Pricing professional services can be a bit tricky. Go too high and you lose the client. Go too low and you leave money on the table.
One of the main reasons for this complexity is that the perception of value is different for every client and for every project. Each time you make a pricing decision it needs to be tailored to the specifics of the client and context. A one-size-fits-all approach to pricing is a recipe for profit disaster.
Keeping it simple and memorable
The 2-5-3 Method is a simple and memorable way to approach pricing every project. The “2” relates to your primary objectives in setting price. The “5” relate to the inputs or factors that should go in to the pricing decision. And the “3” are the three pricing decisions that you need to make, that is, price structure, price level and the pitch.
Pricing a project starts with being shockingly clear on your pricing objectives. In most instances there are just two: [i] getting the client to perceive good value and say ‘yes’, and [ii] delivering a handsome profit to our firm. Pricing is largely about finding the sweet spot where both your client and your CFO are happy.
Undoubtedly there will be times when your primary objectives will vary, such as winning an iconic brand-making project, getting onto a panel, buying share-of-wallet, positioning for future work, relationship building or revenue (not profit) maximising, but these are more the exceptions or variations of the rule.
Once your objectives are clear, you need to start to gather data to inform your pricing decisions. In the spirit of keeping things memorable I have labelled these the five C’s:
With clear objectives and the right data in hand, you’re then in the position to make some choices. Pricing usually encompass three inter-related decisions: what price structure(s) should we offer; what price level should we set; and what’s the best way to pitch our offer.
In law and accounting firms the most common pricing structure is still time-based hourly rates. Fixed fees, value pricing and retainers have been gaining in popularity in recent years. In consulting and engineering, project fees with variation clauses are most common. Investment bankers usually price with a percentage of transaction value contingency fee.
In my view, there is no one perfect pricing structure. The structure chosen will usually be a function of, amongst other things, client preference, relative bargaining power, nature and level of risk, depth of relationship, scope and benefit certainty and degrees of co-creation. Quite often you can augment your pitch by offering clients multiple pricing structure options. My recommendation is to become expert in three or four structures along the risk-sharing continuum. This way you can offer clients more choices and respond to different contingencies.
Price level is the amount to be charged within the structure you’ve selected. So if it’s hourly rates then the level is ‘$350’ per hour, if it’s a fixed fee then the level is ‘$8,500’.
Pitching involves the strategies and tactics of communicating value and getting to ‘yes’. It includes the approach to presenting different pricing options, project staging, pitch presentation, and the approach to conversations about price and value.
To illustrate the importance of price pitching, Qantas’ website usually presents its customers with three benefit-price options for every flight. Interestingly, the 8:00am flight from Melbourne to Sydney on 15 March 2018 has one option that’s 598% higher than another. These three options involve the same brand, same plane, same pilot, same airports, same flight duration, just a different level of amenity, status and flexibility. Qantas’ pitch is noteworthy for three reasons:
So lock 2-5-3 method of pricing away in your brain. It’s not rocket science, but hopefully it will make sure your next project is priced fairly and profitably.
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