I’ve reached the point in my professional life when I’ve decided to price on the value of services delivered no matter the time required to deliver the service (end result). The rest of this post explains why time tracking is bad and value pricing is good. I’ll have future posts on the challenges and overcoming my historical pricing by hours.

Hourly pricing is bad. Tracking employee time by hours is bad, too, but that’s another discussion.

Here’s one reason why: no matter the service provided, the time required is just another item to track and is not indicative of the end result.

Example: if I tell a client I can move a pile of boxes from point A to point B in 10 hours for $100.00 total (or $10/hr), then my client will expect it to be done in 10 hours and to move the boxes.

If I finish early, the client may expect a discount. If I finish late, the client may fear an additional fee to compensate me for my time.

Counter example: I tell a client I’m going to move his boxes for $100.00. The client expects only that I move the boxes.

In the second example, I removed time from the business relationship and it only comes into play when we set on a start date and assuming I do not choose to finish at a later, unreasonable date.

So, the first reason is because we add an element to a business contract that has no value to the service provided.

The next reason is because time-based pricing does not account for value. Value is provided in many ways: doing something right the first time, providing long term value, educating others, etc…

Calculating value is tough sometimes. Buyers might not know how to quantify the dollar vale of a particular result. Organizations do not typically train people about how to dollarize issues. Without this info, sellers cannot help buyers figure out the value of the solution — not to mention the value of the seller’s specific additional value.

The exercise in dollarizing should be a part of every project before it begins. It’s the only way to figure out if a solution is more costly than the problem we’re trying to solve or the result we are trying to achieve.

We can all think of extreme examples: a Rolex watch. Does one really need to spend thousands on the ability to tell time? Wait! A Rolex does more than tell time. It’s a statement about one’s values and it communicates those values. To my father, it’s a waste of money, to one of my good friends, its worth more than the price he paid for it.

Finally, one should be paid what he/she is worth. I cannot really say what’s at the root of this issue better than the folks at VeraSage in their recent post. Self-esteem is an interesting factor. I agree with them wholeheartedly. Believe what you sell is worth what its really worth.

So combining the factors together: forget charging by the hour — charge for results. Set a base price for any service you perform no matter how small — so your value and experience is compensated. Base part of your fee on a portion of the dollarized value of the problem to solve or result to achieve.

In my previous post, I listed some questions related to general company compensation plans. This post is about sales-specific commissions and compensation. It does not delve into the intricacies of every factor involved, though. This is a primer on commissions from my perspective with a few brief examples at the end of the post.

First, let’s look at this question: “Should everyone in the company be eligible for a commission?” Yes. Everyone working at the company has an interest in its continued operation. People may not always think of the company and its well being, but once a person has a taste of the red meat of commission, a new desire is known. You could use a commission as one element in a strategy to convert people from thinking “I have a job” to “I’m building a career at this company”.

The sales team should happily give up a portion of its commission to the person who helps bring in new revenue.

Next, let’s look at the make-up of those involved in a sale and how they might be commissioned. Typically, a professional services firm will have various “levels” of consultants and no true “all I do is sales” people. Everyone is supposed to bring in business, but its the senior partners who are really in charge of this process along with other management responsibilities. These senior execs do not often handle the technical work performed though. We now have a situation where the following can occur:

1. Mr. Big lands an account while golfing with some club buddies
2. Mr. Next in Line scopes the work and performs the grunt work involved in contracting the account
3. Messrs. Just Hired and Just Got My Visa actually perform the work contracted.

So here are four people who should get some form of commission. These people also require administrative support and I believe everyone should get a piece of the contract if his part is successfully executed.

Here is what I’d like to see in a new project, new client deal:

Role	Commission
Mr. Big (the Hunter)	10% gross profit (main annual comp comes in the form of profit sharing)
Mr. Next in Line	3% gross profit (higher base salary than those lower on the totem pole)
Messrs Just….	5% gross profit if its a profitable project (see below)
Administrative Support	3% gross profit split amongst all support staff
Bonus Pool	Everyone splits extra gross profit if the project comes in underbudget and the client is extremely happy

These are examples related to a firm that has recurring business and does not desire to grow like a weed. The commissions are designed to give everyone a piece of a contract.

The thinking behind this plan is that Mr. Big is going to continue to look for deals, Mr. Next in Line wants Mr Big’s cash comp and will learn the ropes of contracting prior to promotion, and Messrs Just will try their darndest to make it a profitable project. Administrative support should seek to provide as much assistance possible and keep the number of their staff low so the commission is split with fewer people.

If this was not new project, new client, but rather new project, existing client then I would make sure to compensate the person who brought that client in to the firm originally, too, even if he is no longer servicing the client. Why? Because everyone should benefit from thinking about new sales. The commission should only be about 1-3% if he is no longer working with the client.

Next, what factors really affect the achievement of new revenue? Is it the number of appointments? Is it referrals from existing clients? Make sure to factor this into your compensation (not commission) plan. If its number of new appointments, then reward the person who is setting the most new appointments.

Next, what type of business do you want people to focus on? New sales, repeat sales, sales of things, sales of services, local sales, sales in an industry vertical, etc… Make sure you grant greater commission on the types you want and make it clear why. I met a guy who actually paid less on larger deals. Um, yeah, let’s keep the deal size small…

Next, do you need “pure hunters” — those people who only bring in new leads and close business deals? This is a sticky subject with some firms. The reason why is because they often make the most money and other staff perceive them as not working as hard since they are out of the office a great deal. This is a results-only position. Effort does not matter. I like the idea myself, but it is very difficult to do in a professional services firm where relationship building is critical. If you can do it, your company will reap the benefits of a successful hunter and rich client relationships.

(For those of you interested in the hunter’s perspective this video is a funny take on selling activities.)

Other factors to consider with commissions:

Do you pay a pure sales person full commission if a project he sold turns out to be a money-losing deal?

How long do you pay a commission? For the life of the account or for a finite time period?

Do you pay commission when a contract is signed or after the project is complete and profitable?

What do you do when a client is late in paying an invoice?

Brief Commission Examples

Small Company interested in attracting new clients

pay sales more for new clients; pay support for retaining business

Direct sales software firm interested in its stock price

pay higher commissions on sales of new licenses and support plans, but lower on professional services (this increases revenue without increasing cost)

Small professional services firm (10-50 people)

pay great commissions for new clients

Large professional services firm (over 100 people, but not a behemoth)

pay great commissions on recurring business with existing clients and new projects with new clients

I’d love to hear your thoughts on the idea in this post. If you are interested, I can dissect a real sales compensation plan for a small It services firm to give you an example of the pure hunter compensation.

I’ve been asked by a few people about my sales proposal template. So, I thought I’d put a short walkthrough of the basic ideas together and post it to the web.

The walkthrough is a ten minute Flash video that shows the Sales Proposal Template (Word Doc) and my commentary.

There is also a YouTube version.

If you’d like me to review your proposal style or upcoming proposal, just send a note or comment here.

If you are in business development, sales, or marketing, I’d love to hear from you on the format and order. This document can always improve.