Tim Williams is a Business Model and Pricing Strategist for professional services firms. He is an industry veteran who is the Founder and Managing Director of Ignition Consulting Group, also a noted author and presenter for major industry associations and business conferences worldwide. As a career marketing professional, Tim’s seminars and keynote presentations have taken him literally around the world, including North and South America, Europe, Asia, India, and Australia.
In this episode, Tim highlights how important it is to devote your time, effort, and energy to the value you can create – a diagnosis of the matter, so to speak, rather than jump right into the solution.
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Why you have to check out today’s podcast:
- Find out how to maximize profits through value creation
- Learn how to price based on value by understanding what success looks like
- Discover an effective method of receiving a rate more than what you would quote your client for
“A lot of companies and professional firms have jumped straight to the scope of work without considering what I call the scope of value, without having a clear definition of what success looks like.”
– Tim Williams
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Topics Covered:
00:40 – What led Tim’s path to Pricing
01:54 – The change from hourly to project-based pricing
02:55 – What pricing model do advertising agencies adopt
04:09 – How hourly rate charges for the cost and not the value
04:51 – The Cost–Plus Pricing hardware companies are using
05:48 – How disclosing more cost information veer away from the value creation
06:34 – The difference between a business model and a pricing model
08:06 – How Cost-Plus Pricing and Hourly Rate Pricing doesn’t capture value
09:29 – Thoughts about communicating value
11:45 – Why it is sometimes hard to price based on value
12:18 – Effective method he uses for charging clients’ high rate
13:08 – Receiving from clients beyond the base price you set
14:15 – Companies going for a subscription model pricing
16:16 – How does the subscription model look like in a crisis communication training
17:28 – The challenges and future of subscription model pricing
19:13 – Areas where the subscription model doesn’t apply
22:54 – One piece of pricing advice that can have a big impact on one’s business
Key Takeaways:
“The hourly rate is only a manifestation of your cost structure. It’s not a revenue model at all. I think the central problem in professional services is that by using the hourly rate, professional firms are simply charging for their costs, not their value.” – Tim Williams
“Unfortunately, professional firms, agencies, in particular, have ceded way too much power to professional buyers by disclosing more and more cost information. You’re having completely the wrong conversation. You’re not talking about value created, you’re talking about costs incurred.” – Tim Williams
“Devote your time and energy to the scope of value question.” – Tim Williams
“I think letting your client decide what the value is, can also sometimes be effective.” – Tim Williams
“I certainly know there’s a school of thought that believes that the entire business world is moving toward a subscription-based model. I think it’s a little more challenging in the service world than the product world. But even in professional services, there’s a fair amount of intellectual property that resides in professional firms that can be packaged up, named, turned into options, and offered via subscription.” – Tim Williams
People / Resources Mentioned:
Connect with Tim Williams:
Connect with Mark Stiving:
- Email: [email protected]
Full Interview Transcript
(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the professional relationship between them. I’m Mark Stiving Mark. Today, our guest is Tim Williams. Here are three things you want to know about Tim before we start. He founded the Ignition Consulting Group 22 years ago, and he’s still there. He focuses on business and pricing models for agencies and professional services firms. And he’s on the board of the Humane Society. Oh, and I just learned he has a second home in Moab, where I was a few weeks ago and absolutely loved it. What a beautiful place. Welcome, Tim.
Tim Williams
Thank you, pleased to be here, Mark.
Mark Stiving
How did you get into pricing?
Tim Williams
Well, that’s an interesting question. I started my consulting practice focused exclusively on a positioning strategy, business strategy for professional firms. Mostly, my sweet spot is the advertising agency world. But I’ve worked with law firms, accounting firms, architectural firms, but professional services primarily. I met a gentleman that you know well, Mark, Ron Baker, about 12, 13 years ago, and he just turned my life upside down when it comes to pricing. As a former CEO myself, I was deep into the traditional cost accounting world. And Ron just completely changed my paradigm. So, there was really no one working in my space in Pricing at the time, and they’re still very few, but I owe my conversion to pricing and value pricing in modern pricing to Ron Baker.
Mark Stiving
Yeah, that’s interesting. What was the first big change that was trying to get them to go away from hourly and to more of project-based pricing?
