Price for value, not for costs

If there is one thing I wished more of my fellow academic peers would understand when working with industry, it is this: You should

Price for value created, not for costs incurred.

Many professors, when asked about the price of some proposed work, will calculate the direct labor costs needed for the project, add some university overhead or other margin, and then quote the industry partner the resulting costs as the project’s price.

Economically, this is wrong. Professors should not be quoting costs but rather the value of the project to the industry partner, sans some discount to make it more attractive. Business people know this; it is a logical conclusion of trying to maximize profits. It is a poor market to be in, if competition drives your prices close to costs. Fortunately, this is not the market most professors are in.

Any professor worth their salt will want to be the leading expert on something, and in order to get grant proposals, will also be able to articulate why this expertise is relevant. As a consequence, an industry partner interested in their work really only has two options: Accept their price or not have a project. Thus, you need to figure out what the project is worth to the industry partner and quote that.

Determining the value of a project to your industry partner and hence its price might seem tricky. You can often start by simply asking how much they expect to be saving or how much more they might be selling due to your work, and take it from there. There is a lot of literature available on how to determine prices.

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