If you’re missing revenue targets, your pricing, not your pipeline, might be the problem. In this session, pricing expert James Wilton, Founder of Monevate, reveals why pricing is the most underutilized growth lever in professional services and how founders can stop leaving money on the table. We’ll dig into the real cost of underpricing, how to align pricing with the value you actually deliver, and how small changes can lead to major gains. Whether you charge by the hour, the project, or something in between, this session will give you a clear lens on what’s working, what’s not, and what to do next.
TRANSCRIPT
Greg Alexander: Hey, everybody. This is Greg Alexander. You’re listening to the pro serve podcast. Brought to you by collective 54. If you’re new to this show. We are for owners of boutique professional services firms, and we hope to help you make more money, make scaling easier and make an exit achievable on this week’s episode. We’re going to talk about outcome based pricing. This seems to be a new buzzword. Pricing is a hot topic within our community and outcome based. Pricing seems to be something everyone wants to talk about. So we’re very lucky to have a true pricing expert with us today. His name is James Wilton. James is a friend of mine, and a member of Collective 54, and he really knows his stuff. So we’re lucky to have him, and I’m going to ask him some questions about outcome based pricing. So you can evaluate whether that’s a good strategy for your firm. So, James, for those that don’t know you. Would you please introduce yourself.
James Wilton: Yeah, absolutely thanks for having me here. Greg. So yeah, James Wilton, I’m the managing partner of a management consulting firm called Monevate, focused on pricing strategy. We primarily work with Sas companies, tech companies and increasingly companies that focus on AI. My quick background is, I’ve been in consulting for about 20 years, started off in sales and marketing, consulting. and then, drifted into pricing largely by chance. Nobody starts off to be a pricing consultant. It turns out it’s just gonna find you. It’s gonna find you. Yeah. Found that I loved it. And just really doubled down and focused on on pricing for the rest of my my career.
Greg Alexander: Okay, very good. All right. Well, let’s start off with the basics. So what the heck is outcome based pricing.
James Wilton: Yeah outcome-based pricing, Greg. It’s a it’s a way of pricing, which means that rather than focusing on the traditional levers of pricing like, you know, if you go to Sas, you think of pricing based on users and usage and so forth. Outcome based pricing is pricing, based on results. So it’s what you end up getting out of the product or service that you are. You are buying.
Greg Alexander: Okay. And as you know, our community is made up of small professional services firms. So my, my next question is what conditions must be in place for outcome-based pricing to work for a small services, firm.
James Wilton: Yeah, absolutely. This is the thing I mean, I think so. Outcome based, pricing has been around for a really long time. It’s got a lot more attention recently, I think, because a lot of AI companies have started to explore it. But it has been around for a really long time, and it’s been very prevalent within within professional services. Firms that said it is quite difficult to do. There are some challenges in doing it in doing it well, and a few of the things that I I find that can be difficult to get to. It is firstly. defining what the right outcome based metric is that you know? What? What does that outcome look like? Are you charging? Is your outcome based on the amount of revenue that you generate for a client. Is it the amount of ebitda that you generate? Are you trying to boost or decrease something else? Is it a spend thing you gotta be able to think about. What is that outcome that they are looking for, which aligns to value and makes it compelling for them. And sometimes that’s clear and obvious sometimes it’s not so. You have to be able to find to find that second one within that is, this is very often a tricky part is like, once you found that that metric you have to be able to get the client comfortable, that the attribution is gonna work out. So let’s say, for example, I’m doing a consulting project, and I’m trying to increase my my clients revenue like, if their revenue increases. Was that all down to me? Or is it down to one of the 700 other initiatives that they have going on at the same time? Right, which also might be a boosting revenue it can get. It can get tricky, and clients aren’t gonna want to pay. They’re gonna be very happy to pay you for revenue that you boost. But if their revenue increases and it’s not clear that it’s from you, maybe less clear that they’re gonna be willing to pay for that. So that can certainly trip you up similar. But similar, but different is baselining like, where do you measure improvement from? Right? If I’m again, if we use the simple revenue example. Again? do I measure improvement from where our revenue is today? Or do I measure it from where we expect the revenue to be after we’ve completed our our work. What if the revenue is kind of trending downwards right now, or it’s all over the place. Where do I set it like where you start to measure can obviously make a big difference to how much you end up earning. So that can be a point of contention which can slow everything down as well. and then I would say, the the last major thing that you have to be able to overcome is. I guess, your discomfort with payment risk. Right? Like, if you’re gonna go with outcome based pricing all the risk is put with the vendor. So now I’m in a position where I’m not gonna get paid until the outcomes have been generated. And in professional services firms right? It often takes time for those outcomes to get to get generated. So if I’m going to be paid based on outcomes, I have to wait for that amount of time which, depending on cash flows and revenue recognition I might not be be comfortable with. And of course, also, there’s no guarantee that I’m going to get those outcomes as well like. Oftentimes, when in professional services. We do work, and we do not have control over exactly whether everything is implemented as it should be, or whether it’s continued, and therefore you may not see those outcomes come to fruition. You may not get that payment, so you have to be very comfortable with that level of risk that you’re taking on.
