Marketing And Selling Knowledge

Marketing and Selling Knowledge Fourteen Ways to Charge for Knowledge Karl-Erik Sveiby 7 August 1998. All rights reserved. Updated 9 September 1998. What is the value of an idea that comes in the flash of a second but is based on a life of experience? It is hardly the time spent on it. Basing the value of knowledge on time spent can never be correct, still it is the most common. What other ways are there to charge for Knowledge? Let’s look at how the knowledge industries charge for their knowledge. They are ranked from one to fourteen, with the most attractive on my personal ranking list listed as number one. 1. Take Intangible Revenues into Account. The most challenging and most creative way to charge for knowledge is to take the Intangible Revenues into account. (Read more about Intangible Revenues) With very few exceptions authors of management books do not get rich from the royalties. So why do consultants spend long unpaid hours in front of their word processors? Because a published book generates publicity and credibility among potential clients. The process of writing the book is also a learning process in itself and it visualizes ones thoughts in a tangible way. Consider the young accountant just employed and now on the audit team. She does not know much and cannot contribute much to the client. The big auditing firms use their large customers to train new recruits by assigning them the routine parts of the audit. The senior auditors and the large customers recognize that such customers are valuable. Indeed, the latter are asking with increasing frequency these days, what they get, in return for teaching their auditors’ "rookies" their business. Intangible revenues are flows of knowledge and they come in three forms; revenues that add to the External Structure, to the Internal Structure or to the competence of the employees (read about how to quantify intangible revenues). Intangible revenues are seldom made explicit or taken into account in pricing decisions, yet they are often the major reason why a project or an assignment is undertaken. They tend to be argued in qualitative terms rather than quantitative. It is time to change that! 2. Link Royalty to Financial Output or Outcome. The approach least filled with conflict for all concerned is to link the fee to the financial outcome of the project. The oldest and most established method is the "royalty". Authors, software developers, designers and inventors, tend to be paid for their intellectual property rights in the form of a percentage on the longterm revenues from their creative efforts, particularly if they are independent professionals. Also pharmaceutical companies often negotiate royalties for using other companies’ drugs in recipes. Royalty is a simple and good method, because it links the output directly to the input, this is why I rank it 2nd. But it is simple only if the creative effort has been formalised into a product or tangible/visible outcome that is protected by law. Royalty becomes much more complex of the outcome is a process or a socially constructed event. It can be very hard to distinguish revenues that the client will receive from the installation of a new order entry system or the profit of a new organization or strategy implemented. Still the method has been used to great advantage by some advertising agencies for well-defined marketing campaigns. Also management consultants involved in cost cutting projects with pre-defined outcomes apply it. 3. Link Success Fee to Non-financial Outcome. A success fee can be linked to a non-financial outcome. The most common today is its negative counterpart: a penalty if certain conditions are not fulfilled. For instance in construction industry, a penalty is incurred if a deadline is not met. A more positive approach and more encouraging for those involved is to link a success fee to pre-determined non-financial indicators, such as the effects achieved among the recipients of the project. Public sector projects involving infrastructure, such as water & sewage treatment or highways/railways or medicine generally have outcomes that are non-financial but possible to measure directly. It gets harder if the outcome is socially constructed, such as the effects of education or welfare projects. The training industry, hard pressed to deliver substantiated evidence of the effects of training, is among those that are trying to find objective methods for measuring such effects. The success has not been overwhelming. A more practical approach is to determine the outcomes using surveys, for instance establishing the satisfaction level among those concerned. Obviously, if one links a success fee to survey results the survey methodology has to be impeccable. Despite the difficulties involved in establishing objective non-contestable indicators I believe that this method has big potential in most knowledge industries. A shift of mindsets will probably have to take place and much more research must go into this field.

4.

