Tactic - Pricing Models & Money Math

Overarching Principles

• Value Over Time: The core of your business should be the value and ROI you deliver to a client, not the hours you spend. Shifting from an hourly to a retainer model aligns your incentives with the client’s success.
• Investment, Not Expense: Frame your services as a strategic investment that generates a tangible return for the client. This elevates the conversation from a cost-based transaction to a value-based partnership.
• The Scarcity Trap of Hourly Billing: Charging by the hour traps both you and the client in a scarcity mindset. The client scrutinizes every minute, and you are incentivized to be less efficient. This model limits your ability to create leverage.
• Price the Risk in Equity: Equity compensation is not a direct substitute for cash. It carries significant risk and a delayed, uncertain payout. Therefore, it must be priced at a premium compared to guaranteed cash compensation.

Frameworks

The Pricing Strategy Triangle

A model for determining the right pricing approach based on the context of the engagement.

1. Competitive Pricing:

   • Description: Setting your price based on prevailing market rates for similar services.
   • Best Use Case: When launching a new service offering or when you know the client is actively comparing multiple providers in a well-defined market. It provides a reliable baseline.

2. Cost-Plus Pricing:

   • Description: Calculating the total cost of delivering your service (time, resources, overhead) and adding a desired profit margin on top.
   • Best Use Case: As an internal baseline to ensure that any price you set is profitable and financially sustainable for your business.

3. Value-Based Pricing:

   • Description: Anchoring your price to the quantifiable value and ROI you create for the client’s business (e.g., increased revenue, higher enterprise value).
   • Best Use Case: The preferred model for establishing a strategic partnership. It frames your fee as a small fraction of the significant financial upside you will help the client achieve.

Actionable Flight Plan

1. Adopt a Retainer-Only Model: Immediately cease offering hourly rates. Structure all client engagements around a fixed, monthly retainer to establish a partnership based on trust and value creation.
2. Frame Conversations Around ROI: Begin every pricing discussion by quantifying the value you will deliver. Use framing like, “If I can’t grow your business by at least X%, then we shouldn’t work together.” This anchors your fee to the client’s potential gain.
3. Negotiate Equity Based on New Value: When equity is on the table, propose compensation based on a percentage of the new value your work will create, not a percentage of the existing company.
4. Apply a Risk Multiplier to Equity: To account for the risk and illiquidity of equity, demand a significantly higher value than the equivalent cash compensation. Start with a baseline of 3x the cash value (e.g., for every $10kincashyouforgo,askfor$30k in stock value).
5. Build Your Value Proposition: Clearly define and articulate how your services directly contribute to the client’s top-line revenue or enterprise value to justify a value-based fee.