for the customer rather than the time or the costs that you incur. So you say value pricing is hard to understand. And I think for a lot of people it might be. But the, it’s actually really easy. If you start from the assumption that all value is subjective, it’s in the hearts and minds of the buyer, then it’s easier to understand, because you start to realise that different customers have different perceptions of value, even on different days. So if you take a bottle of water, and you look at the three elements of that model of water, the cost of producing it to Pepsi or Coke, or whoever the price, it’s going to command in the marketplace, and then the value to the customer, those are three very separate things. And if you know we can think about the cost, I mean, Pepsi knows what it cost to produce a bottle of water. What about the price? Well, that price, if you think about it is not just one single price. Depending on where you buy that water. If you buy it at a Sam’s Club, or Costco or some you know, discount store, you’re buying it by the pallet. So it might be a dime per bottle, as opposed to a grocery store, or it might be a quarter, as opposed to say, an amusement park or NASCAR track or an outdoor event or hotel, minibar or an airport or a hockey game that you could pay up to six or $7. So the price varies kind of dramatically. If you think about it, that has nothing to do with costs, it costs the same amount to get the bottle each one of those locations. So why does the price vary so much? Well, then you got to look at the value. If you think about the value of a bottle of water, if I’m in the desert, and I haven’t had water for four or five days, I’m willing to trade everything I have for it, maybe go into debt substantially, because now that waters instrumental to my survival. If I’m home, washing my dog with the same quantity of water, it’s worth a lot less. And if I’m flooded my basement with water, now it’s got a negative value, you have to pay somebody come and pump it out. Again, those three areas of water is the difference in value is not explained by the cost. And that’s the important thing to understand. Prices are very contextual. And all value is subjective. It’s in the hearts and minds of the customer. And if you think about it, it has to be that way to explain how the world works. Because if it was true, that value was simply determined by adding up all your costs and production, tacking on a desired profit margin that you that you wanted, well then no business should ever go bankrupt, because it doesn’t take a rocket surgeon to put, you know, a price above a cost. But businesses fail all the time. And a lot of businesses don’t even make an economic profit. So what’s going on there? Well, it’s because the customer is rejecting the price offered in the marketplace. And so when you look at it from this perspective, I think it becomes a little bit easier to grasp that at the end of the day in the real world cost is not determined price, price actually justifies the costs incurred by the business. And what determines that price? The value to the customer.
Alastair McDermott 05:21
Okay. Okay. Very interesting. So if price is subjective, and can change from day to day, even in the mind of the of the client in the mind of the customer, if we have a consulting project, and so we have, we have listeners here, independent consultants, and they’re thinking, okay, so, you know, I’m trying to price a project for this prospective client here, how can they hit it like something that’s a moving target that is subjective from day to day? You know, how do they actually go about trying to price something like that?
Ron Baker 05:53
It’s a good question. Because there’s no silver bullet answer to this, you’ll never know if your price was right, precisely, because value is subjective. One of the things that we outside consultants have to deal with is, depending on who inside the organisation we’re dealing with, there’s going to be different perceptions of our value. Some of those people inside the organisation who could be in the C suite don’t want us there at all. Others are dying to get us in there to do whatever. So there’s a difference right there, you know, you kind of have to focus on the economic buyer from that perspective. But what you really have to understand if you want to get at value, because there’s no formula for it, there’s no objective way to get there. And I think this is one of the things that frustrates a lot of business people. And I’m a recovering CPA, and nobody likes objectivity and accuracy and precision more than me. But with value in pricing, you just can’t do that. I rather be approximately right about value and pricing rather than precisely wrong, which is where you end up if you try and use a formula for this or something. And so get a better handle on what it is that your customers are trying to achieve. I’ll give you a real tangible example, that I think will stick with a lot of folks. I hire a landscaper, and to come into my yard, the edging, the mowing, trimming the bushes, trees, all that first guy comes out, he’s trying to price me by the hour tells me it’s 40 bucks an hour. Well, okay, he’s pricing me based on inputs. The problem is from the customer standpoint, I don’t give a crap about his inputs, right? In fact, now I’m sitting there thinking, well, $40 an hour is that for every person you send out here, what if you guys just decide to take breaks every three minutes? And is am I gonna pay for that, too? So it leads to more questions than answers. The second guy comes out, he says, looks around gets a scope of work kind of in his head. And he says Ron would no problem we can do all this $100 a month, the third guy comes out and he actually engages me in the conversation. So we’re on tell me about yourself. What do you do? I’m a consultant. I travel a lot. And he says, I take it you’re not Martha Stewart. You don’t like yard work? I got that. Yeah, I hate yard work. It bores me. I don’t want to look at it. I don’t want to think about it. Something’s broke. Just fix it. If a plant dies, replace it. I have if I see it before you, I’m going to think you’re a lousy landscaper. Because you’re the professional. You’re out here every week. You need to keep track of that stuff. And he says I totally understand. He says, is that why you’re switching from your prior landscaper? And I said yes, exactly why? Because I have to go out and point out flaws to them. And I’m not the expert. I’m not the Pro. That’s their job. And he says I totally understand, he gives me three options. He says I can bring your yard up to neighbourhood standards, basic maintenance, well, first off basic maintenance. And that was like $150 a month, he says, or I can bring your yard up to neighbourhood standards. And that was like $200 a month, he says, or top option, I can give you the best curbside appeal in the neighbourhood. In other words, over time, we’re going to upgrade your landscaping. That was $300. Three times more than I’m paying right now. Which one did they go for?