Create Insurance Premium. This might be the oldest knowledge charging systems in the world! In ancient China the patients paid a monthly fee as long as they were well but they expected to be treated for no cost when taken ill. The charges and the taxes that finance community services are financed in the form of an insurance system. You pay when you are healthy or have a job or a house for times when you are ill, jobless or the victim of a fire. The system is a kind of a retainer with an incentive built in to think ahead and anticipate problems. 5. Transfer Price Transfer pricing is common practice in team sports. Soccer clubs and basket ball clubs "buy" and "sell" their stars, sometimes at incredible prices. The star usually also receives a share of the price. A transfer price is a payment for the skill of that particular person and it is an estimate of how much future value the star is worth to the club. Transfer prices are not common in other industries, often because civil law does not allow it. The laws are the legacy of the industrial era, and were installed to protect workers to be exploited by employers. Today's professionals are more like the sports stars and perfectly capable to care for themselves, so it is likely that transfer prices will become common practice in professional services and other knowledge organisations. Transfer pricing is a good system for two reasons: First, because it allows the formal employer some protection against abuse by individuals. Second, because of the protection the formal employer can invest in an individual's career and knowledge knowing that the investment will not "walk out the door". 6. Let the Supplier Pay. Now this is an ingenious system! How is it possible to charge the supplier instead of the customer? It is much more common than one might think. Why is most of the content on the Internet free? How can it be that the commercial channels on TV do not cost you as the views anything? Why do you only pay 1/5 of the cost of producing the newspaper? Because there are more people with a message to tell than there are people who want to listen. So the market forces have created a market on which the suppliers of information pay, not the consumers. The advertisers pay 4/5 of the newspaper and 100% of the cost of television, because they want us to receive and pay attention to their messages. The information providers pay for the web sites, because they have a message to tell. Other examples: underwriters charge a fee to the new shareholders as an add-on to the share price when they advise the company making a new share issue. The fee is so small so the individual shareholder (the supplier of the capital) does not see it, but the volume can make the total fee quite large. The Swedish central association of tenants has for years been able to charge the property owners a percentage on the rent for their services to the association’s members (don’t ask me how they achieved that!). 7. Charge for a Team. Some big consulting firms charge a fixed amount per team inclusive of expenses, rather then per consultant. It is a method pioneered by the strategy consulting firm McKinsey as an approach of creating more flexibility for planning their resources. The client should in principle not have to care about who is assigned to the project; whether they are flown in or locally based. For the knowledge company the method has the nice added benefit of allowing for lifting the charges of the lowest paid associates and for the seniors to spread very thinly on many assignments. There are not many firms in the position to use this method, though. It requires a high level of concept standardisation and very high project management skills. 8. Package the Solutions. The dilemma facing most knowledge sellers is that the offering cannot be made visual or real until it has been delivered. Moreover, the customer often contributes to the solution. This amplifies the pricing problem. One approach to reduce the problem is to make the offering a "product". Most service firms sell their service as packages, for instance travel, hotels and airlines. Another common approach is to issue a card, which entitles the holder to obtain a range of specified benefits. The knowledge company's equivalent is the "Concept". Much of the conceptual developments made by management consultants belong in this category. Concepts like "Total Quality", "Service Management", "7S", "Learning Organisation" just to mention a few. The latest trend is to trademark the concepts in order to gain more protection from "pirates", EVA , Intangible Assets Monitor , IC-Index but to mention a few examples. 9. Commission A well established method is to pay a "commission". Commission is similar to a royalty in that it is generally tied to the commercial value of a transaction. The advantages are that it is easy to negotiate and simple to follow up. The major disadvantage is that commission is a one-off, thus does not encourage longterm relationships. Thus commissions have come in disrepute because it is a euphemism for bribes to political cronies in some countries or payment to fishy arbitrators. 10. Link Fee to other Vehicles.

