Has there ever been a time when you charged the same client different fees for the same set of services? Have you ever felt the value your clients received from your services far exceeded the fees they paid you? Are you able to accurately price your services based on the perceived value to your clients? As competition in the professional services industry intensifies, successful firms are looking at new ways to effectively price services and drive greater revenues. As I talk with professional services firms, many times the question comes up about new approaches to create and manage the delivery of superior customer experiences – what we at SAP have been calling Client Value Differentiation. One of the hot topics in this area is “margin leakage.” Margin leakage occurs when firms discount too deeply, are unable to recover all their costs, or are just leaving money on the table during a deal. Even small amounts routinely left on the table during deal negotiations add up to a major impact on your bottom line. For many firms, managing pricing and margins is the most underutilized of available profitability levers. The goal for price and margin management is very simple: make better pricing decisions and more money on every deal. So why can effective pricing be so difficult in practice? The reasons vary, but a few issues come up in almost every conversation:
- Lack of enterprise-wide visibility: Pricing decisions cross many functional areas of your firm, and can touch sales, marketing, service delivery, and finance. If your firm is global, pricing decisions may also extend beyond practice areas to geographies. Pricing decisions become complicated when only a few people within the firm have access to enterprise-wide pricing data. This lack of visibility makes it difficult to enforce consistent pricing policies and optimize price and margin decisions across the firm.
- Ad-hoc pricing: Pricing varies for a service line depending on the client and geography. This kind of ad-hoc pricing is often done based on a “gut feeling” and rarely considers the perceived value of the service from your client’s perspective or your cost to serve—both considerations that vary significantly by client or segment attribute.
- Manual, error-prone processes: Many firms have highly manual, disconnected processes to manage prices and contracts. In order to properly analyze pricing decisions, you need aggregated information from your finance, project, and CRM applications available in real-time.
- Salespeople in the dark: Without clear visibility into client segments and pricing policies, it’s difficult for salespeople to negotiate with a client in a way that best serves your bottom line, not just the salesperson’s bottom line.
But how can you develop an effective price and margin management program? Some innovative firms are working with the pricing experts at Vendavo to investigate how the “price waterfall” concept—which has had major impact in the product arena—can be applied to the professional services industry. The idea behind the price waterfall is to identify the underlying factors and associations that link service price to perceived value in order to improve the profit margin for your service offerings. There are a number of steps in this process, but the key ones include the ability to:
- Quantify the value your service delivers by market segment.
- Differentiate the way you serve clients by client segments
- Sell value and negotiate effectively in the context of client and market segments.
With this innovative approach to price and margin management firms can drive better pricing decisions, improve margins, and provide a superior client experience.