Alastair McDermott 08:59
I’m guessing he went for the middle option.
Ron Baker 09:01
I went for the top option because I’m going to sell my house in a couple years. Right? Because if you’re going to sell your house in a couple years now, how did he know that? He asked? He asked. So here’s a guy who took $100 job away from a competitor turned it into a $300 job. But here’s the moral of the story. I’m a happier customer. This guy is only focused on giving me the best curbside appeal, and I could care less how he achieves it. I could care less. I’m paying for the outcome. I’m paying for the transformation of where my yard is now to where I want it to be. And that’s what we need to focus on as consultants. Because when you provide transformations to your customers or their businesses, you’re actually moving them from where they are to where they want to be. And when you provide a transformation, the customers the product, and that’s an incredible value proposition that commands a very premium price. And if you use the language like my landscaper did, you’re going to differentiate yourself from all the other consultants out there blabbering on about scope of work deliverables, hourly rates, full time equivalents, all of which the customer could care less about. And you’re going to focus on what is important to the customer. So the value conversation is really trying to figure out what your customers best curbside appeal, because I promise you, every customer has three categories, best curbside appeal, basic maintenance yard up to neighbourhood standards, whatever it might be, you’ve got to figure that out. And that’s going to be different by customer. And because you’re pricing the customer in value pricing, you have the ability at a very low marginal cost to figure that out.
Alastair McDermott 10:40
Okay, so so let’s, let’s just wrap back around to the other options for a second. So option number one is hourly pricing. And in that option, where you got this offer from from the landscaper, all the risk is on you, you don’t know how many hours it’s going to take what other tricks they might play with that. So that’s that’s one, one option. Another option is just the fixed price. And that was your option two and, you know, it’s going to be what the price is going to be. And fixed price is where a lot of consultants will move to,
Ron Baker 11:15
Alastair McDermott 11:15
They will price basically fixed price. And, and so what they’ll do is they’ll try and figure out what’s the scope of this project? What do I need to do? What would be a healthy profit, profit margin on that, and then I need to make sure I locked down that scope. Right?
Ron Baker 11:29
Alastair McDermott 11:29
And then the third option is your value pricing. And so value pricing is also giving a fixed price, right? You are asked with fixed pricing, you can also give options. That’s pretty typical. But with value pricing, what you’re doing is you’re basing that price off of this value conversation that you have, where you get to understand what the customer is looking for. Right?
Ron Baker 11:53
Right. Because if my landscaper went and talk to my neighbour, my neighbour loves yard work. So he’s got a totally different value proposition with that landscaper, maybe he’s only bringing them in to do something specific. But whatever that landscaper did for him, even if it was on a recurring basis, it would probably be much less than he’s doing for me. So it would be adjusted, he’d get that my neighbour would get a totally different price from that landscaper. And that’s what I mean by pricing the customer. We’re not talking about a menu price here where we all pull up to McDonald’s, and pay the same price for every, you know, value meal or whatever. It’s a customised price. It’s like the McDonald’s menu would change as each car pulled up, depending on, you know, if you’ve been driving for 10 hours in your start, you’re probably going to be willing to pay more
Alastair McDermott 12:38
Quite a bit the argument that that seems unfair, that, you know,
Ron Baker 12:41
How can it be unfair if the price is given in advance, and the customer approves it, if the customer volitionally goes into a transaction by definition that they’re getting more value than they’re paying? And I think what’s really unfair, is the billable hour, because the price is oblique, and it’s hidden from the customer. And I think that’s where all of the the abuse comes in. There’s no abuse with a fixed price. Now, if you’re incompetent or create some type of malpractice or don’t do the job, right or whatever, okay, yeah, there can be problems no matter how you price. But the problem with the billable hour is it’s a lousy customer experience, because the cut all of a sudden, now the customer, you’re making me think about how long you’re going to take to do my yard with my current guy, I could care less. In fact, a lot of times, I’m in here doing a podcast like this or something, the quicker you can get done, I’m happier because there’s no all you know, outside noise. So there’s no correlation between the time it takes to do something and its value. And I think the problem with the billable hour is it measures the wrong thing. It’s just the especially for expertise, especially for knowledge work, especially for consultants to to to use time as a measurement of value is the equivalent of plunging a ruler into the oven to determine its temperature. It’s the wrong measuring device.
Alastair McDermott 13:59
Yeah. Okay. So there’s a couple things I want to dig into a bit more. So the first thing is, you know, just back to the, to the question, but fairness, I think if you look at aeroplane airline ticket pricing now, like, I don’t think that there’s two people on an aeroplane of 300 people who have pre paid the actual same price for those tickets. You know, everybody’s got a different price coming from different sources, maybe based on how many it is to an exit, multiplied by how late they bought the tickets, multiplied by what third party website did they come through? And who knows what else is going into those pricing decisions? So I think that’s, you know, that’s an example we can look at to say, okay, that that’s kind of consumer level value pricing, so and clearly it works in that industry. So the other thing that that I think terrifies people with fixed price projects is scope creep, because that’s something that we we get from clients, we get this pushback. Um, can you talk a little bit about scope creep, as it relates to value pricing?