What does a money transaction from one account to another really cost? The banks know it very well, but for ages they have charged for there services by concealing the real cost in the "float", the time they borrow our money without paying interest. The financial services industry charge by using "spread" (difference in buy/sell prices) or commision on the capital raised. Union membership fees are often linked to the salary. Needless to say such practices can be very profitable for the vendor, because they conceal the real cost, but they are increasingly being phased out in the banking industry and it will be interesting to see how commission fees will hold up in the onslaught of the Internet. 11. Buy into Customer. Instead of charging a fee in cash, the knowledge company might transfer the whole or part of the fee into shares in the company they work with. This is similar to profit sharing although the involvement and the risks become much greater. It is the backbone of the revenues for the venture capital industry, the most valuable and rarefied knowledge of which is their managers’ ability to pick and back successful entrepreneurs. The method should be used with great caution by other industries. The knowledge organisation may suddenly find that they own shares in a bankrupt basketcase or that valuable cash is stuck in non-core industries or that the obligations of ownership requires valuable management time to be spent on board meetings outside their competence sphere. The approach is most common in the financial industry. 12. Link fee to Input. To charge a percentage on the input is a fairly simple method and has been used by knowledge companies for a long time. Head-hunters often charge a percentage of the salary of the new employee. Advertising agencies earlier often charged a percentage of the total space cost of an advertising campaign. The method is simple, because generally the input is easier to establish than the output, but it is not a very good approach. The method is rightly regarded with suspicion by customers since it has a built-in incentive to increase their costs. It is being phased out in advertising industry world-wide and it is doubtful whether the headhunters will be able to keep it. 13. Retainers Retainers are common practice in the consulting industry, particularly for small consulting firms for which it adds a sense of security. It is like being employed part-time. Retainers are also used by vendors to a large corporation that take over outsourced internal departments like recruitment, facilities management, IT-dept. Even if retainers do not have to be linked to time spent, they are no remedy to the fee-for-time problem. 14. Tender. Tender has long been established practice in technical consulting where projects are well-defined. The vendor offers a fixed price irrespective of the time involved. Engineers and Architects are used to it. The advantage from the clients’ point of view is of course that they can compare similar offers. The problem from the vendors' point of view is that the tendering process is a risk reducing exercise so it reduces the incentive to come up with creative solutions. The yardstick tends to be the price offered, so the offering is commodified to such an extent that it becomes unprofitable. Technical consulting also tends to have the lowest profit margins worldwide, the lowest salaries and the lowest added value. Tenders are spreading to most professional services, auditing being hardest hit. There is hardly an audit assignment today or a computer programming project without a prior tender process and consequently audit fees are put under hard pressure. Public sector assignments are also generally put up for competitive tender these days and they are particularly price oriented. There is not much to do about the trend, however. Tenders are here to stay and one of the best ways to get around it, is to select what tenders are submitted very carefully based on how much intangible revenues they bring. © Karl-Erik Sveiby

SELL YOUR KNOWLEDGE The Professional´s Guide to Winning More Business © Monica Nicou, Christine Ribbing, Eva Åding Published 1994 by Kogan Page, London, ISBN 0 74 94 13 66 2

Digest If you are a professional whose prime commodity is brainpower, or if your organization identifies itself as ´knowledge-based´, this book is for you. Whether you are a lawyer, accountant, architect, IT or management consultant, or whether you sell your services in internal markets, for example HRD or R&D.

Sell Your Knowledge deals specifically with business development and marketing in business- to business markets. The markets can be both inter- and intraorganisational. Knowledge as competitive strategy goes beyond products and services. The more complicated products and services become, the more buyers and clients will have to interact. Furthermore, professionals who offer their clients expertise and knowledge cannot delegate their marketing to sales people. This is because their source of business is their own skills. Is your company a Knowledge Organization (Definition)? Is knowledge your business? Ask yourself the crucial question: Do we use our knowledge to carry out services for our clients or do we offer our knowledge to help them improve their business? "The aim we have for our clients is to enhance their competitiveness through either: development, improvement - creating something new - problem solving". This is achieved through the transfer of information and knowledge between you and your client.

Why is it difficult to market knowledge? 1. There is no demand. Knowledge companies have a range of methods, concepts and techniques through which they help clients to solve their problems or develop 2. The client buys ´a pig in a poke´. The more complex or new the technique or method is, the more trust the client needs to have for the knowledge professional. 3. The long-term acquisition process. While a simple product or service can be sold in half an hour, a knowledgeintensive service or product needs a time space. The marketing of knowledge puts a focus on relationship management. The image of your Knowledge Company, unit or organization is no make-up. It is your real The model for relationship management is the four phases model of the dynamic client relationship. 1. Arousing interest to attract clients (Market communication) 2. Dialogue about the client´s needs (Selling) 3. Collaboration in the assignment (Creating quality) 4. Follow-up, feedback and client care. (Retaining the relationship and getting an ambassador). If you succeed in managing the relationship and creating an understanding of the results that you have created for your client, you will have a ´sales department´ in your customer´s organization.

