Pricing of consultancy Services is a hot topic within all consultancy firms and it is seen that the consultancy firm as well as the prospective client has a very self-interested view.
Clients typically ask, “How do I get the best value for the price I’m paying?” But while doing so, they are actually groping in the dark as they do not know how to determine what the price should be, so they look for a benchmark and try to simplify their logic.
So the hourly pricing is attractive to clients as it offers an easy way of arriving at a reference point. But yet, clients do not understand the pricing very well because they do cannot predict the value that the consultants actually offer. Thus we see several pricing models available to simplify the matter like hourly, contingency, value-based or fixed fee pricing.
However, these options confuse the clients. Hence consultancy service firms need to approach their clients in a ‘steppered manner’. They need to keep price out of the dialog for quite a long time. First they need to create value in the client’s thinking before they put a price on it.
But many clients want to get to the price before talking about value. Consultancy firms normally approach this issue by establishing a Base Value Proposition (BVP). This is normally done by building credibility by presenting a case study based on a previous client. The case study reflects the specific value they were able to create for that client. From there, they explain to the clients that once their team has a full understanding of the problems, they would be able to quantify the value for them.
But value is what clients do not understand. Knowing their problem, they even have a notion of the solution, but they do not know the potential value of the solution. A skilled consultant should have a more comprehensive understanding of the solution and its potential impact than the client does.
The BVP gives them an idea of what the consultancy firm can do. This is the stage when the firm identifies the potential range of value they can provide to the client.
The benefits could be potentially worth thirty times the consultancy fees, but only if the client is prepared to make significant changes. If the client is only prepared to make limited changes, then the benefits might only be worth five or six times the fees. The firm has to realistically analyze the client’s environment and ability to change to quantify the value they can actually provide.
But what happens if the firm is competing against a consultant who is pricing by the hour? Here the firms underline the risk normally associated with complex projects. Flat quantified value is like paying for insurance because something might happen no one can foresee.
But the most important differentiator should be the approach of the firm that cannot be simplified to an hourly comparison. The consultancy firms have to differentiate themselves in a fundamental way from the competition.
It is like saying–the competition is just giving you time; I’m offering you an entire approach, which I define as value.
Clients however have learned to negotiate by simplifying things. They know that the downside of hourly rates for clients is lack of control over the end cost. So they try to cap it by working on the hourly rate and multiplying by the estimated length of the project. What they arrive at a capped hourly rate. So they conclude that the meaning of value pricing is just an hourly rate in drag.
It is a challenge to reflect value to the customer and make him understand that the consultancy price is really justified. It is imperative that consultancy firms work with their clients and actually measure the value they have created in a contract.
There are many techniques to prove that clients actually achieve cost savings and that the savings are attributable to the consulting firm. Consultancy firms need to quantify benefits with the client in areas where there are numerous external variables that drive value. They should use value pricing only in areas where there are definite opportunities for value creation. They should block out the areas that are quantifiable, so they can differentiate better than their competitors.
Consultancy firms also segment the project into defined value chunks with a deliberate sign-offs for each chunk. This allows the client to walk away at the end of each segment if they wanted to. That way, the client doesn’t have to buy the whole project at once but can buy it in smaller pieces. Thus by creating a series of value checkpoints, it is win-win situation for the firm as well as their clients.
In many cases, performance guarantees provide a great value add-on. The firms that have been bold enough to offer a guarantee as a differentiator have been enormously successful. A guarantee puts huge pressure on consultants to deliver consistent performance. Most consultants impress the client in the initial phase, win a big contract but don’t manage the performance consistently. The best consulting firms not only impress the client at the beginning, they wow them at the end. In spite of the different pricing models available, the hourly rate will continue to be available in the market. It’s useful for clients who want to make quick decisions and price quickly. It’s also advantageous for consultants when there’s high risk and low value in projects.
Professionals’ mindset about marketing has changed quite dramatically over the years. They really want to understand how they can create, communicate and capture value for their clients. But there haven’t been any marketing models that explain how that all hangs together. The problem is that, though the mindset of the consultants has changed, there is a huge resistance comes from the marketers.
Much of what firms spend their marketing money on is of dubious value. There are huge teams of people spending a lot of time creating newsletters and marketing collateral and a lot of other things. But if you actually have a look at it, they’re spending money on advertising campaigns that have no demonstrable return on investment at all.
Perhaps; it is time that marketing firms hire management consultants to push their professional values.