As part of this how to guide series, we want to explore the different pricing options that are available for any learning and development (L&D) practitioner. If we look in the current market, there are so many different options that are available, so the big question is how we differentiate between the options and provide value for customers and the provider as well.
Something that we often think about is the impact of brands on pricing. For example, if we look at Apple and how it prices its laptops, it’s very simple to see that their products are much pricier than the competition. Given the same specifications and hardware, the pricing between an Apple MacBook and a Dell can be very large. So, do brands have an impact on pricing or is it more about the value that is being created by Apple for consumers? Does the value creation give them a very big leverage on pricing?
How can we learn from Apple and its pricing strategy, and more importantly, how can we leverage it in the corporate L&D industry?
A disclaimer here. For this article, we found a fantastic hour-long video podcast that I think is crucial for anyone to understand. After listening to it, we thought there must be a way to link the learnings to the corporate L&D industry. In the podcast, the focus was on creative work (i.e. graphic design, branding design etc.) but given that corporate L&D sometimes resembles a consulting engagement, we saw a lot of similarities to the concepts.
Therefore, a lot of what is being covered here in this article has its roots in the podcast. We try our best to link it well to the whims of the corporate L&D industry.
Lastly, we have to put in a plug for The Futur, which is a fantastic channel on YouTube that covers a lot of the challenges we face in the “consulting” space which is not product driven and we think if you’re looking for a channel that can help you navigate the challenges you might face, Chris Do and The Futur team might have you covered.
One last note is that we are not paid or sponsored to reference this podcast, we just felt that the content was perfect for our challenges in the L&D industry. Let’s get to it.
Components of Pricing
Price in a nutshell conveys utility to a buyer. Pretty simple right?
For example, some folks might indicate that price is a function of costs, for example the labour of creating a product or solution, but essentially consumers don’t or won’t care about your costs. The only aspect that they do care about is the utility of the product or service to them. A good example might be an MBA degree. If you look at the curriculum pricing for an MBA programme at MIT Sloan, the pricing is somewhere close to US$82,000 (approx. RM 365,000). Some people might look at this price and drop off their chair as this is a very similar programme to other local MBA courses which are a lot cheaper.
The utility factor for a local course vs. one in MIT might be very different for different folks. The reason a lot of people pay MIT Sloan for their programme is that they see value or utility in the $82,000 price tag. That might be exposure to a very valuable network, getting direct access to high paying employers or getting the brand recognition of MIT on their individual CV. The price that is attached to the MIT brand justifies the price that people are willing to pay to attend its MBA programme. They justify their human capital investment based on their perceived utility from the programme.
Now, if we were to look specifically at the costs that are incurred to run the MBA programme, it might be way lower. After factoring the faculty costs, the materials and administrative costs to run such a programme, MIT could easily be making a huge return from its MBA programme. Therefore, value is subjective to the buyer. In the podcast, Ron Baker makes the point that if price was only determined by costs and every business adopts a cost + pricing model, no business would ever fail. See image below for a simple illustration of what cost + pricing looks like:
Photo by https://www.linkedin.com/pulse/what-cost-plus-pricing-steph-sanderson/
If we take this approach and apply it to the L&D business, a lot of L&D and training business apply a cost + approach due it its simplicity. If a programme takes $2,000 to create and deliver, the price that if often charged is a multiple of that (i.e., $10,000). Baked into that $10,000 is the assumption of your fixed costs.
Consumers might pay for the solution as they care about the outcome of the solution and therefore might take on the price being charged. They essentially do not care about the costs to produce or create the product. They have no interest in understanding your fixed costs (rent, salaries, product development costs, utilities etc.). It’s about the value or utility they associate with the solution.
Another tricky point to contend with is the impact of year-on-year price escalation. On an annual basis, a lot of businesses price up their solutions by baking in an escalation clause where they might increase pricing by 5-10%. Now, if we apply the same logic to buyer utility and value, the customer does not care about your cost creep, they care about the value the product or solution has to them. If the price increase does not impact their utility value, the consumer continues to purchase the product. If the price breaches the utility value, they stop purchasing. Therefore, again it’s clear to see that costs are not what drive price, it’s buyer utility.
Thinking about our own spending habits, imagine paying RM10 for a black coffee from your local coffee shop. It makes sense to some people to pay that price as the utility that you derive from that cup is not constrained to the coffee itself. It might include the coffee shop environment that you are enjoying, the 30 minutes that you might spend at the shop talking to friends or family, the relationship that you might have built over time with the shop owners, etc.
Now, if that price were to increase to RM20 per cup, your utility value would be breached and you would possibly find another coffee provider. It’s not the price of the coffee beans that you would be concerned with that determines whether you would pay the extra RM10 for the coffee, it’s your utility in the overall coffee experience. So, if cost + pricing is one way to look at pricing, what are other options that might be more valuable to both consumer and provider?
