Meet the MasterMinds: Harry Mills on Pricing Consulting
Services
 Harry
Mills is the CEO of The
Mills Group, an international consulting firm, and an
expert on marketing and selling professional services. He's
a regular keynote speaker and the author of twenty-three
books on sales, negotiation and influence, including Artful
Persuasion and The
Rainmaker's Toolkit: Power Strategies for Finding, Keeping,
and Growing Profitable Clients.
MCNews talked to Mills about the always-controversial
subject of pricing consulting services.
MCNews: What do you think is the client's view on
the pricing of consulting services?
Mills: Well, it's obviously a very self-interested
view. The typical client's thought is probably, "how
do I get the best bang for the buck I'm paying?"
Clients also tend to simplify things. They don't know
how to determine what the price should be, so they look
for a benchmark or an anchor.
I call it the Eiffel Tower effect. If you're lost in
Paris, you use the Eiffel Tower as your reference point,
right? Clients want a similar reference point, or anchor,
when it comes to price. That's why hourly pricing is so
attractive to clients because it's an easy way of anchoring.
But to answer your question, I don't think clients
understand pricing very well because they don't understand
the value consultants offer. So they look for a way
to simplify the matter.
MCNews: Does the variety of pricing models--whether
it's hourly, contingency, value-based or fixed fee pricing--confuse
clients?
Mills: Yes, it does. So I think you've got to
keep price out of the equation for quite a long time.
First you've got to create value in the client's thinking;
you don't want the price or the pricing model to come
up too early. Otherwise you'll get the anchoring effect.
You've got to communicate how you will create value before
you put a price on it.
MCNews: Many clients want to get to the price before
talking about value. How do you manage that pressure?
Mills: Clients do tend to want an indicator of what
you're going to charge and may say, "just give me
an idea what it will cost." If it's a simple project--just
a few hours or a few days long--it's much easier to do
that. But for most large jobs, I recommend a three-part
value creation process.
First, establish what I call the Initial Value Proposition
(IVP). Now obviously when you meet with a client for the
first time, you don't know all the facts about the business
or the project. Establish credibility by presenting a
compelling story--a case study based on a previous client.
And through that story, show the specific value you were
able to create for that client. So that's the IVP. From
there, you explain to clients that once you have a thorough
understanding of the problem, you will quantify the value
for them.
And value is what clients don't understand. They start
out with an understanding of the problem or the pain.
Even if they have a notion of the solution, they don't
necessarily know the potential value of the solution.
If you're a highly skilled consultant, you should
have a more sophisticated understanding of the solution
and its potential impact than the client does. The last
thing you want to do is talk about price or fee before
you've established what you can do. In other words,
you've got to sell the value before you start talking
about price.
The IVP gives them an idea of what you can do. Then you
gather a whole lot of information about the client and
the project as you go through the rainmaking, or sales,
process.
MCNews: At this stage, are you identifying the potential
range of value you can provide given the project objective?
Mills: Yes. For example, you might be working
on a project that could potentially provide benefits to
the client that are worth twenty times your fees, but
only if the client is prepared to make significant changes.
If the client is only prepared to make limited changes,
then the benefits might only be worth five or six times
your fees. You get your super profits when you add super
value. But you have to realistically analyze the client's
environment and ability to change to quantify the value
you can actually provide.
MCNews: If you take a client through that process
and there's a quantifiable value they can understand and
agree with, what happens if you're competing against a
consultant who is pricing by the hour?
Mills: You have to make the case to the client why
it's not a good idea to be too simplistic by bringing
it down to an hourly rate. You've got to say, look, this
is a complex project and there are things that could go
wrong. In part you're paying for insurance because something
might happen no one can foresee. What's that worth to
you? So that's part of the response.
But the most important point you have to make is that
your approach is so different that it can't be brought
down to an hourly comparison. If you're going to use
value pricing, you've got to differentiate yourself in
a fundamental way from the competition.
You've got to establish the value of your approach, its
intellectual underpinnings and the track record behind
it. You have to explain why you're different from the
hourly players out there who are simply selling time.
That's what you're really saying--the competition is just
giving you time; I'm offering you an entire approach,
which I define as value.
MCNews: Are clients migrating from the hourly rate
mindset to value? Do you see this taking hold?
Mills: Well, the trouble is that pricing labels
get blurred. For example, the downside of hourly rates
for clients is lack of control over the end cost. So many
clients try to turn hourly rates into a fixed fee. The
client will ask for your hourly rate and an estimate of
how long you think the project will take, and then say,
I'm not going to pay anymore than whatever that total
works out to be. What they've really got is a capped hourly
rate.
But what's happening is that a whole lot of people are
saying, if we're doing it for a fixed fee, that's value
pricing. So the two are getting confused. When you
ask people what they mean by value pricing, it turns out
to be just an hourly rate in drag.
MCNews: You're not likely to go back and measure whether
you achieved a particular value for a client in a fixed
fee contract, are you?
Mills: Some professionals agree on a fixed fee
in advance and call that value pricing. Well, I have a
broader and a deeper definition of what value is. I
think you create value in conjunction with the client.
You work out together what the solution is worth.
I tend to use a 5:1 ratio. If I quantify a million dollars
worth of value or benefit to the client, I think I can
easily justify a $200,000 fee. Now there's a bit of arbitrariness
in using a 5:1 ratio. But I know there's a huge amount
of skepticism on clients' mind. Even if the benefit is
twice your fee, you will run into resistance from clients.