Greg Alexander: You know, within collective 54. We’re always benchmarking performance of firms, and within the professional services sector. There are 9 subsectors, you know, legal accounting, consulting, etc. and I’m always looking for the outliers, the firms that have the highest revenue and profit per head. To me that is the ultimate measure of a professional services firm, because 85, 90% of our cost structure is labor. So the more revenue and profit per head, the more profitable the the founder becomes. and the the outliers always come from firms that use outcome-based pricing, or what we used to call it, performance based fees 2 in particular. So from financial services, if you look at investment banks. they take you on, and if they sell your firm, they get a percentage of the transaction. That’s why their typical fee is 2, 3 million dollars per engagement, and then also litigators. So if I’m an attorney and I file a suit on your behalf, and we get a settlement then. And I get a percentage of whatever the settlement is. These are extremely profitable and highly scalable firms. But that’s obvious, because the outcome in both of those cases is directly within the control of the service provider and attribution is very easy there the deal happened. It didn’t happen right. But in so many other areas of professional services like you mentioned revenue. So let’s say, I’m a marketing agency. and I run a campaign on your behalf, and revenue goes up. But is that because of the campaign? Is that because of the new product you released? You know. What have you so is there an opportunity for members of our community to blend this. So you know some type of pricing that marries like a retainer or a fixed bid with a bonus, you know, that’s based on an outcome. Does that exist? And if so, how might somebody think about implementing a blended approach.
James Wilton: Yeah, absolutely. Yeah. They’re definitely, always, Greg. And I think there’s many potential models you can. You can do that. I think the the one I see most frequently is it’s kind of a risk based model with a with at least a symmetrical upside, right? So the generally within within professional services. It’s it’s it’s not unheard of. But it’s rare that you put everything at risk. Right? You wouldn’t just say I’m gonna base. I’m gonna put my entire store based on these outcomes because we all have costs. You have to cover those. You don’t want to be doing that. So it’s more likely that you say this is what I would charge if I was charging flat fees or a flat a flat retainer. But I’m gonna put some of this at risk, so I’ll charge you less on that on that piece. But then I’ll give myself the opportunity to earn at least a symmetrical amount. The amount that I put at risk based on that, on that performance. And sometimes it’s higher than that. Right? You can decide exactly how you how you construct it. But that means that you’re then not completely underwater. If the if the outcomes don’t come until much later, or they don’t come to the same, the same level. and it also actually shields the the client a little bit, because actually, you know, we all think that clients always want to pay for for outcomes, and to a certain extent they they do, but not entirely right. They love the idea of paying less. If it doesn’t work out. They don’t love the idea of paying more if it works out really well, so like having that sort of that limit on the amount extra that you would, you would earn if it goes well, is actually comforting to them.
Greg Alexander: So on that you know, when you’re speaking with the client, and I’ve had this happen to me, the client says, Hey, Greg, if you’re as good as you say you are. Then, instead of charging me a hundred $1,000 for this fee, don’t charge me anything, and if it works I’ll pay you 150, and then I say, great! Let’s do it! And then they back off, and they say, Wait a minute. I wasn’t expecting you to accept that that structure like. Maybe Greg knows something that I don’t know. And if I go down this path I’m gonna end up paying a lot more than I would have if I just stuck with a traditional consulting fixed fee gig. So what recommendations do you have for members, and how to communicate this approach to their clients.