Your Tool kit for Business Planning - The Seven Cs Method The marketing of knowledge involves all professionals in a continuous process of: * identifying client categories (market segments) which can benefit from their knowledge; * learning about chosen clients problems and needs; * communicating to create awareness about those needs and sell; * contributing to change and results for clients so that they will act as ambassadors * developing their knowledge base; To plan your business development and market communication, you can use seven key words, the seven C´s. The first three Cs deal with visualizing your target groups. FIRST C: CHOICE OF CLIENTS. Start by breaking down your total potential client market into a number of distinct groups. This gives you the possibility to analyze the different needs Choosing target groups, ideal client companies and clients help knowledge professionals to a joint vision and a goal image. SECOND C: CLIENT INFORMATION. The most important qualification of a knowledge professional, except for professional expertise, is the ability to search for and analyze the chosen clients´ needs. If you are a big company you ought to organize internal pools of expertise that provide the organization with business intelligence through gathering, analyzing information. Client information is the process of seeking information about target markets and clients, and analyzing that information to find new needs for knowledge, pro

THIRD C: CHAIN OF CLIENT VALUES. You sell a result, not a method or an activity! Consultants are often fascinated by their methods and skills but unaware of the results that they are hired to achieve. 1. Intrinsic value soft, intellectual or emotional value e g knowledge, capability, skill, attitude, confidence, satisfaction, relationship. 2. Extrinsic value - practical/functional value, having to do with output, time and quality e g enhanced productivity, efficiency, time reduction, task completion. 3. Systemic - financial value e g yields, profitability, turnover, income, cost reduction. Applying value theory to the context of knowledge marketing gives you a means of discussing and analyzing your clients´ problems and needs, the value you are going to offer them. FOURTH C: CONTACT NETWORK. The most effective way of selling knowledge is to be recommended by a person whom the client respects and trusts. Knowledge professionals need actively to build networks. In order to communicate with strategic business contacts in a goal-oriented way, you can organize them into four groups: * clients * investors * suppliers * key people Clients represent former, present and prospective clients. Investors represent those people that have invested their money, reputation, ambition, etc. Suppliers include those external organizations and people who contribute to your organization´s knowledge, services and administration, e g subcontractors. Key people are those strategic people in your chosen client categories, who control media and forums in their business environments. FIFTH C: CLIENT EDUCATION. A knowledge company´s responsibility lies in helping their target groups understand their needs through educating them. The knowledge organization is a step ahead of the customer, so you need to * point out threats and opportunities * suggest solutions * activate crucial issues * give advice * debate and share values. Your aim is to create an awareness of lacks and opportunities and thereby create a demand for your knowledge. SIXTH C: CHANNELS OF COMMUNICATION. Communication is the strategy for developing an optimal chain of marketing activities. Professionals have access to many different communicative media for clients. How does the knowledge professional communicate to create, retain and develop mutually beneficial client relationships? One of the most important aspects of ma SEVENTH C: COMPETENCE DEVELOPMENT. Competence is the attraction factor for knowledge companies. Knowledge acts as a magnet and as such it is your most important competitive tool to attract both customers and new employees. * Shared visions for their client categories and clear knowledge goals for themselves, * Courage to take the risk of demanding assignments, * Professionals who take responsibility for their own and their colleagues´ learning, * Openness to share mistakes and learn from them, * Commitment to develop through working via strategic partnerships and networks * Continuous development of new concepts, methods, tools etc for efficient and effective ´production´. Is there a role for a full time marketing professional in the knowledge organization? What are the organization´s expectations on this person that can be called Marketing Developer? This person has to synthesize different skills. Marketing skill * Coordinator (e g client data management, administrator of activities) * Analyst/controller (e g market and client research, client base management) * Consultant (e g act as pedagogue, adviser and coach) * Leader (e g facilitate the formulation of goals and strategies, encourage and coach the professionals in their marketing activities) References: "Sell Your Knowledge offers a 158-page gold mine of ideas and examples on the issue of Know-how marketing". Dr. Kerstin Friedrich, Strategie Brief Frankfurter Allgemeine. "Sell Your Knowledge gives an interesting structure of theory together with valuable practical suggestions." Bob Barnden, Partner, Coopers and Lybrand.

Evaluating Customers Correctly Most customers are sources of value, in forms other than hard cash. They provide training for employees, they can be used as references, they talk to each other and so spread the word and the image, and their demands encourage the development of competence. The importance of customers is specially evident in knowledge organizations. The big auditing firms, for example, use their large customers, to train new recruits, by assigning them the routine parts of the audit.