Ron Baker 14:57
Yeah, just on the airline thing. That’s absolutely right. It’s called dynamic pricing or, you know, yield management, revenue management, the hotel industry, rental car companies are doing it. Even sports teams now are pricing based upon the game they’re playing, who the competitor is maybe who the, you know, the starting pitcher is, they might vary the the ticket prices. So it’s called price discrimination in economics. And I know that term discrimination has a terrible connotation, but it’s also got 150 year history in the literature that I’m not about to change. The fact of the matter is price discrimination is ubiquitous. It’s all over the place. And every time you clip a coupon every time you pay a child’s price, every time a drug is sold in one country cheaper than another. That’s all price discrimination. And there’s nothing unfair about it. In fact, it’s got huge welfare benefits. If it wasn’t for price discrimination, there would be no Tuesday matinee tickets at the theatre, there’d be no children prices, there’d be no senior discounts, there’d be no drug pricing in lower income countries, enabling them to get some of these wonder drugs. Price discrimination is absolutely essential for the workings of an economy. And the airlines kind of rethought the world that in the days when the airlines started to do like you were saying out, Alastair, about the different prices for everybody in that plane. If you found out like, say in 1979, when they started that, that the guy next to you pay 10% of what you did, you’d be very upset with the airline. Let me ask you this today, when you find that out, if you find it out by chatting with your seatmate, who are you upset, Are you upset with?
Alastair McDermott 16:31
Yourself for not for not having found that deal.
Ron Baker 16:34
The airlines train the world on that very point. And that was massive. So you asked me about scope creep. So when there’s scope creep, people, I know, people freak out about this? Well, if I give a fixed price, what what if something happens that we didn’t anticipate or the customer wants to change something? Whatever. Okay. Is there any is, is there any industry that’s had to deal with this? That’s like one of my first questions Who else has had to deal with this? Auto mechanics and contractors. In fact, I’m pretty sure the change order and change request process was developed by contractors. So when you have a change order with your contractor, they have a discussion with you, Hey, I knocked down your walls, build your game room, and you’ve got dry rot and termites, okay? Well, they’re not just gonna sit out there and fix it, they’re gonna come and have a conversation with me, here’s the problem, here’s the diagnosis. And maybe here are some options on what we could do to solve this problem for you, they get my input, I get to make the decision. And then they go ahead and do it probably with a price adjustment, maybe a timeline adjustment as well, on the date that they’re going to complete my game room. Mechanics do the same thing. If they find something else in your car was they’re working on something else, they’re going to call you at your office and ask you, hey, you need brakes. And you’re going to say how much and they’re going to give you a price, they’re not going to say, well, we will track our time and fill out the timesheet, when you come to pick up your car, you know, you’ll give us what we bill, you know, you’re not going to give them a blank check, you’re going to want a price. So the change order is actually a communication tool. And it’s brilliant, and the contractors developed it. And for the life of me when I started studying this in the 80s, I had no idea why we weren’t using this. Because contractors developed it. I don’t know why. And to a large extent, a lot of firms still don’t use it today. It’s those are the those are the ones that value price. But a change order. It’s it’s not that difficult of a process. Now, here’s the difficult thing about it. When you see scope creep, you have to stop, pull back and have a conversation with the client. And what I’ve learned after 31 years of doing this is professionals don’t like to talk to the client about price. They try and avoid that conversation.
Alastair McDermott 18:39
Ron Baker 18:40
And it boggles my mind, because price is always important, but its price relative to value. And why we’re so afraid or ashamed or fearful of talking about price has always baffled me, it’s always baffled me because it’s a big part of our relationship with our client. You can’t hide it, it’s there. You might as well just get it over with and that way you have a better opportunity managing client expectations as well.
Alastair McDermott 19:06
Yeah, absolutely. It seems to be something you know, ingrained, not just culturally, but you know, in our species that we don’t like to talk about pricing and cost. And it’s a difficult conversation and speaking difficult conversations. And let me segue into the value conversation itself because it just to give listeners an example of this or kind of a background on this, I discovered value pricing by 2018 or so. And I consumed as much information about it as I could. And I started trying to implement it. And so I put I’d say that I put into clients, I’d say I delivered probably about 15 proposals with value pricing. And I think I was successful with three or four, a handful and I just found the whole process. It was a very steep learning curve. So I just want to talk to you about you know the value of conversation and why, why that’s so difficult.
