The professional’s guide to pricing

Expert Q&A with Positive Pricing’s Stuart Dodds.

What are the challenges that professional services firms experience with pricing?

“If there are many professional services firms providing a similar service to what you do, and you’re unable to differentiate yourself, you’re a commodity – because the client has a choice, and that choice is typically based solely on price. It’s hard for people to see anything other than price pressure in their day-to-day work, and that, in turn, can erode pricing confidence. If you keep getting told you’re too expensive, you quickly start believing that.

“The sector isn’t as naturally relationship-driven as it used to be. You have procurement or purchasing functions, or COOs taking more interest in getting good value – often code for ‘at a lower price’. Professional services spending is high up on their list of considerations, and this is putting pressure on firms to focus more intently on the pricing approaches.”

What’s Driving This Focus On Pricing?

“There’s a twin squeeze: there’s more competition, and our clients seek greater efficiency. Fee earners are also facing internal pressures from their boards and senior partners to grow their practices, their book of business, and maintain [or improve] existing profit margins. That’s why we’re seeing more professional services firms actively looking at pricing.

“There are three ways that you set price. One is a price based on your cost. How much does it cost to deliver the service, and then what appropriate margin do we add on top of that? In my experience, professional services’ profit margins range from between 20% to 50% plus. The disadvantage of that is it’s purely an internal measure: it has no relation to the quality of the work or the output. Yet this is the way most professional services firms price.

“The second perspective is market-based pricing. If I know I can ‘only’ charge about £500 because that’s what my competitors are charging, well, I’d better charge £490 to make sure I win the work. That’s what a lot of professional services firms do; they often think: ‘If we charge more than the market rate then we’re not going to win the work.’ This, however, assumes that what you provide for your clients is exactly the same and therefore price is the only determinant of success.

If the client can see the value you’re delivering, they’re probably going to want to work with you again, pay their bills quicker and speak to other professionals to say they should use you

Stuart Dodds
Co-founder, Positive Pricing

“The third, much better, approach is value pricing. It doesn’t matter how long it takes to do the piece of work, so the inputs are irrelevant. It doesn’t relate to what the market is doing because it’s tailored specifically to one transaction or project. If it’s worth £1m to the client, for example, you’re going to charge a fee relative to that figure. If it’s only worth £1,000, you’re going to charge a much lower figure because the value to the client is very different. Here it’s about aligning your pricing models and commercial approach more closely to the value you’re delivering to the client.

Stuart Dodds.

“It’s not a cookie-cutter approach – it’s more a case of thinking about how to deliver value to your clients, and it’s beginning to force professionals to ask: ‘Do we understand what our client does? Do we understand what’s important to them?’”

What are the benefits and challenges of the value pricing approach?

“One of the challenges is that it’s often the supplier’s perception of value that they’re delivering. The critical thing in any value pricing is what does the client value? I could give you a fantastic service, but if you didn’t want a fantastic service, you’re not going to pay for it and you’re not going to value it, because you didn’t want it. You’ve got to understand what your client wants, needs and values, not what you think your client wants, needs and values. That’s a mistake many people make.

“The other challenge is articulating it. What does value mean? It’s going to change depending on the situation you’re in and the project or activity you’re doing at that time.

“If the client can see the value you’re delivering, they’re probably going to want to work with you again, pay their bills quicker and speak to colleagues and other professionals to say they should use you. You’ll also probably have fewer challenges around the invoicing, so you can focus on what you like doing, which is delivering great service to your clients.

“You’re removing some barriers and strengthening the relationship with your client through value pricing. Hopefully you’ll strengthen your financial performance in tandem with that because you’re pricing your services more appropriately to the value you’re providing your customers, rather than what competition determines.

“Understanding the client is fundamental – and so is communication. The way you find these things out is by engaging with and talking to your clients.”

How can professional services define value?

“That’s the hardest bit to do. Firms need to ask themselves several questions. First, what can we do to help our client at the client-organisational level? For example, how can we help the client increase their revenue? That could be through introducing new products, it could be helping them merge with other organisations, it could be doing something smart with their tax structuring. Second, how can we support the client to reduce costs? Third, how can we help our clients manage or mitigate risk? Or how can we help the client protect their reputation or build their brand?

“Next is how we can add value to our individual client contacts and stakeholders – for example, how do you make their life easier and make them look good? The easiest way you do that is by talking to them to understand what their goals, objectives and challenges are.

“Finally, it’s by having an offer that is distinct from your competitors – this being based on your specific expertise, client relationships and so on.

“We’ve found it’s also best to communicate value when the client is most willing to receive the messages about it. These opportunities are typically around the proposal stage when the client asks you and competitors if you want to help them with something; in the interactions and meetings with the clients; and the final one – which many firms forget about – when invoicing. This is perhaps the most intimate touch point with any client because it’s the point when they ask themselves if it was worth it. Ensuring no surprises on your bill and that your clients can clearly see the value you are delivering is a great start.”

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