James Wilton: Well, actually, that that little example you just gave. Actually, Greg, is like is pretty much close to a recommendation that I would actually have for them right? Which is use, outcome, based pricing as an option that you can put in front of your your clients. But don’t necessarily, you know, don’t go all the way. There. This is. This is all that we that we do. I would say in a lot of these negotiations you get into when you have flat flat fees you’ll put your flat fees on the table. The client will say that it looks it looks high. Would you be willing to do some kind of an outcome based based model. And then you can say, absolutely, we love to do outcome based models, because we, you know, we have confidence in the work that we’re that we’re going to do, and we’d like to be able to take a portion of of the upside. So yes, here’s how we can do it, outcome, based model. And then you structure it. And you know you should do it in a way that feels good to you, and you actually feel that you would be happy to take off, because, you know, there’s always a there’s always a chance that they will. They will take you up in it, but you put that in in front of them. They understand they will be paying less if it if it doesn’t work out, but they’ll also understand what they’ll be paying if it does work out.
James Wilton: and your client knows that if you, the consultant or the purveyor of professional services are going to put these fees on the table. You must be relatively confident that you’re going to be able to get on the right end of that equation, right? So it makes them start to realize the value of the work which actually makes them feel far better about paying the flat fees. So even if you actually like, if you, if even if you never actually have anybody, take you up on your outcome based model, it is still very good to actually have one that you can offer and present it in those in those scenarios.
Greg Alexander: I agree with you, and I would add the following region within the professional services sector. Most boutique firms are afraid to use outcome based pricing. So if you’re a service provider who isn’t afraid and actually leads with it, price is a signal, and you’re signaling to the client that you are different than the alternatives, and maybe even more more confident. Okay, so let me tell you what’s happening right now, James, as our members are listening to this. They can’t help themselves. and they have fired up their spreadsheet. and they’re starting now to compute. How much should I take as my base fee? And if I put X amount of dollars at risk, how much upside should I get if I succeed? They’re trying to back into a math like you mentioned symmetrical or asymmetrical, symmetrical a few times? Is there a rule of thumb, or is there some type of formula to follow.
James Wilton: Great question. I don’t know that there’s a formula to follow for exactly how you should, you should decide what that upside is, but I do think there are several factors that you should be thinking about when you’re when you’re building it out. And I think the 1st thing is to what extent do you want to go with the outcome based pricing model versus go with, go with the flat fees model, because if you want to go with the outcome based pricing model. You don’t want to make the upside too aggressive because you want the client to pick it right? So when you start going to massive multiples of the amount that you put at risk, the less likely they are to move forward with that with that that model. So that’s part of it, I think, like generally, if I think you, you feel happy and confident, generally giving yourself the opportunity to earn an upside of the amount that you put at risk like earning that above the base amount is absolutely fine. I would say. I think the second part of it is the the amount of fees that you are putting at risk, or being asked to put at risk, and how that affects your your margins. So, for example, right. Let’s say that I’m a consulting firm, and I’ve got a 40% margin on my services when I’m applying my my flat fees. If I have a if I put any more than 40% of my fees at risk, then if I don’t end up, start making my fees at risk back or getting in into upside. I’m underwater on that on that project. So in that case, to be able to sort of reset the formula so that I start thinking about. I start feeling good about earning back. I probably want to start putting more upside so that I can tilt the equation back in my back in my favor around that. So you have to think about those about those those factors, right? Putting in a position where you feel your expected return on the project is going to be is going to be high enough that you are comfortable, taking taking the risk. But it’s low enough that you feel that it’s fair for your cost for your clients, and they are as likely to take it as you would like them to be.