Ron Baker 20:01
Yeah, that’s a great question and that is the most difficult. So don’t feel alone, please there be, there’s two guys that I look up to on the value conversation. They’re both colleagues of mine. So they’re not going to mean anything to the audience. But I’ve watched these guys in live meetings with customers, and they are masters at asking the question. They are the masters of the art of dialogue. This is an art. It requires incredible listening skills, because you should only talk about 20% of the time. It requires you to constantly ask a more beautiful question. So the art of studying questions and there’s a great book out there by a guy named Warren Berger called “A More Beautiful Question”. And it is amazing, because really crafting a beautiful question. I mean, Socrates said half the wisdoms in the question, not the answer. And when I think about consultants, you know, consultants are not paid for answers. They’re paid for questions. McKinsey, you know, they don’t know how to run a business any better than the family that’s been running it for five generations. But what McKinsey has is one an outsider’s perspective, because it’s hard to see the you know, the label when you’re inside the bottle. The other thing is they have better questions. And so asking real good questions like that landscaper who came to me, he asked me questions I’ve never been asked before by a landscaper, most landscapers, you’re lucky to get a quote out of them. This guy had a conversation with me now we were walking around the house, and he was scoping things out in his mind. But he wasn’t boring me with that he was talking about me and what my goals and objectives and future preferred vision was for the future, you know, all of that. And so the value conversation is an art. But it’s also a skill, meaning don’t fret. If you’re not good at it, you’ll get better the more you do it. And the two guys that I know who are really good at this, I’ve asked them, I have a couple shows with one of them guy named Dan Morris. And we asked them, Dan, how often do you think you get the value conversation? Right? This guy’s a master at it. He said maybe 40% of the time. So yeah, 40% gets you in the Hall of Fame. If you’re in baseball. So don’t beat yourself up. I mean, don’t let perfection be the enemy of you know, progress,
Alastair McDermott 22:10
Ron Baker 22:10
Just do it and get better. But it is difficult. And I think it’s difficult because it’s so we’ve just never been taught it we’ve never been educated about it’s not part of the culture of how professionals work. We’ve always slid a engagement letter across the table with our blasted hourly rate and hope the customer signs it and you know, we get started on what we enjoy, which is doing the work, that the value conversation requires you to step back your requires you to take on the role of a doctor. And the second law of medicine is, first laws obviously do no harm. But the second law of medicine is a prescription without diagnosis is malpractice. And if we don’t have that in depth conversation with the customer, we don’t really learn what they’re seeing, you know, the patient understands the symptoms, but the doctor understands the disease, the doctor has to treat the disease, not just the symptoms. And so it’s up to the doctor to do a thorough diagnosis as many tests as required a fant thorough family history, we need to spend more time as consultants doing reconnaissance and doing diagnosis. And you know what I found, we just don’t do that. We just we just jump right into the work because that’s our comfort zone. But we need to step back and go, Okay, what is it really trying to achieve, because there may be a better way to do it, they may not need you to do it, you may not be able to do it because you don’t have the expertise. Or they may have unreasonable expectations about what’s going to happen to them, if you didn’t do it. And if any of those things are present, then you have to even maybe turn down the engagement or the customer, because you have to understand how they judge success. And that requires an upfront upfront dialogue and conversation that I think we take enough time to, you know, to do that military has got a great saying, time spent and reconnaissance is never wasted. And I feel the same way about diagnosing the customer.
Alastair McDermott 24:01
Right. So I know that people listening to this are not going to walk away from listening to this episode with a thorough in depth understanding of the value conversation. I think it’s something that you have to do more research and learning. And you have to practice it. But could you actually talk about the specifics of like, what questions are you actually asking there and and what are you trying to do with those questions? Can you can you just give us like that kind of a basic framework on on how to approach that?
Ron Baker 24:30
Yeah, I mean, there’s lots of books out there with customer questions, yelling what keeps you awake at night? You know, I’m more interested in what what motivates you to get out of bed in the morning, you know, what your purpose is, but just really, you know, what are they trying to achieve? What are their what’s their competition, like? What’s their business model? Do they have any plans to change their business model is there a competitive pressure on them, you know, just all of those things, whatever is your that your area of expertise is but more focused like that landscaper did with me about focusing on what I was trying to accomplish while I’m trying to sell the house. So best curbside appeal is really a big, big motivator for me. And he learned that, and you only learn that because he spent a half hour kind of walking around the house and engaging me in a conversation. And those are the types of questions that that really, that really, I think, help you formulate the impact that you’re having on that customer and the value that you’re creating. And then of course, that allows you to set a price, you know, that you think is commensurate with that value, but certainly lower than that value. So the customer makes a profit, so both sides profit. So look, I have no idea how my landscaper came up with $300. And I don’t really care, I do know, three times more than what I was paying. But he knew I was changing. So I had to be upset with my prior guy. So he knew my price sensitivity was lower than most of his customers probably. So I don’t know, I may be his most expensive customer. But I assure you, if the guy does everything, I don’t have to do a damn thing. And he takes really good care of me. It’s like white glove service like that first class seat airline, and I’m willing to pay it and I probably he’s got other customers who are too and maybe even more, but that’s the art of that value conversation.
Alastair McDermott 26:18
So when you’re having that value conversation, just the client know that that that’s what you’re trying to achieve is to you’re trying to figure out what the value is to them. And then if they do, is there a pressure on them to try and downplay the value of it? Is that something that you that you’ve encountered?
Ron Baker 26:35
No, because I don’t, I wouldn’t call it the value conversation with the customer. I just, you know, it’s a conversation to see if you’re a good fit, you know, you could call it your onboarding process. You could call it a diagnosis, prescription needs and diagnosis, or just, you know, are we the right fit for one another? I mean, it’s not that you’re trying to manipulate them, it’s, it’s, you’re really trying to give them you know what they want, it’d be like going to an architect and saying, Give me my dream house? Well, his definition of a dream house and my definite might be completely different. He’s gonna have to ask a lot of questions about how I live in my family and all of that. It’s that type of discovery processes. Maybe it’s called a discovery. I think Blair Enns has a very interesting, he’s got three steps to the value conversation. I can’t remember they’re laid out in his book. And it’s a really nice approach. I thought, but and there’s a lot of different frameworks for it. But it’s really important to take the time to do that. I think.
