The specific management challenges faced within professional services firms are now broadly understood. Most firms have well-established key client programs, staff development strategies and practice group plans. They also have in place effective financial metrics to ensure appropriate utilisation and leverage, communication strategies to manage the firm’s brand, and client feedback programs to manage quality and consistency of performance.

Yet the one lever that has a greater impact on profitability than any other – pricing – in many firms is still poorly understood and poorly managed. This is highlighted as much by the myths that surround pricing as by the specific behaviour undertaken by firms.

Myth #1 – Losing work based on price indicates your pricing strategy isn’t working

The scenario is often as follows. A team spends many weeks putting together a bid for a key target. Significant thought and effort go into determining how the project would most effectively be delivered. The team refines the communication of its capabilities and elaborates with specific experience it has from previous work. Many hours are spent assembling the bid, including some very late nights nearing the deadline. But in the end the team is proud of its efforts and confident that it has effectively communicated why it would be the ideal partner for the project.

Then, after waiting several weeks, the client finally advises that it has chosen another firm. The frustration is understandable and immediate feedback from the client is that your price was too high.

Everyone’s disappointed. Nobody wants to feel this way again and so the push begins to ‘fix’ the firm’s pricing.

But before we move too much further perhaps we need to understand what the client meant by “your price was too high”. One possibility is that your offer was perceived to be identical to the winning bidder in every way except price. However this is unlikely. Most clients recognise that the benefits delivered by one firm, by the very nature of professional services, will not be the same as those delivered by any other firm. The experience of the team, relationships with the client and service levels provided – among other things – will clearly vary from one individual to another and from one team to another.

What is more likely from the client’s perspective is that it received a range of bids from a number of firms, which provided it with different benefits. These were then assessed relative to the price. Having made this assessment it chose the firm that provided the greatest value.

Feedback from the client can therefore be that the price was too high (relative to the benefits). Alternatively, the client could say that the benefits you provided based on the team proposed, their experience and suggested approach were not good enough (to justify the price). Both statements are a true reflection of the client’s thinking. The former statement is the most likely feedback.

If you are losing a lot of work based on price then your pricing strategy may not be appropriate. However, an effective pricing strategy will still result in losing some work because of price. If you never lose work because of price, your pricing strategy is definitely inappropriate. You are clearly pricing too low.

A managing partner was recently telling me about how his firm had just completed a major project to develop its pricing capabilities. This involved undertaking a quite sophisticated assessment of past projects to understand the cost of various elements in those projects. Based on the analysis the managing partner stated that the firm “was confident that it could now price with a high degree of accuracy”. While I applaud the efforts, significantly more work was required for the firm to be able to “price with a high degree of accuracy”.

The error this firm made was to assume that costing is pricing. While the cost of a project is a key input into pricing it is not the only input. Firms also need to consider the degree of competition, competitors’ pricing strategies, the role of price, the value being created for clients and the firm’s overall pricing objectives. The firm above had effectively built one wall of the house, stood back admiringly and was ready to move in.

While many firms claim to appreciate that there is more to pricing than costing, their behaviour fails to reflect this. A common financial metric used in many firms is a multiplier – the expectation that each fee earner will deliver fees that are a multiple of their costs. This is not inappropriate as a costing tool and instead should only be seen as one input into pricing. In firms where this think ing is embedded it limits the upside they should be achieving. The pricing focus within firms is often about bringing the bottom 10-20 per cent up to a minimum level. Generally the greater opportunity is to push the top 10-20 per cent to where they could be.

Myth #3 – Pricing strategy should be driven by client feedback

Having recognised that a robust pricing strategy requires input on client value and competitors, firms often seek to address these issues through client feedback. While this is not inappropriate, care needs to be taken regarding how feedback is obtained and used.

The first challenge in asking clients about your pricing is to obtain honest feedback. Clients would generally like to obtain your services at as low a price as possible. Many will highlight that if you were less expensive they would give you more work. But of course your pricing cannot be assessed in isolation of assessing client perceptions of the value you offer, your competitive position and pricing relative to competitors.

Perhaps more importantly, the feedback obtained may simply be a reflection of your position in the market. Feedback from clients to firms that occupy a premium market position (high price and high perceived benefits) is generally that they are too expensive. Clients love the benefits and performance. If only the price was a little lower.

Feedback to firms that are in the economy position (low price usually accompanied by lower brand strength, less breadth and depth and/or lower perceived capabilities) is generally that they are not strong enough in certain areas. Clients love the price, if only the benefits delivered were greater.

Based solely on client feedback it would be appropriate for those in a premium position to reduce their price. However the impact of this is that they would become less profitable and therefore over time less able to retain their premium position. If your clients are saying you’re expensive, this may simply reflect that you are in a premium position – particularly if they continue to use you.

Myth #4 – Competitive markets equal price sensitivity

Competitive markets are only price sensitive where clients have multiple options that satisfy their needs and price is a primary driver of choice. If clients are not buying based on price, don’t sell on it. Price is playing an increasingly important role in some professional services. However, the intangible nature of professional services means that for most clients, if they find a firm that has the expertise, delivers a great service, understands them, continues to improve, and with which they have a strong, trusting relationship, then paying a five, 10 or 20 per cent premium is justifiable.

Managing the myths

Myths like those mentioned above are able to foster within professional service firms because so many individuals – from partners to finance to marketing – all play a role in pricing without necessarily having full knowledge of contemporary pricing practices. Given that pricing has a greater impact on profitability than any other lever, myths such as these can have a significant detrimental impact on profitability. To effectively address this, a number of leading professional services firms are now following the lead set by most other markets and establishing pricing teams to manage the area.

Of course, the key question that remains for the majority of organisations in the professional services sector is: who’s managing your pricing?

Don’t let your firm’s pricing strategy be guided by myths. Talk to us today for practical pricing strategies that produce real results.

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