Implementing Value Pricing: A Radical Business Model for Professional Firms

CHAPTER 19

Price-Led Costing Replaces Hourly Billing

Innovation requires builders not bean-counters, and the last person who should be running something is the man who controls the costs. Sure, you need that man in there somewhere to keep a rein on things, but he shouldn’t be at the top.

––James Dyson, Against the Odds, 2003

Andrew Carnegie was fond of saying, “Cut the prices; scoop the market; run the mills full. … Watch the costs and the profits will take care of themselves.” Of course, Carnegie made steel in mass quantities, and greatly reduced its price so use could be expanded. In today’s intellectual capital economy, there does not exist as strong a correlation between inputs and outputs, costs and value. The value of the book you are now holding is not the sum of the paper, ink, glue, and binding costs, but rather the value of the knowledge it contains. To believe otherwise is to fall prey to the materialist fallacy. George Gilder once said this worldview is similar to believing that Canada will produce the world’s greatest literature since it has the largest trees.

For all of the economic evidence assembled on why costs do not “add up” to equate to value, it is amazing how many firms still cling to the cost-plus pricing method, a direct cousin to the labor theory of value. The mirror image of a bad idea is rarely a good one. In their outstanding book The Strategy and Tactics of Pricing (third edition), Thomas T. Nagle and Reed K. Holden offer the following indictment of ...