Alastair McDermott 27:33
Yeah. His book is called “Pricing Creativity”. And the first conversation he has, I think, is called the probity conversation, which is basically where you’re, you’re proving you’re trustworthy. And sometimes,
Ron Baker 27:45
Alastair McDermott 27:46
Need to have that conversation if you’ve built authority, like, right, right people bet. Or if you get a personal referral from somebody they trust, and so that trust comes along with it. And then you can go into, I don’t know, does he call it the discovery conversation or
Ron Baker 28:01
Something like that? Yeah.
Alastair McDermott 28:02
Yeah, yeah, I do have a sheet, by the way, just for listeners. I do have a sheet of sales questions that might be useful for people. If you go to TheRecognizedAuthority.com/sales you can download that. And it’s, it’s actually a sheet of questions that I use in these kinds of scenarios. Just to give some, just to give like a quick overview of that, the first thing I do in the meeting is, is I asked about the current situation and try and get them to do a brain dump, basically, for 15 or 30 minutes where they just upload the whole picture. And then I start asking some of those other questions. I like Jonathan Stark, he has a very simple framework that is very easy to remember, which is “Why this, Why now Why me”. So why this way you do this? Why is it a priority now? And why did you decide to talk to me instead of you know, reaching out to somebody cheaper, you know, you could hire somebody overseas, or you could, you know, hire somebody straight out of college as an intern or something like that, basically, trying to get into it that way.
Ron Baker 28:58
Right. And I love those two, it’s just that when once they answer those, you still have to go deeper.
Alastair McDermott 29:04
Yeah. And so some of the other questions that I have, I think some of this comes from Jonathan Stark, some of it comes from Blair Enns. Some of it comes probably through your interviews and podcasts, I’ve also listened to how can your business improve as a result of this? What is it currently costing you? What’s the cost of inactivity? Or not doing not doing this? What if you invest in a new solution, and it failed? So some of those kinds of questions. I still find those questions very difficult to implement to, to deliver in a meeting, and then turning that turning that conversation into an actual number. And, and that’s difficult. You know, if if we’re looking at something and saying, Well, you know, if we if we implement this project, and other people implement their parts of this project, the headline number will be, you know, $10 million a year in revenue, let’s say so what’s my percentage of that. And then is it a single one off? Or is it a recurring thing? And then what about the fact that other people are contributing to this? So all of that needs to go into the mix. Can you talk a little bit how you actually come up with a number, then based on something like that, if you want to use that as a hypothetical?
Ron Baker 30:15
Yeah, no, it’s it’s a great question. It’s an art. It’s an art, you know, if I know I’m having a million dollar impact on a customer, I, first off, I do have to figure out if that’s a one time thing, or is that recurring? If it’s recurring, then I got to discount it back to its present value. So it can’t be just, you know, 1 million times 10 years, it’s got to be discounted back to a present value. And you know, McKinsey has a juris stick that they use that, you know, they try and make whatever value impact they’re having equal to at least three times the price that you’re paying them. Now, that’s a rule of thumb, I’m sure they violate it. But that’s kind of where they start just probably in their heads. And I’ve always found that somewhat reasonable. I think sometimes it can be more pink, sometimes it can be less, but you have to really take into account, is this a one time customer or is this a customer, we’re gonna have a long term relationship with things, this is one of the things that subscription model puts at the forefront subscription model is all about recurring value. So the metric and the subscription model is not the math of the moment, its lifetime value. And so you would, you would definitely only go after customers that were recurring value, you probably wouldn’t take a one off type engagement under a subscription model, there’d be no reason to, because subscription is about holding that customer for as long as you can. So you know, you’re just gonna have to experiment with this and do it by iteration. But here’s the thing, first off, it’s going to make you better at creating more value for your customer. Because those in depth conversations are going to lead you to what your customers really trying to achieve. And if you can achieve it for them, they’re going to be happier, and they’re going to be happier, even if they’re paying you more like I am with my landscaper, I’m paying him three times more per month than my prior. And I’m happier. So that that’s really the moral of the story is you’re going to be able to create more value, you’re going to be able to command a higher price, even if you blew it. And maybe under price. The thing is with pricing with value pricing, you learn from your mistakes, you’ll you’ll have a sense, you’ll have to figure out did I leave money on the table on that engagement. And if I did, well, I’m probably going to be bolder, next time, my price with the next customer and you’re going to get bolder and you’re gonna get bolder and you’re going to get bolder, and that that’s going to happen. Whereas with hourly billing, we tend to make the same mistakes over we write down, we write off the customer complaints mean, okay, there’s no education, the third kick of the mule. So I’m not getting better with hourly billing, but I have every incentive to get better with value pricing.
Alastair McDermott 32:43
Yeah, I think it’s that question of incentives. Like when you look at hourly billing, there is an incentive to take longer, you know, and, and like you said, with your landscaper, you don’t want them to take longer you want you want them finished in gardens and not making noise outside.
Ron Baker 32:56
Alastair McDermott 32:57
They get everything done in 10 minutes. That’s great, you know.
Ron Baker 32:59
People that people that build by the hour, if they would have built the Concorde, it would have been cheaper to fly on it. And that’s just crazy. Again, there’s no correlation between time and value.
Alastair McDermott 33:09
Yeah. Okay, so let’s talk then about value pricing to dot zero, which is something that you you’ve called subscription pricing. Can you talk about that a little bit on why you see that as kind of the next iteration?
