Could Your Pricing Be Stronger?
Robust pricing is a key to profitability, yet most professionals spend little time seriously exploring how to price their services effectively. Worse, they often underprice as they overreact to client pressure to reduce fees and become afraid they will lose the sale.
If you’re reading this, it’s likely that your work for clients is infused with deep experience, knowledge, creativity, and ideas. Would some (or all) of your clients pay a few percentage points more for your services? Under the right circumstances, some definitely would. And obviously, a small increase in price yields a disproportionately large increase in net profitability.
Here is a quick rundown of 9 possible inputs that you should consider when you establish your pricing. Some of these, like Value and Difficulty, you should most certainly also discuss with the client:
Value to the client. In many respects, this is a much more appropriate way to charge than using hourly rates. After all, clients seek results—value—not “bums in seats” as they say.
Standard market scales. In some markets, there are accepted fee or commission levels based on a percentage. Financial advisors may get 1% of assets under management per year, for example, and most executive search firms typically charge around 30% of an executive’s total annual compensation for completing a search. What I personally don’t like about this approach is that it doesn’t allow for flexibility to account for the other variables such as value or degree of risk.
Internal benchmarks. Many professional firms, especially consulting firms, have a target gross margin they want to achieve, and they determine pricing by working back from that goal (usually translated into daily rates, which are calculated to support the desired level of profitability).
In many services markets, pricing is often based on “time and materials”—e.g., how long is it going to take us to do this? For many reasons, charging by the hour is fraught with problems, as the legal industry has discovered during the recent recession.
Embedded intellectual capital and/or proprietary data
. In some cases, you may have proprietary data or information that you have accumulated at great expense. There may also be physical products involved in your service delivery (training materials, for example, or software).
Difficulty, speed, and risk. If you take the time to explore these during the sales process, you’ll have a greater chance of earning fees commensurate with the challenge of the particular assignment.
. In many cases clients are willing to trade off quality for speed. Ask yourself: Are you delivering too much quality? In other words, are you doing a 120% job when 95% is going to result in a highly satisfied client? Your own perfectionism and risk aversion may be eroding your profitability!
. It’s great to talk about value pricing, or raising fees for very difficult work, but you also have to consider what your competition is offering to charge.
Value to you
. Finally, how badly do you want the work? How valuable will it be to you and your career? There are many intangible factors, such as the marquee value of the client, that might induce you to invest in building a relationship. That said, be very careful about listening to a potential client’s siren call that says, “We need a discount on this work…but look, we’re interested in a long term relationship (subtext: “Don’t worry, it’ll be worth your while!” But it rarely is in these cases).
Look carefully at your pricing strategy. If your main guide is how many hours it will take or what your competitors are charging, you’re probably missing out on significant opportunities to strengthen your pricing. And remember: What supports higher prices is not your own assertions or calculations but rather factors like the client's perception of the value you offer, the uniqueness of your brand, clearly-defined improvement metrics, and your ability to define the problem broadly and tie your work to the client's highest level goals. In other words, it's everything you do up until the moment you submit a proposal that really matters, not the quality of your negotiating skills.
How do you approach pricing, and what have you found to be effective in achieving higher fees?