Wednesday, November 13, 2013

What’s the Difference between Pricing Professional Services...and Anything Else?

When was the last time your asked to see the time sheet for the car you are buying? This was just one of the many of rhetorical questions that Rob Baker asked when I attended his “Firm of the Future” forum a couple of weeks ago.

Ron is a US-based advocate for the abolition of the billable hour in professional services firm, as well as an ‘Influencer’ on LinkedIn. According to Ron, he doubts he will see the redundancy of time sheets during his lifetime, but the “tipping point” may not be that far away.

I was curious as to how different the pricing of professional services is, which Ron knows a bit about, and other products and services, which is where my expertise lies? And the answer is? Not that different at all.

Lets start with cost-plus pricing, the ‘family’ of pricing models to which the billable hour belongs. As with so many other goods and services, clients don’t care about costs, inputs or hours, the bar on the left hand side in the graphic below:

The second bar, assuming you have a profitable product, is your price. This is an area of conflict: one party wants to minimise this, and the other party wants to maximise it. Move on to the next bar, which your value or your output. This is what your discussion with customers should focus on, because you are both in agreement on this. Both parties want to maximise it.

Goods commonly have product ladders, and often come in small, medium and large sizes. There is absolutely no reason why professional services shouldn’t do likewise. A product ladder helps companies segment the market, in the same way that families will buy a 24 roll packs of toilet paper, while singles opt for 4 roll packs.

A well-designed product ladder gives your customers choice. And as we know from behavioural economics, if you give customers a choice of two products, the decision becomes a price based one. Give customers three products to choose from, and the decision becomes a value-based one.

So how do you create those different products? I recently sat down with a business coach to help him migrate from time-based pricing to a fixed price subscription service. After walking him through Ron’s six “T’s” – time, terms, technology, talent, tailoring and transference, as well as numerous other features (e.g., material and documentation, support between coaching sessions), we had price plans sketched out within half an hour. Not only that, the coach was much clearer on what his scope, roles and responsibilities were under the plans.

So what does explain the difference between pricing of professional services and other goods and services? It can probably summed up in one word: the “ego’s” of the service providers.