Ron Baker 33:22
I see as the next iteration because it’s just look out the window. And you can see the tsunami rolling over us with subscription. I guess the first thing to say about subscription is it’s a payment, usually monthly, but not necessarily, but it’s a payment for recurring value. And if you look at the number of goods and services now coming online that are offering subscription, it’s amazing me I can subscribe to a home, I can subscribe to solar panels, I can subscribe to, you know, obviously Hulu and Amazon, things like that. But I can subscribe to a Porsche. I can subscribe to a boat, Brunswick has got a boat programme, so I can subscribe to a boat, all these different things. So here’s here’s my bottom line on this, Tien Tzuo, who’s the founder of Zuora, which is a subscription based software platform that allows subscription businesses to do all the accounting and pricing and all that, he says in five years time, you won’t own anything, you’ll subscribe to everything. Now, I’m not willing to say that because I don’t think that’s true. I still think ownership has got its place. But what I will say is in five years time, you’ll have the option of subscribing to everything. And your business is going to have to deal with that regardless of whether or not you move to a subscription model or not. So today in the United States, I can subscribe to a concierge doctor or direct primary care doctor. 250 bucks a month, sometimes cheaper. We’ve interviewed a guy on our show who works in Detroit, Michigan, Dr. Paul Thomas. I think his monthly price for his office is $130 and that gives me all my medical needs from a general practitioner. He’s a GP. Anything I need, I’m covered he do. He’s telemedicine long before COVID office visits, home visits, he’s got he’s only got a panel of patients of 600 people. So he can devote a lot more time to every patient. I mean, most GPS have a panel of patients of 3000 plus, which is why they get burnt out, which is why you spend a total of five minutes with your doctor. And if you think about a concierge doctor, they’re there to keep you healthy, not just to get your better when you’re sick, they want you to stay healthy. So patients have concierge doctors take less drugs, they’re admitted into the hospital a lot less, they have fewer emergencies. I mean, and the drug companies have noticed this, by the way, because right now, I think there’s some 1400 DPC practices around the country, this is a significant trend. And the point is, it’s not a fee for service, I, we’ve got to get away from this mentality of selling services, selling scope for work, I’m subscribing to my doctor, I’m subscribing to his practice. It’s the same with a Porsche in the subscription model with Porsche. It’s not tied to a car, because they give me a fleet of cars that I can choose from that they’ll White Glove out to my house and take the other one away, I can pick an SUV one day, I can pick a convertible the next day. I’m subscribing to Porsche, I have a direct relationship with the company, that’s a completely different animal than on buying a car from Porsche or leasing a car. It’s a different relationship. It’s deeper, it’s more meaningful, and it’s gonna last longer. So Porsche has got this programme, they rolled it out in a couple cities at first now, I think it’s up to like 10, or 12 different cities. And here’s the interesting stat about this, Alastair, is really fascinating. 80% of the people that subscribe to it’s called Porsche Drive, if you want to look it up, 80% of the people that subscribe to Porsche drive are new to the brand. So what are they going to be driving the rest of their lives?
Alastair McDermott 36:47
Right. That’s fascinating. So they’re, they’re opening new markets as well. So,
Ron Baker 36:52
Demographics and all of that.
Alastair McDermott 36:54
I just did in the background, by the way, I just did the maths on on your doctor 3000 people at 150 a month for 12 months, that’s 5.4 million.
Ron Baker 37:05
It could be 600, it’d be 600. Because it’s the it’s the standard fee for service GPU that has 3000. Now the guy that we interviewed, he maxes on it. He only does 600 now,
Alastair McDermott 37:17
Thinks he’s only clearing a millionaire then.
Ron Baker 37:20
Alastair McDermott 37:21
That’s to me.
Ron Baker 37:23
Well, yeah, except he’s added three doctors, since we talked to him the first time, and he’s opened up another office. So it is scalable. Now, it’s scalable, just like every other
Alastair McDermott 37:33
And clearly very profitable, absolutely, with a lot less stress on the doctor, which probably results in better outcomes as well.
Ron Baker 37:41
And most importantly, when you when you see these doctors, and there’s a massive GP shortage around the country. And the reason is these GP doctors, they didn’t get into medicine, to sit in front of a computer and fill out your electronic health records, as they’re, you know, having a consultation with you. So the five minutes you do get to spend with them half the time they’re typing into their computer, which they hate by the way, DPC docs don’t do that. They love electronic health records, but it, they’re doing what they got into medicine to do, which is help people, and you can help people, if you have 3000 of them, you can help them at a very deep level if you have 600 of them. So they always have capacity. So I think this idea that, you know, the way to grow is to add more customers. Now there’s growth for the sake of growth. That’s nonsense. growth for the sake of growth is the ideology of the cancer cell. A sustainable, profitable business adjusts its capacity, and its pricing accordingly. So if I have you know, if I call my dentist and say I’ve got this toothache, Doc. Well, yeah, Ron, well, we’re really busy, I can’t fit in for two weeks, not going to be happy camper, he better always have capacity for me, or anybody else who needs it. And you know, you got it, you kind of account for that in your pricing and your strategy, your positioning and your business model and subscription does that forces you to do that.