Greg Alexander: You know what I would add to that, and that’s really good advice is what I love about the outcome based pricing conversation. Even if this conversation just happens internally on your deal desk, when you’re scoping a piece of work, it forces you to ask this question, which is, what is the value of this work. You know, if we pull this off, how much money is the client going to make or save? And sometimes you say, I don’t know. So that’s a problem. So before you ever put a proposal on the table, regardless of your pricing mechanism. time and materials, retainer fixed, bid, outcome, based. Pick your flavor. You’re probably not going to win the deal if you don’t have great conviction in what the value of the work is.
James Wilton: Yeah.
Greg Alexander: Right. So just having that conversation is great. Then, once you have that conversation internally. and you sharpen up your business case as a result. Then you go. Have that conversation externally, and what I have found is sometimes the clients don’t even know. and then they start saying to themselves, You know I never really thought about that. You know, I hire consultants as a matter of course, and I just typically pay based off a rate card. But you’re asking me a really interesting conversation. Let’s talk about it, and almost every time that happens the size of the deal grows. Because the client starts to say, Wow, this is really valuable work. Now the debate isn’t. How much should I pay you per hour? The debate is, how much of the gain should I share with you? And that’s an entirely different conversation. And let’s say the project’s worth a million dollars. And now the conversation is well, Mr. Client, are you willing to share with me 10% of that? 50% of that? 30% of that you know what is it? And that’s a different style of attribution. It tends to grow the average deal size. So that would be my advice to those that are listening on the general utility of thinking this way.
Greg Alexander: whether you use it or not can be very helpful. Do you? Do you agree with that, James?
James Wilton: I do agree with it. Greg. Yeah, no, it is exactly the right way to think about it. And I would just add on to that as a as an extra wrinkle in there. You also need to be able to factor in. Firstly, like, what kind of a buyer do you have. What are they interested in? Because I think the technique you’re putting out there. Greg, like, describes a lot of professional services buyers who are really interested in the Roi that they’re gonna get from the project right? There’s a lot of them that fall into that that bucket. Also important to know that not all professional services. Buyers fall into that bucket. There are some who are just really thinking about this. This is just something I need to do, and it’s a check in the box. And I’m not really focused on, you know, whether we make a ton out of this. Or we just do. Okay, I just want to keep the price under under here. I would suggest in most cases that’s not as great business to be going after as the high Roi, but the reality is, sometimes we are confronted with those, and we have to recognize it when we are so that we so that we price appropriately. And then the second piece is, you also want to think about your competition as well, because even if you’re going after an Roi focused buyer who is going to be interested in how much you’re going to be able to make them. You also have to remember they’re going to be alternatives to you who are gonna be offering something comparable. And they’re gonna be charging a certain amount for the amount of value that they’re going to be creating as well. So while in theory you might be able to say, you know, yes, we’re gonna get. We’re gonna be able to generate 10 million dollars for you. And we should be able to take just making up the numbers. 25% of that. Right? You might have a competitor who’s saying, well, yeah, we can almost make that 10 million dollars as well. But we’re only going to take 10% of it right? And that’s sort of that. That difference, that trade off between the amount they’re asking for. The amount of value that that you can offer is is important. It comes back again to competitive intelligence and trying to have an understanding of how these these guys price, but also being able to think about your value relative to those right? So if they’re going to, you know, if if you both think that the size of the prize is 10 million dollars, what’s the increased amount of confidence that you will actually get that versus? They will get them. And can you start to sort of take a portion of that value which, again going back to attribution, becomes far more tangible, and makes them far more likely to take a risk on you.
Greg Alexander: You know, listening to you talk about reference pricing, you know, reference to the competitors. I can’t help but think and reinforce a thought that I believe so, as it relates to boutique pro surf firms. I tell everybody to niche down as much as you can. because if you niche niche niche niche, you can become the category king of your category. And what that means is is that you? You can’t be compared. So there is no reference pricing, because you happen to be the one firm that does this esoteric thing, and nobody else does it. So there is no reference pricing the reason why I’m bringing this up is that when I reached out to you to be on the on the podcast. I did so because you were commenting about how AI, how outcome-based pricing is a thing now, because you have all these new AI tools, and they’re all trying to figure out how to charge. And they’re trying all these different things, and they’re trying to not be, you know, the next version of Sas and charge by the seat, etc. So I can’t help myself, I’m going to ask one off topic question just because I want to get your opinion. So so how so is is that the frontier right now is all the pioneering, pricing work happening in the AI space.