Tim Williams
Yeah, that’s the big problem in professional services is the hourly rate, that was adopted as a pricing model in the ’40s, by law firms adopted by other kinds of professional services. And actually, ad agencies were kind of late to the hourly rate game in the sense that they didn’t start doing it till maybe the mid-1980s. So that’s the problem is professional firms trying to package up the tremendous value they create into an hourly rate. And that’s the wrong unit for knowledge work, isn’t it? Because the nature of knowledge work is that the advice and solutions can create tremendous value irrespective of the amount of time that was spent developing the solution.
Mark Stiving
Oh, that’s absolutely right. I always thought advertising agencies charged based on a percent of the spend from their clients.
Tim Williams
They used to back in the days of a madman, that was the dominant compensation structure, agencies would earn a commission on the media that they placed on behalf of their clients. So hence, the word agent in the agency, much like the business model of a travel agent who earns commission or real estate agent. Agencies were true agents back then. But when the consolidation of the advertising business started happening in the 1980s, the big multinational firms actually decided to take their agency business and divided into specialized units so that you have media separate from creative and you’ve got PR, and you’ve got experiential, and you’ve got events. And so, there are lots of different specialties. So, unless you’re a media agency, you can earn the media commission. So, they had looked for another revenue model. And they, unfortunately, adopted the hourly rate, bad decision.
Mark Stiving
Well, so the hourly rate just makes so much sense when you’re thinking about how do I cover my costs and make a little bit of money? And it just doesn’t optimize your profits in any way whatsoever?
Tim Williams
Absolutely right. In fact, if you think about it, the hourly rate is only a manifestation of your cost structure. It’s not a revenue model at all. I think the central problem in professional services is that by using the hourly rate, professional firms are simply charging for their costs, not their value because the hourly rates constructed, there’s a formula for it, it’s salary plus overhead, plus an expected profit margin.
Mark Stiving
Yeah, and so if you think about it, that’s identical. Maybe you don’t know this, but that’s identical to the way hardware companies tend to price where they just add up their cost of goods sold and add a profit margin and say, here’s our price on that.
Tim Williams
Right, cost plus, and that is also very prevalent in professional services where you literally take the cost of staff to add an overhead factor at the desired profit, and that becomes your price. It’s called Cost Plus Pricing, but it’s just as bad or worse than the hourly rate because then that opens up with professional buyers procurement, all sorts of obnoxious conversations about well justify your costs. It looks to us like you’re spending too much on overhead and too much on health insurance. And by the way, your profit margin, you’re making too much money, because all those things are disclosed in the cost-plus model, which are all the wrong conversations to be having, aren’t they?
Mark Stiving
That’s it. So, the good news about hardware companies is they don’t have to disclose their costs. That’s just how they figure out their prices. But, yeah, if you’re going to disclose costs, now that conversation goes crazy.
Tim Williams
Yeah, and unfortunately, professional firms, agencies, in particular, have ceded way too much power to professional buyers by disclosing more and more cost information, it changes the dialogue. And so, you’re having completely the wrong conversation. You’re not talking about the value created, as you write about. You’re talking about costs incurred.
Mark Stiving
Yeah, nice. Nice. I’m going to ask you a really, really hard question. And I know this is hard because I’ve struggled with the answer for a very long time. But your LinkedIn headline says business model and pricing strategist for professional services firms. What do you think the difference is between a business model and a pricing model?
Tim Williams
Well, closely related, and it really explains my focus in consulting because I think there are two sides of the same coin. Business strategy in its pure form is a positioning strategy deciding what markets you’re going to target and what service offerings are going to offer, you can’t do everything for everybody. Right. So that’s the decision about business strategy. Pricing strategy and that’s a dimension of your business model, Pricing Strategy, also a dimension of your business model, that’s the missing piece. That is your revenue model. I have this pyramid, a triangle model that I like that explains the business model, and it has three elements. The first is, create value. Second is deliver value. And third is capture value. So, the create value piece is where you make the positioning decision. Which markets are we going to serve? And what products and services are we going to offer? The deliver piece is about your production system. And the revenue. I mean, the capture value piece is about having a revenue model and I submit, most professional firms don’t have a revenue model. They only have a cost structure. And the cost structure masquerades as a revenue model.
Mark Stiving
Yes, and they’re essentially doing Cost-Plus Pricing or Hourly Pricing. And that’s what they think of is how they’re going to capture value.