Alastair McDermott 39:04
So the other thing that I’m just thinking there is this is I mean, if people are interested in implementing this, this is forcing people to look at their business model and re-examine that and see, you know, are there alternative ways to do what we’re doing here? Can we deliver the same outcomes, the same results, this same value for our clients in a different way? So I don’t know. And this, this, this might be a bit out of left field run. So if you don’t have an answer, that’s okay. But have you seen where people in the consulting field have actually implemented subscription? Have you seen that?
Ron Baker 39:44
Yes, I mean, there’s an HR consulting firm and Houston and its name is, I can’t remember its name, but they they moved away from you know, taking a percentage of the salary that when they play, somebody went to a subscription model. Many lawyers have started subscription, we’ve interviewed a couple of them on our show. And in fact, there’s, there’s dozens of them now, they’re springing up kind of all over. Now, they tend to be niched, one guy that we interviewed, does, has a law firm counsel for creators, he deals with creative people where IP, so he’s an IP attorney, essentially. And, you know, it’s like a $99 a month, or he’s got various options. But if you want to talk to him, you’ve got to be a customer. And the only way to be a customers to sign up for some level of his subscription. Now, he still has a hybrid model, where if he’s gonna do something else for you, like an in depth project, he might, you know, he’s got one off pricing for that. But the point is that he’s getting that recurring revenue from a subscriber base. We’re seeing some CPA firms move into this. I know there’s are there are consulting firms that do it, I know, there’s a couple advertising agencies dipping their toe in the water with this. We’re in early days, but here’s the thing, doctors, this whole movement started with doctors, at least in the professional space. And the first concierge doctor was a company called MV Squared, still in existence. It was the it was founded by the former Seattle Seahawks Sonics, NBA team doctor, and he said, Boy, one of my players gets injured, I go out there on the court and know exactly what to do. Because I know everything about these guys. I know their medical history, the family has I know every What can I do this with my patients. So we started MD squared. Now, it was really expensive back in the day to to hire them as your concierge doctor, it might have been like 10 grand a year, 20 grand a year. But hey, if you’re CEO pulling down millions of dollars, you’re gonna pay for that convenience, because they’ll come to your office, you can go to their office, they locked the door behind you. You’re the only one in there. If you need a specialist, they walk you over come to the specialist appointment with you. I mean, they’re your doctor. It’s almost like having a personal doctor. And they started in 1996. So we’re 25 years behind the curve in the professional like CPA, lawyer, consultant space, we’re slowly catching up to this. But now the tsunami of subscription models just bawling over us, if you look at most of the unicorns are subscription based, and so many other offerings are coming out on subscription. Now, some people say, well, there’s subscription fatigue. Yeah, I can see that if you’re a consumer, but b2b, there’s, there’s no there’s not subscription fatigue, if anything, they want more things on subscription, because it takes it off the capex budget and puts it on the optics budget, it’s much easier to deal with.
Alastair McDermott 42:35
Are you familiar? So I don’t know. By the way, if David C. Baker is any relation? I assume not.
Ron Baker 42:41
Not. I am familiar with him. We just had him on the show a couple weeks ago.
Alastair McDermott 42:44
Great. Okay. So, so David C. Baker is somebody I read everything that he publishes. He’s a very smart guy. And he did talk about when he’s referring to those monthly recurring revenue or mmm or or he talks about how that can be a negative sometimes in the sense that it’s, it’s more geared towards implementation than than strategy and strategic guidance. And so you can, the way I think about it, and I saw this, when I was doing websites was, I was putting on the janitors uniform, and I was, you know, being asked to, you know, make changes to webpages here or change a picture there, things like that. You’re moving away from the kind of high level online marketing strategy, and you’re moving into being kind of told what to do just be in part because of the nature of the ongoing relationship. Familiarity breeds contempt that that kind of stuff. Have you seen any of that kind of negative side effect of this?
Ron Baker 43:42
Yeah. And I look, I think that’s a negative side effect of your strategy and your positioning more than your business model. It’s what David talks about, in his book, “The Business of Expertise” between strategy and implementation, he draw, he draws those two rooms, or in between, he says, over time, the strategy room should encroach upon the implementation room. I mean, look, I don’t want to be a pair of hands. And I don’t want to do any implementation. And if I can get away from that, and just, you know, be somebodies ideation, strategy, coach, mentor, whatever you want to call it, and consultants are designed for this. If I’m hired as a consultant, I want to be on a subscription. Because I’m basically saying to my customer, hey, if I can add value, I’ll be there. I’ll do it. I’ll join that meeting. I’ll join that project. I’ll work with that team, whatever you want me to do. Now, if I can add value, if it’s if it’s an area completely, I know nothing about I don’t feel I can contribute anything, I’ll bow out. But if I’m on subscription, there’s all sorts of ways a consultant can add value, even kind of tangentially to their expertise, maybe just being an outsider. And I’m willing to do that on subscription. I don’t want a transactional relationship with my customers. I don’t, because if I’m in a transactional relationship, you know, here’s the scope of work we want you to do. This, what’s going to be the price. That’s a transaction relationship, I don’t want to, I guess I’m too old and too talented for that. I just don’t want it. I want a recurring relationship where I can add value over possibly many things. And I’m not going to be worried about the scope. It’s like, hey, at the right price, you know, when you move to subscription, it’s no longer scope out of scope, it’s covered or not covered. And if you’re covered on there, I’ll do it. Now. I’ve got a plan my capacity, I’ve got to do all of those things, just like you would in any business model, whether you’re billing by the hour, value pricing, or fixed pricing, whatever, you know, you have to think about scaling, and how do you scales at human capitals at Digital Library, whatever, you have all the same issues in any business model that you pick, but boy, I’ll tell you, it’s a much better relationship when you’re offering that recurring value. It’s just you’ve you’ve removed pricing. The thing that I love about subscription is peace of mind. It’s convenience. And it’s frictionless. I don’t have to go to the Department of paperwork when there’s a change order, or there’s scope creep and get, you know, something signed off in triplicate, and have a conversation with the customer. Now, it’s just like, hey, you’re covered. And yeah, if you if you ever think I’m not adding value, cancel, you make it really, really easy to cancel the subscription business. And I know that sounds really counter-intuitive. But in fact, Netflix did a thing. I think it was a year and a half ago, where they cancelled people like 600,000 I think it was it was a big number that cancelled subscribers who were paying monthly and never accessing it. They don’t want those. Those are not real relationships, even though they were getting the money. They cancelled them.
