Interest rates have been steadily rising and operational costs tracking alongside them. You may be wondering – what should you do about your prices?
On one hand, the cost of doing business is increasing. On the other hand, some of your clients might be doing it tough. Some of your employees might also be doing it tough and there is an ongoing war for the best talent.
With this context, it is reasonable to price in a way that ensures your business is sustainably profitable while continuing to remunerate your people fairly. You also want to deliver value to your clients.
Pricing is the single most powerful lever a professional services firm has to improve its profitability.
Straightforward cost accounting shows a 10 per cent price increase can stimulate a 33 per cent rise in a firm’s profit. In comparison, a 10 per cent reduction in variable costs translates to just 2 per cent extra profit.
“Increasing your prices by just five per cent can increase your returns by hundreds of thousands, even millions, of dollars depending on the size your organization,” says Libby Maynard, partner and pricing expert at Beaton.
Yet, there remains a sense of “ick” around increasing prices or even discussing price. Especially post-COVID. It’s uncomfortable to negotiate – so many consultants will discount their prices when pushed.
“There are a lot of mid-sized organizations that did not increase their prices during the pandemic. And their costs, especially labour costs have been going up throughout that time,” says Maynard. “Smaller incremental price increases are much easier to negotiate than larger less frequent ones.”
How can you know if your firm is pricing work too low, or too high relative to the value you deliver?
A competitive pricing analysis by Beaton can help – here’s how.
How pricing is determined
Many professional services firms are pricing by default. This is based on historical billings, or, “the way we’ve always charged”.
Ask yourself: are you charging the same client the same price as last year? Billing the same rate with little analysis into how the value you deliver or the costs you incur may have changed? Or without any consideration of whether that service or client is profitable? You are probably pricing by default.
Pricing by design, on the other hand, involves truly investigating the costs, efficiencies and brand value that goes into your product.
“The single biggest expense for a professional services firm is typically labour costs,” says Maynard.
“The simplest way of calculating profitability is to look at your labour-cost ratio. Then you’ve got to look at other overhead costs and consider how you’re going to structure the pricing – fixed fees, hourly rates, retainers, or some other alternative.”
“Understanding what it costs you to produce work is a really important starting place, but it’s not where you should end. You don’t want to confuse cost with price.”
Libby Maynard, pricing expert and partner at Beaton.
Fair value and the dangers of discount pricing
Calculating the cost of delivering services, then adding your desired profit margin, may seem an efficient way to calculate price. But it does not account for brand value and the years of experience that go into providing the right advice. Branding is closely aligned to pricing and each can drive the other up or down.
Like paying more for a designer handbag, high prices can denote a premium brand. Beaton research shows that clients tend to associate a taller dollar figure with excellent quality. So, firms that discount their prices risk undermining their clients’ perceptions of quality and ultimately the brand.
“Discounting can be a slippery slope,” says Maynard. “If you discount, firstly it will impact perceptions of your brand. Second, clients will expect you to always discount.”
The right price should be aligned with client’s perceptions of value. Every year, Beaton research into the feedback of tens of thousands of clients of professional services firms via the Client Choice Awards asks clients what they perceive to be an appropriate level of fees for a firm’s overall client service (OCS). The fair value line indicates what clients believe to be a fair price for a given level of service.
In the example diagram below, Firm B sits squarely on the fair value line. Firm C, below the line, has discretion to lift its prices given it has low perceived prices compared to its overall client service. Conversely, Firm D needs to lift its perceived value offering in its OCS to justify perceived high fees.
How to lift profits with a pricing transformation
Understanding where your firm sits on the fair value line is essential in pricing. Firms sitting above the fair value line risk having dissatisfied clients. Those sitting below it are missing out on a valuable opportunity to increase their profitability.
“Firms may be reluctant to put prices up for fear of losing clients. But Beaton research shows price is rarely the reason for clients to change firms – what they are looking for is value. If you can understand what it is that the client is trying to fix or achieve, then illustrate how you can help them achieve that, the pricing conversation becomes secondary,” says Maynard.
Beaton’s Competitive Pricing Analysis can help you understand where your firm sits on the fair value line, and how your perceived fees and value compare to your competitors in the market. This data can give your organisation confidence to undergo what Maynard calls a “pricing transformation”.
“Once we research the market and show them the data, it gives firms confidence to increase their prices. I always say, it’s a long journey. Changing price is a marathon, not a sprint,” she says.
“Taking a longer-term view, we look at whether the firm has the right governance structures and tools in place for making pricing decisions. Whether they understand their cost base and their profitability. And whether their people have the confidence and skills to have positive, relationship-enhancing pricing conversations.”