Assuming that your service offering is a good match for your client’s needs,
nothing has more impact on your overall profitability than your pricing. The
leaders of professional services organizations understand this — in my
latest research pricing was the number-one marketing critical issue. (Figure 1)
So if
pricing is such a critical factor to the success of your professional services
organization, what pricing method should you use? Let’s start by taking a look
at where the industry is now.
Figure 2 (from the research referenced
earlier) shows that currently 50% of study respondents stated that
time-and-materials was their most common pricing method, 45% said fixed pricing,
and 5% said pay for performance pricing.*
This is
a ratio that needs to change. Asking your clients to pay time-and-materials (pay
by the pound) is a seller-centric pricing strategy designed to eliminate your
risk and guarantee that you get the margin you desire. There is no incentive to
be more efficient, in fact, the temptation is to be inefficient, tacking on
hours and days to maximize project revenue, or using the project to train your
“green beans” on the client’s nickel.
Think
about this from the prospect’s side of things—have you ever been in a cab and
what you expected to be a $20 trip turned out to be a $50 fare? What did you
think of the cabbie? Would you willingly travel with him or her again? People
are conscious (and often a little nervous) of having a meter running—if you
doubt me, just ask your clients!
Yes,
asking customers to buy by fixed price (pay for the promise) makes your job a
little more challenging, as you must couple strong discovery with solid
experience to accurately estimate your costs. And yes, you are taking on some
risk if you get it wrong. But well-thought-out, value-based fixed pricing can
deliver the double dip of higher margins and stronger client
relationships by directing the conversation away from billing rates to
bang-for-the-buck. Sell the way your clients want to buy, and make fixed pricing
your primary pricing strategy.
* I’ll
tackle this pricing strategy in a future article.
[PRINTER FRIENDLY VERSION]