That such customers are valuable is recognized by the senior auditors and the large customers. Indeed, the latter are asking with increasing frequency these days, what they get, in return for teaching their auditors' "rookies" their business. Other customers contribute their image. Having IBM or General Motors as a customer is a valuable reference, and it is quite remarkable how many big-name companies appear as existing, or former clients, on consultants' CVs. However, the size of the customer has little to do with how interesting or challenging the projects are. The most challenging and therefore the most educational work is often done for less well-known customers. A knowledge strategy therefore involves getting to know one's customers really well. When armed with an intimate understanding of its customers, a knowledge company can be more selective in its marketing, and can concentrate the company's most valuable (scarcest) skills on projects where they fit in best, and will do the most good both for the customer, and the knowledge company itself.

Case: PLS-Consult The Danish management consultancy firm PLS-Consult, follows a deliberate knowledge strategy, and has begun to measure the competencies, and development of its own staff, as well as the ways in which its customers contribute invisible revenues. Customers are divided into: customers who contribute to image, references, and/or new assignments (very much/average/not much); customers with challenging and widely educational projects that contribute to the firm's internal structure (very much/average/not much); customers who improve individual competence (very much/ average/not much). About 15% of all their customers belong to the most valuable, "very much" class, which PLS-consult wants to expand. It divides consultants into three categories of experience: less than three years, between three and seven years and over seven years. The basic qualification is a Bachelor's degree in engineering or business administration. Over half the firm's consultants have over seven years' experience. PLS is anxious to develop three more strategic competencies in its consultants, and therefore seeks to identify: Leaders competent at managing major projects; Teachers competent at transferring skills to others working on a project (and so contributing to internal structure); Generators competent at bringing in new customers. About half PLS-Consult employees possess one or more of these abilities, which is a high figure. Most of these findings are based on subjective assessments made by the senior executives at PLS. Internal attitude surveys, and customer satisfaction polls have also been run, and will be repeated systematically in future. These kinds of data enable PLS-Consult to keep strategy under constant review. How much of its revenue, for example, comes from "image", and how much from "educational" customers? What proportion of its most valuable skills is being assigned to customers that can enhance the firm's image? How much of the revenue comes from very satisfied customers? Who are the most and the least satisfied customers? Which customers are most profitable in cash terms? How much revenue comes from "bread-and-butter customers", who contribute 'financial' profit, but nothing else? The management has, for example, identified the need for more "teachers" to enable PLS to grow faster. This begs questions like "How can actual and potential teachers, be developed and recruited?", and "What kind of customer projects should such people be assigned to?". By measuring the growth of volume in projects in which teachers are involved, the company can tell whether it is on the right track. PLS would also like to win more image-enhancing customers. By measuring the volume of that segment, they can see the extent to which that goal is being achieved. Customer polls can thus be used for strategic purposes.

An issue of concern: The share of fees coming from highly satisfied are the same as last year, whereas the share of least satisfied customers has increased. (not PLS data) Satisfied customers are all important so the key to sustained profitability is the ability to establish and maintain stable customer relationships. Regular customer surveys paint moving pictures of customer satisfaction. A summary of responses to such a survey is shown in the chart. The share of fees coming from customers who regard the service as very satisfactory, is the same as last year, whereas the share accounted for by the least satisfied customers has increased. A chart of this kind should raise some questions from the Board. The value of a customer base can also be assessed in terms of market development, because customers likely to generate a flow of new projects, rather than the occasional one-off, are clearly more valuable.

Large efforts are put into low image projects while the share of fees coming from high quality project, which give high image is low. One of the most important means of competition is thus the ability to choose the right customers. One might distinguish the following categories: a) Customers who are profitable. b) Customers who increase the competence of the engineers. c) Customers who support the build up of internal structure. d) Customers who build up the image and provide contacts with other customers. Thus a key strategic aim should be to attract customers whose projects will improve image, internal structure or individual competence, as well as being of high quality, and profitable. The graph in the Figure above shows a not-too-favorable picture (the numbers in the example do not come from PLS-consult). High image projects are both the best and the worst: the best if the customer is impressed by the high quality of the work, and the worst if the customer is dissatisfied.

In the chart above, no revenue is being earned from satisfied high-image customers. If the firm is to gain image, something must be done about a situation like this.

A good situation: Almost 25% of the revenues come from customers who also contribute highly to both external image and corporate structure. Projects that make it possible to develop new concepts and methods, or which are big enough to be educational for many employees, are more valuable than other projects. Customers who provide opportunities for such projects help to reinforce the company's internal structure.