Value Based Pricing
Value based pricing is another pricing that leverages on the utility that consumers place on the product or solution rather than the cost components. In the podcast, Ron Baker goes into an example of how whenever we purchase something that has positive utility to both consumer and seller, we often hear a double thank you. I.e., when you purchase a coffee, both sides of the transaction utter the words “thank you”, implying that both parties have a win-win outcome. If one party loses in the transaction, it would be your standard “thank you” and “you’re welcome” approach.
Providers that offer value can frequently offer pricing that is much higher as it goes to the heart of why the consumer is purchasing the solution; the “why” behind the purchase. We can see that in a lot of options that we come across in the L&D space. Take the Malaysian context of L&D. In Malaysia, we have HRDC that “regulates” the industry where there is a price point that is set for a day or half day training options for corporate. It’s a fixed price where suppliers are often times forced to meet that price point. It’s an artificial price that regulates the value of the industry.
Let’s say you offer a full day programme for RM6,000 to a client. That’s a fixed fee and for sellers, it implies that you can cover your costs of running the programme and other fixed costs that revolve around running a L&D business. The game is all about volume. How can I do as many day sessions in a month?
The fixed rate however does not cover the value of the product or solution to the customer which is the employees of the organisation. Value is perceived by the customer and the implication is that the RM6,000 is a flat rate value the customer places on L&D. Anything higher and it breaches their value utility threshold. As a consequence, the industry suffers from low quality content and delivery as volume determines that I can only provide a fixed amount of value to any given customer.
If there was no artificial ceiling price, a supplier could technically provide best in class value to just 1 customer all year round and charge them RM1,000,000. So, what can we do as L&D providers in this case?
Whenever drafting an L&D proposal, come up with 2-3 options.
Option 1: Standard 1 day programme at the RM6,000 price point. No extras.
Option 2: Develop a specific skills-based framework (i.e. help solve the “how” for the client. If they are looking for innovation, build a 3-month accelerator programme around innovation)
Option 3: L&D framework consulting – coming up with “why” customers need an L&D framework for their business and aggregate the training options or providers (i.e., provide more value to the client) - price TBA
Shifting the price dynamics from cost + to value pricing allows the customer to look into how they can work with you rather than just looking at the lowest cost and outcome base. Focusing on just one option might lead to more customers that are interested in that same outcome and the cycle continues where you as the supplier can’t get out of the vicious cycle.
Check out some relevant articles on value-based pricing:
How do you break out of your current pricing model?
Photo by Andrea Piacquadio: https://www.pexels.com/
Strategy 1: Specialise in a domain
Having a specialisation in a specific domain allows you to stand out as a subject matter expert. We have seen this play out in many areas in our life. In the case of specialist doctors, we often will pay way more than we would to a general practitioner. This is often due to the specific advice that he or she can provide in a specific area of medicine.
The same can apply in L&D. If you’re a cultural transformation expert and you’re renowned all over the world, you can break out and command a value-based price. Think of Simon Sinek. I don’t think he would be charging RM6,000 for a full day programme. It would probably be somewhere close to 20x that price. The utility to consumers is justified due to his subject matter expertise.
Strategy 2: Break out of your limiting self-belief of value
Sometimes, the inability to break out is due to your own self belief that you can’t price it higher to the client since you might be taking advantage of the client. I think that ultimately comes down to whether you believe that you’re adding value to that client-supplier transaction. If we see money as a medium of creating service to clients, we can often see more value in our time and investment. Taking a hard look at our value might allow us to see how we can shift our pricing from cost + to value based pricing.
Taking pricing from cost + to value based pricing is achievable for all businesses especially so in the L&D industry where a lot of value is created with creative frameworks and solutions for clients. There is a lot that we can learn from other businesses and industries. We can break out from defining pricing based on our costs outlays and move towards creating more value and outcomes from customers.
In the end of the day, customers don’t see price rationally but from an emotional standpoint. It’s about the utility or value of price that consumers are interested in and as providers in the L&D industry, the faster we shift to this form of pricing, the more scalable and profitable we can become.
Last note. In the podcast, right at the end, they sum it up perfectly and this is the way we all look at L&D. A lot of providers and trainers come into the L&D industry as they want to create value and lead change in their subject area. If you’re in the leadership training space, it might be that you want to create better leaders in your country. If you take on the volume-based approach, it is not possible to create impact as it is a very touch and go approach. True value can only be created by focusing on 30-50 customers. Going into their challenges and spending the right time with them will allow you to create real impact.
However, you can’t make a good living if you price at the standard pricing and spend the right amount of time to delve deep. It can only become possible through a deep customer relationship, and the right price option might very well be value-based pricing.
It is therefore worth thinking your pricing strategy and aligning it to your deeper goals as an L&D provider.
One more last note: if you’re a Malaysian L&D provider or freelancer, it might make sense to play to the structure of HRDC but always be open to the idea of different pricing options for international clients or L&D consulting gigs.