Tim Williams
Right? Because they feel like that will at least cover their costs, which often doesn’t. And they’re not thinking at all about the money they’re leaving on the table. But most professionals have never read a book on Pricing. I asked this question of audiences of you know, global multinational organizations full of CEOs, CFOs. How many here have ever read a book on Pricing? Not a single hand ever goes up? So, they haven’t studied the subject, which makes it a really unfair fight when they’re in the room with professional buyers?
Mark Stiving
Yeah, exactly. So, I laughed when you said create, deliver, and capture value. Because I often talk about pricing, as create, communicate, and capture value. Sure. And I can see clearly how they’re different the way that you think of it the way I think of it, because you were thinking of the business model. And that deliver piece is really, how is it that we are delivering value to the marketplace?
Tim Williams
Right.
Mark Stiving
As a pricing person, I’m not so worried about that. I’m worried about choosing what things we do. Right? I’m worried about how we talk about it to the market and how we then go capture it with revenue models or pricing models or if you want to think about that,
Tim Williams
Yeah, excellent point about communicate value. And I know there’s a 5C model too. Isn’t there?
Mark Stiving
Going to be 20C somewhere?
Tim Williams
Yeah, so communicate, absolutely is an important missing element. I’ve seen what you’ve written about communicating value and talk value, not price. Definitely, something that’s not taught inside the client organizations that I work with, in fact, what they prepare for discussions with their buyers with their clients, almost exclusively to defend their costs. Here’s how many people here are their hourly rates, here’s the estimated time and so they’ve got this all on spreadsheets and they’re well prepared to defend that, they’re not prepared at all, to present, communicate and defend the value that they’re about to create for their clients.
Mark Stiving
Yeah. And I think part of that problem is they don’t even understand what value means they don’t get this concept of value. How do your buyers make that decision?
Tim Williams
It’s true. And it’s particularly ironic, given the kinds of organizations I work with because ad agencies are in the value creation business. I mean, that’s what they do for their clients. What’s the value of things different for Apple? Yep. Right? What’s the value of that? Certainly not tied to the hourly rate, is it? So, they’re in the habit, like a lot of companies and professional firms have jumped straight to the scope of work without considering what I call the scope of value without having a clear definition of what success looks like. And so, we teach concepts like the success workshop, devoting a lot more time and energy to defining what success looks like, and having a clear understanding of that as a foundation for understanding the value you’re about to create. Because unless you do that, then it’s pretty difficult to price based on value, isn’t it?
Mark Stiving
It is, and sometimes my business, this is especially true, so it’s probably true in your business, as well. Sometimes it’s hard for me to price based on value because the value I can give to a company is worth millions, if not billions of dollars. Yep. And so, it’s tough for me to say, ‘Look, I’m only going to take 10% of a billion dollars.’
Tim Williams
But that’s pretty persuasive, isn’t it? To say we expect the value of this to be $10 million, and our fee is only 100,000? Or 10,000? Right? I don’t have a problem with that. I think it puts things into perspective.
Mark Stiving
Oh, absolutely right. Absolutely right. I just, I usually recommend people charge 10% of the value they’re delivering to their clients. That’s an absent competition. Oh, you know, if you’ve got a really, really big number, that’s a…
Tim Williams
Sure, or a method that I sometimes use. And I’ve got a major client relationship right now, where I’ve said to the client, to my client, here’s the base price of our work together. When we get through this project, I’d like you to evaluate the value created and pay me a little more if you feel like there’s been more value created, then I’ve charged you in a fee. I’ve done that several times. And I think, you know, I think you don’t do it with every client. It’s only right in certain instances. But I think letting your client, letting the buyer decide what the value is, can also sometimes be effective.
Mark Stiving
Okay, you don’t have to answer this. But have you ever gotten a check after the project that was above and beyond what the base price was?
Tim Williams
I have. Yeah, several times, even in speaking engagements. These are all series of experiments because I teach this idea that we’re really in a pricing test kitchen. And we should always be in a test and learn kind of mode. So, they ask what’s your fee to come and speak, I say, ‘Tell you what, we will send around an evaluation form at the end of the presentation, and the audience will rate the presentation on a scale of one to 10 on these three factors. And that will determine the price. So that’s often quite a bit more than I would have quoted as a fee. I mean, that puts the pressure on me to do a good job. Of course!
