Low upfront fees, measurable KPIs, and guardrails that keep everyone honest.
The Problem with Traditional Pricing
Traditional consulting and software pricing creates misaligned incentives:
Time and Materials: The longer the project takes, the more the vendor earns. Efficiency is punished.
Fixed Price: Vendors pad estimates to cover risk. Clients pay for uncertainty.
License Fees: Vendors get paid whether the software delivers value or not. Usage doesn’t equal impact.
In operations improvement, these models particularly fail. The value isn’t in hours worked or software deployed—it’s in measurable business outcomes.
Value-Based Pricing Explained
Value-based pricing ties compensation to delivered results:
- Low upfront fees - Reduce client risk and barrier to entry
- Defined KPIs - Specific, measurable outcomes that matter
- Shared upside - Vendor earns when improvements materialize
- Guardrails - Caps and floors that protect both parties
This alignment transforms the client-vendor relationship from adversarial to collaborative.
Designing KPIs That Work
Not all metrics make good KPIs. Effective value-based KPIs are:
Measurable
You need reliable data before and after the engagement. If measurement is disputed, the model breaks down.
Attributable
The improvement must be traceable to the engagement. Confounding factors—market changes, other initiatives—muddy attribution.
Meaningful
The metric must matter to the business. Moving a number that doesn’t impact outcomes isn’t value.
Timely
Results must materialize in a reasonable timeframe. Multi-year value realization doesn’t work for most engagements.
Common Operational KPIs
Operations improvement offers natural KPI candidates:
Cost Reduction
- Inventory carrying cost reduction
- Transportation cost per unit
- Labor cost per transaction
Efficiency Improvement
- Forecast accuracy improvement
- Order fulfillment cycle time
- Inventory turns
Quality Improvement
- Defect rate reduction
- On-time delivery improvement
- Customer complaint reduction
Revenue Impact
- Stockout reduction (recovered sales)
- New channel enablement
- Customer retention improvement
The Guardrails
Value-based pricing needs boundaries:
Baseline Establishment
Agree on measurement methodology and baseline values before work begins. Document everything.
Measurement Windows
Define when and how improvements are measured. Account for seasonality and implementation timing.
Caps and Floors
Set maximum vendor compensation to avoid runaway success fees. Set minimum fees to ensure vendor sustainability.
External Factors
Define how to handle events outside either party’s control—market crashes, supply disruptions, organizational changes.
Attribution Rules
Specify how to handle improvements from multiple initiatives running concurrently.
Implementation Approach
Phase 1: Discovery
- Identify potential KPIs
- Assess measurement capability
- Establish baselines
Phase 2: Agreement
- Select target KPIs
- Define measurement methodology
- Set fee structure and guardrails
Phase 3: Execution
- Implement improvements
- Monitor leading indicators
- Adjust approach based on results
Phase 4: Measurement
- Capture outcome metrics
- Calculate improvement
- Reconcile payments
When Value-Based Pricing Works
The model fits well when:
- Outcomes are measurable and attributable
- Baseline data exists or can be established
- Implementation timeframe allows for result measurement
- Both parties are sophisticated enough to negotiate fair terms
When It Doesn’t
Consider alternatives when:
- Metrics are hard to measure or attribute
- Engagement scope is exploratory or uncertain
- Timeline is too short for outcomes to materialize
- Organizational complexity makes attribution impossible
The Bottom Line
Value-based pricing aligns incentives around what matters: delivered results. It requires more upfront work to define terms but creates better outcomes for everyone involved.
For operations improvement engagements, where value is measurable and impact is tangible, it’s often the right model.