You know the term “selling ice to an Eskimo?” I think it could be an important lesson in the value of a tight marketing plan paired with a complementary pricing strategy. But let’s sell snow to the affluent instead.
The other day I saw the most beautiful scene outside my window. Large puffy white flakes of snow fell gently down. What a blessing! In the colder parts of the world snow is supplied in varied amounts completely independent of demand. As the winter drags on and the snow accumulates, budding entrepreneurs may be wishing for a way to get rid of the white stuff, and make a buck or two in the process.
The Product
What form will this new product take? Snow in its native form would be difficult to transport to markets where there is demand without significant refrigeration and packaging. As such it would need a higher price tag just to cover costs. Perhaps it could be marketed as the basis for a new natural snow beverage: maybe an icy complement to premium Canadian vodka, the target market being the wealthy in countries without snow.
The Cost
Having a clear sense of the cost of providing the product to customers is important to not losing one’s shirt. What costs should be considered? The broad categories would include:
Marketing
Our market research shows that no one else is offering this product. The closest comparator is blended ice, which bears no novelty factor. The product is easily replicable, so building brand recognition and reputation quickly are key. It is recommended that the product be tightly marketed to the highest margin buyers possible, including high-end bars in the world’s top hotels, showcasing it as a taste of the Canadian north.
Pricing
Product pricing should match the marketing strategy. Imagine sitting in a 7 star hotel in Dubai, 50 degrees Celsius outside and sipping the Canadian Arctic? It is the fresh, all natural Canadian snow that makes the drink, and with careful communication of this the marketing of 2 oz servings of the snow in spectacular packaging that makes a $1000-$1500 exclusive drink could net the snow vendor significant compensation.
While the snow accumulates to the degree that there is no place left to put it, Canadians may feel incented to sell their snow to those without. This exercise demonstrates that with a little imagination and a solid marketing plan and pricing strategy, even a public good like snow can be turned into a premium product.
Tick, tock, tick, tock….Does that sound determine your living? If you’re a professional services provider, it doesn’t have to.
Hourly based billings
Hourly billing is simply a client paying for an hour’s worth of effort, with the expectation of some service being performed. The positive aspects of this method are that an hour is a tangible, well understood measure on which to base billing. If provider is new to an area this method of billing shifts the risk from the service provider to the client. On the negative side, there may be an ethical issue as the provider may be incented to bill more hours than are necessary to perform the service, and since it’s not tied to outcomes, it makes it hard for client to see the value in what they are paying for. Unhappy clients may shop around for a better deal. The provider’s quality of life may be diminished living a life tied to the clock. Their earnings are also capped by the number of hours that can be billed in a year.
So what’s a professional services provider to do?
Charging based on value provided
One option is charging based on an estimate of the value that the service creates for the client, keeping in mind the cost of providing the service and what the market will bear. An example of this method might be as follows. A lawyer specializing in privacy law is asked by his client to draw up a privacy statement. If the lawyer, who has done many before alters an existing statement and bills as if it was drafted from scratch, it would be unethical. However if the engagement letter described a desired outcome (the privacy statement) for a specific price, no conflict would exist.
The benefits of choosing value-based billing are that the client sees a clear link between the cost and the outcome (the privacy statement). The lawyer’s job satisfaction increases because he can focus on the more interesting aspects of his practice instead of drafting everything from scratch, but he still gets paid as if he was.
There are cautions though. The lawyer needs a good understanding of what the job will entail to price it correctly, including the ability to mine the firm’s financial and statistical systems to gain a good understanding of the costs and pricing norms for the services offered. That’s where I come in. This information must then be specified in the engagement letter.
Other pricing methods
There are still more options. What if the lawyer took it a step further and commoditized his privacy statement service by offering an easy to use template for sale. This would allow him to market his services to a wider audience, perhaps to small businesses that don’t require a highly customized product. Taking it even a step further, he can add a notice in the template offering customization services for further fee.
Other professional service providers may prefer to offer subscription-based services. Still others may provide services in return for an equity share, perhaps to start ups that are lacking in cash flow but rich in potential.
The possibilities are only limited by your imagination! Figure out what the customer needs, and charge for it.
In this posting I’ve talked about what hourly billing is really paying for, and offered other suggestions as to how a service provider might bill to free them from the clock.
Tick tock, tick tock….not so confining anymore.
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