There’s a good write-up of this “self identification of price sensitivity” approach in Tim Harford’s book “The Accidental Economist”. He looks at the economics of coffee shops and highlights that the differential pricing for the top end “chocolocamochacino” drinks vs the standard coffees bears no relation to the actual incremental costs of those drinks – it’s more a reflection of the customer’s willingness to pay a lot extra for a little more luxury.

Ian

Thanks for the clarrification. It’s a good point.

Great suggestion!

Ford Harding

My “eliminating discounts” phrase was meant as more of a dig at (what I see as) the large number of companies who seem to have adopted this as their primary strategy. The comment was less about saying we shouldn’t raise prices, and more about the fact that so many have discounted so much that raising prices just gets them back to square one.

In terms of other approaches, one thing that’s worked for me (but I’m far from an expert in) is allowing the client to “self identify” as being willing to pay a premium by offering a simple range of solutions at different price levels. The key to testing out price elasticity is to make sure that the options are significantly different in price. Rather than 3 similar options differing only 5-10% from each other, make sure the top end option is 50% more expensive than the base version.

Ian

That’s a helpful comment. Using a little reverse logic, it suggests that if your competitor is hiring a lot of people, he may be putting his B Team up against you, because he wouldn’t be hiring unless the A Team was full out.

Ford Harding

Long-ago I once debriefed a client after losing a sale, for which our bid had been lower than the competitor’s. The client had worked with the competitor before and commented that they were expensive but worth it. Ever since then I have sought to have clients describe or firm the same way. There’s nothing wrong with charging a premium, if you can provide premium service and outcomes, as defined by the client.

No respectable professional wants to gouge his clients, but if a sophisticated client will happily pay more, why shouldn’t you charge it? I have also quoted prices to clients on occasion and heard the response, “Actually, I thought it would be much more expensive.” I had clearly left money on the table. So, I don’t think it’s a matter of just is eliminating discounts. There are legitimate opportunities for increasing prices.

Other than that, I agree with what you say. At some point, it is important say to your team that you are willing to lose an opportunity if you don’t get a price increase. You only do that when you have a strong pipeline. A coach inside the client organization is always helpful. But ultimately you will only know you can increase your prices by trying a higher price out.

Of course, you can always look at the sign-in book in the client’s lobby to see who a competitor is sending to compete with you. But there must be other techniques as well. I hope we will get more ideas in further comments.

Ford Harding

At one level, yes, you could probably create a program (with enough computer power and some econometricians) that would provide sufficient data to determine an accurate answer.

But as Ian notes there is a far simpler way, which works for both the sole proprietor and for the professional firm: demand. Once that picks up, you’ll notice. Here’s another, perhaps simplistic, heuristic: in the ‘buyers’ market, you’re struggling to keep the A team busy and deciding what to do with the B team. In the ‘sellers’ market, you’re struggling how to balance resources and considering adding B, or even C team players.

Not perfect science, but pretty practical and widely understandable.

David

Despite what we’d all like to believe, clients rarely see their professional service provider as being completely unique or so differentiated that no other supplier could do something similar or deliver similar levels of value.

While in the long term I’d always work towards establishing this position of unique value – I would recognise that I might well not be there at this present time and would be subject to the same competitive pressures as others.

So even if we are able to deliver very high levels of value – if our competitors can too, at lower price, then we’ll still feel the pinch. And often, there’s a limit to how much value a client needs. Obviously, higher ROI is higher ROI for a cost reduction/revenue growth engagement – but if you’re getting a will written or building a simple IT system to meet a specific need, there’s a ceiling on how much value you can add. In those cases, unfortunately, price becomes a key competitive factor when there are many suppliers pitching for the same work.

Of course, you could argue that there are creative ways to add value that weren’t originally thought of – and that’s true – but not always.

So how do you know you can begin charging a premium (or more accurately for many firms – stop discounting so deeply!) – I think:

a) You should be getting a good feeling from the strength of your pipeline/enquiry levels, etc.

b) You hopefully have some trusted relationships with clients who will give you an “insiders view” as to budget/pricing pressures as they don’t want to see you ripped off (and, of course, you don’t want to see them ripped off, so you’ll only charge a fair price)

c) You can experiment at little with pricing on smaller, less strategic projects to see what “the market will bear” (that sounds awful – but what I really mean is “whether you still have to discount to win the work”).

Ian

Well said. Still, as David Maister reminded me long ago, value is a pretty slippery concept. It means different things to different people at different times. A person willing to recommend the high-cost provider to her boss one year may not be willing to do so the next when economic conditions have changed. The whole focus of this company may at that time be on cost control. The challenge, as I see it, is to determine when the client’s definition of value changes, and she is willing, once again, to focus less on cost and more return.

Offerings also differ over time. A competitor able to field its A Team against you during a recession may be offering a client its B Team once the recovery is underway and it’s best people are busy, so fewer resources are available to choose from. When that happens, you may be able to charge a premium over the competitor. But how do you know? Can you know?

Ford Harding

Now, this may mean different things to different parties at different times. In your ‘sellers’ market (not sure I agree with the premise, but I’ll go with it here…), the buyers appeared to ascribe more value to the offer than in the ‘buyers’ market, probably because they have more discretionary resources available. That doesn’t mean there wasn’t value, only that the parameters had changed. I mean, who among us hasn’t cut back since last fall (even those still with jobs). Doesn’t mean that we’re not spending at all, just that our perceptions of what’s valuable RIGHT NOW has changed.

Value has many components, of which price is but one. And buyers buy the entire offer, which in the case of professional services, encompasses the spectrum of the relationship, and not just the narrowly defined ‘offering’ or ‘product.’ But anytime the seller focuses on just one aspect of the total offer, someone (the buyer or the seller) will be shortchanged (for a description of a buyer ready to buy but talked out of it by a seller who focused on the wrong things, read my recent blog post at the link below).

So, my simple answer is to focus on the value of the project to the client, rather than trying to ‘push up’ rates. If the value is there, you’ll get your fair share.

David Harkleroad
CMO
http://davidharkleroad.wordpress.com/