Economics 101 says increasing price should be the quickest and easiest way to increase profitability.
And yet – how many CEOs and CFOs practise this? Many simply do not have an analysed and actionable pricing strategy for professional services firms. Many others are not confident with how to raise prices for services. Higher prices are a difficult subject to broach but a crucial one, especially in the face of rising costs or reduced cash flow.
There are four levers every business can pull to raise profits: increase unit sales, increase unit price, cut variable costs, and cut fixed costs.
The biggest lever for higher profitability is price. If you raise your price in the right way, you won’t lose clients. You may even gain more satisfied clients. In this way the improved profitability can be sustainable.
This article explains how.
Reasons for using a more expensive firm
Clients seeking better value or higher-quality service are key reasons for using a more expensive professional services firm.
As Warren Buffet famously quipped, “Price is what you pay; value is what you get.”
This statement emphasizes that the cost of a product or service (price) is not the same as its worth or perceived benefits. The price is simply the financial transaction but its value is what the buyer receives and how satisfied they feel in return.
We can translate Buffet‘s truism into B2B market research-speak with a formula. This formula expresses the way a B2B professional services client thinks and feels about value and what drives it:
Perceived Value (PV) equals Benefits delivered minus Perceived Price, moderated by what our research describes as Cost Consciousness.
Based on the PV formula:
- If price reduces for the same benefits, this will increase value to the customer, but reduces profitability for the firm.
- If price rises, while the benefits increase and/or cost consciousness improves, perceived value remains the same, or even increases.
One of the main reasons for using a more expensive professional services firm is to gain more value for the price offered.
Drivers of perceived value
So, what exactly drives the perception of value?
Beaton research measures 14 distinct attributes that together make up the benefits delivered by a professional services firm. We ask clients of firms how they rate the value of the service they receive and show the extent (percentage) to which each attribute drives value.
Note the very small percentage for perception of fees (i.e. price) – this drives less than one per cent.
The chart below focuses on law firms, however we find the same patterns in accounting, consulting, built and natural environment professions. You could use this data to inform law firm pricing strategies or any professional services pricing.
Source: Beaton Benchmarks
This graph illustrates the top “value” markers or benefits to a client. These are ease of doing business with, effective communication, cost consciousness, commerciality of advice, care and reliability.
It also shows an interesting phenomenon. That, contrary to popular belief, price is not the biggest deciding factor for clients choosing a professional services firm.
Rather, clients choose firms based on the quality of service based on the above attributes. They judge based on overall value for their money – not the dollar amount.
At Beaton we have seen pricing trends continue to show that clients are willing to pay more if they are receiving great value.
Contrary to popular belief, price is not the biggest deciding factor for clients choosing a professional services firm.
How to raise prices for services – according to research
Given the above, the easiest way to raise prices for services without disappointing your clients is to improve the benefits (value) they receive. This allows your firm to raise prices while keeping your clients or customers satisfied.
It also begs the question, is it possible to raise prices for services, without materially increasing costs? The answer is yes. Here are some examples of how.
1. Automation
Computer tools and artificial intelligence enable firms to automate many processes and improve their service or speed of service.
Automation often enables cost savings, faster delivery times, and improves overall service quality. It can help businesses to allocate resources more strategically and focus on higher-value aspects of their offerings.
Standard processes like communication updates and aspects of project management are easy things to automate. This can boost how clients perceive your firm’s “ease of doing business with” from the above graph.
2. Offering different options and price points
Informing the client and providing options for how a project can be undertaken can empower them to understand the value of your service. Informing them of possible options and their various costs, risks and benefits for each option is a great way to do this. It demonstrates “commerciality of advice” and “caring about their clients”.
3. Consistently measuring and reporting service levels
Clients are busy and have their own projects to focus on. They may not always ask – but always welcome being regularly informed with how their project or your service is progressing.
Regularly communicating with your clients provides opportunity to recap or go back over the work you have done and are doing for them. This demonstrates “reliability” and “responsiveness”.
Introducing a premium pricing strategy
If it’s possible to increase price while demonstrating benefits, one million-dollar question remains. Are clients willing to pay more for service than they currently do?
At Beaton we have asked this question many times in our research. Time and again, the answer is yes. Clients are willing to pay more for service than they currently do.
In fact, clients are willing to pay top-dollar – or what we call “premium pricing” – for the same service. This occurs if they perceive they are getting better value from your firm.
This chart measuring the accounting profession demonstrates the willingness of clients to pay more for services. Note the percentages above each bar indicate the percentage of clients willing to pay more than they are currently charged.
Crucially, these findings are from clients who are experiencing a given level of benefits. Imagine how much more they would be willing to pay if they were offered the increased level of benefits described above!
Source: Beaton Benchmarks
Become a price-maker, not a price-taker
The evidence presented here shows any professional services firm that puts its mind to becoming a price maker can succeed.
Perhaps not across all clients, all projects and all service lines. But by selectively choosing clients, projects and service lines defining how to deliver superior value (at no greater cost to you), you can charge premium fees and watch your bottom line grow.
At Beaton we work with firms in all professions to ensure they are setting prices competitively and profitably. We draw on our 20 years of market research and data to consult with you to improve your price position. Visit our pricing page to learn more or get in touch to speak with us directly.
Thanks to Grant Hollings and John Lipscomb, members of Beaton’s research team, for the analysis.
To find out more about Beaton’s pricing resarch and consulting options, and how they can benefit your organisation, please visit our pricing page or contact us to discuss your options with a Beaton partner.