James Wilton: And there is a lot. I mean, I think people are just really trying to figure out how to price AI right at the moment because it. You know, there are just there are things about it that are that are definitely tough and different, although I will say, you know, I’ll get on. Get on my soapbox. Here, Gregory, I will say that you know the the thing that’s mostly causing confusion about pricing AI is not that it’s more difficult to price AI than anything else. Right? Like the process of pricing an AI product is exactly the same process as pricing everything else. If you’re doing pricing right? Then you go about the same process for AI. As for Sas, the difference is that for Sas for so long people could just be like, Oh, okay, it’s a sas product. Therefore it’s good, better best that it seats. They wouldn’t really have to think about it, and they’d know that, you know, that may not be the optimum, but it would probably work out fine.
James Wilton: Can’t do that for AI anymore, because the value that is created is very different the way people use it is very different, and at least at the moment the cost is very high as well. Right? So they, you know, these kind of models of just charging a flat amount per seat, regardless of how much somebody uses it could really put you on. You put you on on the water. And there’s also the fact that people start leaning into usage based models. Now, these kind of input based token usage based models which cover costs far better, but they’re not linked to value at all. Right, like the amount of times I pump a question into Chat Gpt does not correlate with how much value I get out of it. So you know you. So I think it just means that they’re they’re they’re looking for for models that will help them. That will better align with the way that they get value. Also help them cover costs and outcome based pricing is such an attractive area, because if you pick the right metric and you do it right, it can correlate to exactly how, what, how the the AI gets gets value for it as long as you, as long as you design it right, and because the value is so specific and so nuanced, attribution becomes a little bit easier as well. So there are ways that you can. You can make that you can make that work for you now. And also, of course, if it is outcome based. And people believe in the outcomes, and they believe the outcomes are valuable. You can charge more per unit than you could do in a comparable model. It’s not so outcome, based. So it sort of helps with that. It helps protect the costs right now. but it also insulates them in the in the future potentially because right now, they have these concerns that if we’re pricing based on on input workload and the cost of the input workload drops. then everybody’s going to expect us to drop our prices, and we’re going to end up not getting the benefit of that, whereas we’re pricing for the outcomes, the tool develops that’s not dependent on what it costs to generate at all. So it’s far more defensible. So very clear rationale, for why everybody’s pushing in that direction. Of course, I think, as they go in that direction, they’re finding out a lot of the difficulties that have existed in outcome, based pricing since it started, and we are starting to see some models. But it’s still definitely not the the primary thing that companies are doing.
Greg Alexander: You don’t want the consumer side, you know. If you think about something like Chat gpt. I hope that they don’t follow the pattern that the predecessors did you know, if you think about the user experience with Facebook or Instagram or Linkedin or Google, you know it’s free. But then I get bombarded with all these damn advertisements.
James Wilton: Right.
Greg Alexander: Right. So you know who really is the customer? The customer is not me, the user. The customer is the advertiser. I hope that Openai and and its and its peers stick with the subscription model. I’m happy to pay you 200 a month shit. I’m happy to pay you 2,000 a month the amount of value I’m getting out of that tool. But if you start bombarding me with ads I’m leaving. So I just, I hope that doesn’t happen so, all right, anyways, that was a little bit of a rant, but I wanted to get your take. But, James, I really appreciate your contribution this week. It’s always great to hear from you and keep us posted on how outcome-based pricing continues to evolve.
James Wilton: Absolutely well. Thank you for having me, Greg.
Greg Alexander: Okay? All right, a couple calls to action for listeners. So if you’re a member of Collective 54, and you want to talk to James More about outcome-based pricing. We’re going to have a private 1 HQ. And a session with him. So look for the meeting invitation, and we look forward to seeing you on that. If you’re not a member and you want to become one, go to collective 5, 4.com and fill out an application, and we’ll get in contact with you. But until next the next episode I wish you the best of luck. As you try to grow scale and someday. Exit your firm.
Note: This transcript was generated by Zoom.