If you can't confidently establish at least a 5:1 ratio
between benefits and fees you're going have problems using
value pricing.
MCNews: How do consultants verify that the value was
achieved? What are some techniques to prove that the client
actually achieved that million in cost savings and that
the savings were attributable to the consulting intervention?
Mills: Tax accountants have an easy job proving
value. So we need to be more like them. We've got to quantify
benefits with the client in areas that are not as concrete
as tax, where there are numerous external variables that
drive value.
The first rule for consultants is to use value pricing
only in areas where there are definite opportunities for
value creation. You won't get very far, for instance,
if you tell an auto dealership that you can save it $25
per car sold. That would be just pitiful.
Next, block out the areas that are quantifiable. For
example, let's say you have a measure for your client's
sales productivity. We would show the client that for
every percent we can improve that measure of sales productivity,
we can increase revenues by about half a percent. We can't
guarantee absolutely, but based on our work in similar
industries, we conservatively estimate that we can raise
productivity substantially through the use of our services.
Once that is quantified, we move onto the other value
areas we have diagnosed.
MCNews: Do you think the offer of a guarantee--not
necessarily of an outcome but of client satisfaction with
consultants' work--is emerging as a trend?
Mills: I don't see guarantees emerging as a trend,
but they are a great value add-on. The firms that have
been bold enough to offer a guarantee as a differentiator
have been enormously successful. We've offered a money-back
guarantee on all of our training for twenty years and
we've had only one problem.
The reason I don't see guarantees as a trend is because
a lot of my work is with the big accounting firms. And
they are incredibly risk-averse by nature. They live with
professional liability, and are having the pants sued
off of them in all sorts of environments. So the notion
of a guarantee just gives them the willies. I do tell
consultants they should consider guarantees, and they
say yeah, it's a good idea, but someone else can do that.
A guarantee puts huge pressure on consultants to deliver
consistent performance and at the right times. Most consultants
wow the client in the initial phase, win a big contract
but then don't keep managing the wow experiences like
a performance. A performer who is being judged every day
knows that the final show has to be as good if not better
than the first. The best consulting firms not only impress
the client at the beginning, they wow them at the end.
MCNews: If they don't want to offer a guarantee, what
else can consultants do?
Mills: Don't say to the client, we're going to
do this big project and you'll pay us a huge fee. Instead,
segment the project into defined value chunks. Make them
explicit with deliberate sign-offs for each chunk, and
set it up so the client can walk away at the end of each
segment. That way, the client doesn't have to buy the
whole project at once but can buy it in smaller pieces.
What you're establishing is a series of value checkpoints.
Clearly define the way you go about your work and
be explicit in the way you create value, how you price
it and how you collect the money as well. Most consultants
want their money in small or regular chunks for obvious
reasons, so that's a much better way of doing it for consultants
as well as clients.
MCNews: Do you think the hourly rate approach to pricing
will ever go away?
Mills: No, I don't, because it's very, very convenient.
An American legal group recently did a review of the history
of it. Funny enough, it has a recent history. I never
realized that. You might think it's always been around,
but lawyers have only been charging an hourly rate extensively
since about the Second World War.
The hourly rate simplifies the process and I think it's
useful for clients who want to make quick decisions and
price quickly. It's also advantageous for consultants
when there's high risk and low value in projects.
MCNews: What's your opinion on the effectiveness of
services marketing?
Mills: In general, marketing for services doesn't
work very well. I did a speech on entrepreneurial markets
for an MIT forum. I made the point that the reason entrepreneurs
struggle with marketing, particularly for services, is
that the model doesn't make sense to them. But just about
every Western manager has been through Marketing 101,
and they learn their Four Ps. I can't believe academics
are still flogging the Four Ps but they continue to do
so because they've hung all their work on that model.
Professionals' mindset about marketing has changed quite
dramatically over the years. They really want to understand
how they can create, communicate and capture value for
their clients. But there haven't been any marketing models
that explain how that all hangs together.
We have found that as soon as we introduce the 8
Rs framework for marketing services, professionals
get quite invigorated. All the pieces come together and
they say, that's what I've always done, but I haven't
really understood the whole picture before.
And as a professional you're never just out there rainmaking,
are you? You're never just doing one specific marketing
task. While you're out there working on a project, you
might also be talking to someone with the intention of
creating a referral. You're always doing some other part
of it and you need to understand the whole when you're
doing the part.
I have found that you can change the mindset of the
professionals, but our biggest resistance comes from marketers.
MCNews: Because they're wedded to the old model?
Mills: Much of what firms spend their marketing money
on is of dubious value. There are huge teams of people
spending a lot of time creating newsletters and marketing
collateral and a lot of other things. But if you actually
have a look at it, they're spending money on advertising
campaigns that have no demonstrable return on investment
at all.
MCNews: Last question--what's on your reading list
these days?
Mills: I'm very interested in how people change
minds, so I'm reading the biographies of famous people
who have been brilliant at changing minds in different
situations. Churchill for example, at the right time and
the right place, was able to move nations and people with
a vision.
I like reading about quirky characters, and I like Churchill
particularly because he was not slick. He was pudgy and
funny looking--much closer to the average consultant.
We don't normally look like presenters on television.
So Churchill leaves us with hope.
MCNews: Thanks for all of your time.
Visit http://www.millsonline.com
to find out more about Harry Mills, his books and services.
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