Mark Stiving
So, one thing that I’m hearing a lot in professional services firms is this concept of subscriptions. I got to say, I love subscriptions in the SaaS world, and in so many different places. Are you teaching, pushing, helping your clients move towards subscriptions at this point in time?
Tim Williams
I am. And I certainly know there’s a school of thought that believes that the entire business world is moving toward a subscription-based model. I think it’s a little more challenging in the service world than the product world. But even in professional services, there’s a fair amount of intellectual property that resides in professional firms that can be packaged up, named, turned into options, and offered via subscription. These tend to be the kinds of services that involve, say ongoing research or analytics or a series of activities that are pretty predictable that most clients needs. And so, thanks I’ll give you some examples like in PR firms, a lot of the work they do is in crisis communications when companies have a problem, they hire PR firms to help them out of the mess. They offer crisis communications training and media relations training. This is the kind of thing that’s now being packaged up and offered by subscription. So, subscribe to our crisis communications program. And we’ll train you and you’ll be prepared for when a crisis arises. So, it is happening in professional services. And in the high-end consultancies. McKinsey has a lot of intellectual capital that’s now packaged up offered by subscription.
Mark Stiving
Yeah, so let me push back on this just a little bit because I want to understand it well. Let’s talk about crisis communications training for a second. There’s a firm out there, that’s 100 person ad agency, I assume that’s a reasonable number. And someone goes in and says, ‘Hey, I’ve got this crisis communication training.’ And they said, ‘Great, I’d love to buy it.’ They come in, they train, half the people, 50 people, where’s the subscription? Right, I think of a subscription is we have to frequently deliver benefits, frequently deliver value, so that it’s worthwhile for a customer to pay us on a regular basis?
Tim Williams
Well, it really is based on the fact that most companies have quite a bit of turnover. I mean, you’ve got 20% of your staff turnover, sometimes 30% in marketing and communications departments in large companies. So, you’re never done with the training, it’s ongoing, you always need to train. And you always need to be prepared and have your assets ready, and your ducks in a row for when a crisis does happen. So, I think a better example, would be analytics products, where agencies are tracking marketing metrics on behalf of a client, and they’re delivering monthly reports. And that’s a perfect candidate for a subscription because that happens on an ongoing basis.
Mark Stiving
Yeah, I agree completely with that one. But the reason I push back part is, you know, that’s the world I’m in is, I train people all the time. And I try really hard to figure out how to make it look like a subscription, how to deliver value on a regular basis. And I do that in a lot of ways, but it’s still challenging.
Tim Williams
I think it’s challenging. I do, I think professional services, there’s a natural pushback, first of all, and professional services, because we like to think everything, we do is custom and unique and not off the shelf and not cookie cutter. So, we don’t want to offer anything by subscription. But that’s really old school thinking, there’s a lot of activities and solutions we offer that actually could qualify for a subscription. Social media programs are an example. So, in agencies, they are helping to monitor and develop social media content on a monthly basis, sometimes thousands of pieces of content. So, you can have A program, program B, program C, program A is 100 pieces of content, program B is a 500 program, C is 1000. I mean, those kinds of things that are ongoing, and fairly predictable, can actually work quite well. And I think part of the value is that it changes the frame of reference, it changes the conversation with your clients, and your diversifying your revenue stream. So, I don’t know a single professional firm that derives all of its revenue from subscriptions. I know people like my friend, Ron Baker believe that that’s where the world is headed. I’m not there yet. I’m not sure it would be possible to derive all of your revenues from subscription, but bits and pieces. Sure. And I do preach that idea.
Mark Stiving
I think I agree with you in that there are things about it that make a lot of sense in a lot of areas. But there are also places where it doesn’t make sense. So, if I want a new logo for my company…
Tim Williams
Right? You can’t subscribe to that. No, that’s a defined project with a stop and start. You can’t subscribe to a new logo. Yeah.
Mark Stiving
Yeah. And then the other thing I think about often is the uncertainty of it. This struck me when I, when this was actually the difference between hourly and non-hourly but the same thing applies in the uncertainty in that I went to buy a battery or actually I was getting an oil change but I saw a sign on the desk that said they will replace your battery for $169 or some number like that. And I thought that was just a flat fee to get a job done. Yeah. But what if I walked in and my engine was making this ting–ting–ting noise are they going to charge me, you know, here’s a $350 flat fee to fix your ting–ting–ting noise.
