In Steven Levitt and Stephen Dubner’s best-selling book Freakonomics, they propose a scenario in which you are selling your house with an asking price of $300,000 and receive an offer of $290,000. Should you accept it or wait a week to see if you can get the full asking price? They argue that most real estate agents will tell you to take the deal because “a bird in the hand is worth two in the bush”. The reality is that while the typical real estate agent will give you that advice, if they were selling their own house, they would hold out for a higher selling price.
The reason for this is that their incentives are not aligned with the home seller. While the home seller stands to receive an additional $10,000 by waiting, the agent’s 3% commission of $300 is too small for them to wait. They will want to sell the house quickly so that they can focus on selling more homes for higher total commissions.
Consultants suffer from the same lack of alignment – or more accurately – their clients suffer from it (like some alcoholics don’t suffer from alcoholism, they rather enjoy it, consultants enjoy this misalignment as well).
If a client is considering two options; one that will cost $300,000 and another that will cost $200,000, the consultant has the incentive to suggest the higher cost option, assuming all other things such as risk and profit margin percentage being equal.
But what if we aligned our interests with the client? If we determined the value to the client based on the project’s payback rather than our own profit, the result would be a better long-term relationship and potentially higher long-term profits from repeat business and client referrals due to an improved level of trust with the client.
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