Alastair McDermott 46:42
Ron Baker 46:42
And I thought that was an amazing move. It just shows you the mindset difference.
Alastair McDermott 46:47
That really is well, I wasn’t keeping an eye on time. I’ve just noticed though, so we need to wrap it up. I’m gonna ask you two very quick questions just about books. Do you have a favourite business book or resource that you’d recommend that people check out?
Ron Baker 47:00
Wow. Well, one specific on top of the one I had mentioned, I think I mentioned Warren Bergers book “A More Beautiful Question”.
Alastair McDermott 47:06
Ron Baker 47:06
And that’s for the value conversation. Another one I really like. And you know, I know there’s a lot of books out there on questions and value conversational SPIN Selling solutions, all of that. But the one I really like is a guy by the name of Mohan Khalsa. I believe that’s M-A-H-A-N K-H-A-L-S-A and it’s called, “Let’s Get Real or Let’s Not Play”. And it just forces you to have that put that out, you know, the elephant in the elevator right on the table and say, Look, we both have to win from this relationship, we both have to earn a profit. Let’s figure out if we can do that. And he’s got a very simple framework, kind of like Jonathan’s, a little bit more involved than the three why questions, but I really like his approach to the value conversation in that book. So I would recommend that, and I’m not going to recommend my own house, Jeff is I know, this isn’t The Oprah Winfrey Show. But,
Alastair McDermott 47:57
Some people know, at least seven out there, right, the professionals guide to value pricing measure
Ron Baker 48:03
Which is out of print. So the one that you’d want of mine would be “Implementing Value Pricing”. Yeah. That’s my latest on on value pricing 1.0. Doesn’t have it doesn’t have anything on subscription. It just has a
Alastair McDermott 48:16
Soul of enterprise as well does some business in the knowledge economy. And I’ve got to check that out. And then that’s also the name of your podcast, right? The Soul of Enterprise.
Ron Baker 48:24
Correct. And people can go to the soulofenterprise.com. See all 350 some odd shows that we’ve done, we’ve been on the air now seven and a half years, roughly a little over seven years. And there’s a tab on the website like Ron’s shows by topic. And it’s got Ron’s favourite and my co-host, Ed’s favourite, and there’s one tab for subscription. So you can click on that. And you can see all the shows that we’ve ever done on subscription. There’s some shows where it’s just me and Ed talking. There’s some shows with this DPC doctor that I was talking about. from Detroit, there are shows with Tien Tzuo, the founder of Zuorah, and the author of the book “Subscribed”, and that would be the number one book I would recommend if you’re interested in the value pricing 2.0 or subscription. We’ve done shows with John Warrillow, from Canada on his book, “The Automatic Customer”, which is another great subscription book. We’ve done shows with Robbie Kellman Baxter of the author of forever, “The Forever Transaction”. And we’ve done a show with Anne Janzer who wrote the book “Subscription Marketing”. All four of these experts in this space were amazing. And the thing I really took away is when you go to sell your practice, it’s going to be a heck of a lot more valuable if you have that annual recurring revenue than if you don’t get the multiples are amazing. Because the market is just screaming we want recurring revenue.
Alastair McDermott 49:46
Ron Baker 49:46
And that’s why you see so many companies. I mean, Apple now gets half its revenue from subscription. And I think at some point, you’re going to be able to subscribe to Apple.
Alastair McDermott 49:54
Yeah. And you know, as somebody who has repositions might be this is a way from web design. I will say that that has allowed me to take the leap and to fund my experiment into this new this new brand in I’m working on authority, building authority that is still being funded in major part by the subscription model, because I do have a lot of clients from WebsiteDoctor, who are on subscriptions, and,
Ron Baker 50:24
Alastair McDermott 50:24
And those, those monthly retainers are paying for, you know, all the video equipment and things like that, that that I got to set up this this podcast. So I absolutely do believe in the value of that. So
Ron Baker 50:38
You know, we interviewed Jonathan Stark just real quick, and he was talking about he’s kind of launched the subscription thing. And he says it’s my favourite revenue. And I thought that was a really interesting comment, because there is something psychologically different about recurring revenue, rather than transactional revenue. And I don’t think you’ll fully internalise that feeling until you live through it.
Alastair McDermott 51:01
Yeah. Okay, we gotta leave it there just for time. Ron Baker, thank you so much for being here with us. I really appreciate it.
Ron Baker 51:07
Thank you. I’ve enjoyed it.
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