Tim Williams
Right, maybe a $350 flat fee to diagnose the noise and I’m okay with that because you’re offering some price certainty, you’re not sure whether it’s going to take you an hour or a full day to diagnose it. But you know, you’ve been in business long enough that on average, these kinds of diagnostics, incur a certain kind of internal cost. And so, I think that kind of thing can work. And I think one of the things that most professional firms miss, when you say the words value-based pricing, they immediately go to ‘Oh, you mean skin in the game, you mean, we’re going to tie our compensation to marketplace results.’ And I have to, I mean, I don’t even use the terms value-based pricing in my writing and teaching anymore, because it’s too confusing, people jump to the wrong conclusion, I’ll say progressive pricing, or modern pricing or strategic pricing or some other description because they miss the point that the simplest form of value- pricing is simply fixed price for fixed scope, divorced from the hourly rate divorced from your internal cost, you quoting a price based on what you believe you can do to solve that client’s problem knowing in some cases, you’ll make a great margin and in some cases, you’ll break even or worse, but on average, you know, fixed price for fixed scope is a fine way to dip your toe in the water for professional firms.
Mark Stiving
So, every time I say the words value-based pricing, I define it, what I define it as is charge what your customer is willing to pay.
Tim Williams
Yeah. Right. I just think, in my own practical experience, is that so many people in my space react to it as in one of two extremes, value as in Walmart, right, as in cheap, value price, or they jump to ‘Oh, you mean we have to tie our compensation to some kind of an outcome?’ And my answer is, yes, you can, you can do some outcome-based pricing for the right clients and the right opportunities. And that ought to be a little slice in your, what I call your pricing portfolio because we want diversification in the way they price. There’s no, as you know, there’s no one right way to price. But yeah, I just find the language is, I don’t use the term anymore because of that.
Mark Stiving
Nice, nice. All right, I think we’re running out of time. But what’s one piece of pricing advice that you would give our listeners that you think could have a big impact on their business?
Tim Williams
Well, we’ve touched on it, and that is to devote the time and energy to the scope of value question. So many firms, because especially in these economically challenging times, they feel like ‘Well, we’ve got to just jump straight in on the work, we’ve got to take the assignment, they want these 19 things, they estimate their cost on this scope of work, and they jump in and do it. You’ve got to step back and say, Look, we know this is urgent. You’ve got lots of priorities, but we need to have this, we need to stop and have this discussion about. What does success look like and set three-quarters of the time because this has been researched? In the marketing space, the client will answer the question, what’s your objective by saying sales? Sales? Well, that’s not very useful. I mean, what company doesn’t want to sell more? I mean, we need to peel that onion and understand what predicts sales? What are the things that if we do more of will lead to more sales? And most clients are hard-pressed to answer that question. And they need their business partner to help them plumb the depths of that question.
Mark Stiving
Yeah, so it’s saying, if you just want me to do something, I can go do something. But if you want to do something with results, let’s go figure out what works and what doesn’t work.
Tim Williams
Yeah, that would be a good way to frame it.
Mark Stiving
And so, I think what I just heard you say I want to make sure I got it was the big piece of advice is let’s make sure we do the diagnosis and the prescription before we start doing the work.
Tim Williams
Yeah, that would be another good way to say it, right. I mean, we’re way too prone to jump in to the treatment without the diagnosis. For sure.
Mark Stiving
Nice. Nice. Tim, thank you so much for your time today. If anybody wants to contact you, how can they do that?
Tim Williams
Our web address is ignitiongroup.com. That would probably be the easiest way I publish a blog there and there is a contact form so I’ll be pleased to hear from you.
Mark Stiving
Excellent. Episode 89, all finished. Would you please leave us a review, to my listeners, not you, Tim. Although you can, too, if you want. And as always, I read your reviews online. night_owl4 said, In depth and entertaining.
“This is the best podcast on pricing I found. Interesting guests, a knowledgeable host and an entertaining and pacey format.”
Thank you, Mr. Night Owl. Please join us at the free community of championsofvalue.com. You find that at community.championsofvalue.com. That’s where we publish all of our memes, or blogs, or videos, or podcasts, or at least links to all of that so you won’t miss any of the free content that I put out. If you have any questions or comments about the podcast or about pricing in general, feel free to email me [email protected]. Now, go make an impact!
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