Three dilemmas of pricing services

► Dilemma 1: Whatever You Quote, They Want It for Less

The buying and selling of consulting services isn't like other shopping experiences—it's more like shopping in a bazaar than in a supermarket or department store. After all, you pay for groceries before you consume them and they have set prices; but neither of these conditions is true for consulting services.

Guerrillas are right at home in the consulting bazaar, where pricing is a process of give-and-take to reach agreement with clients on the worth, or value, of the consultant's services. But all too often, clients are not comfortable haggling over fees, and they can't connect their perception of value with the hefty price of most consulting services.

Interpretations of value vary greatly from person to person and time to time. Like the differing takes on the worth of that Van Gogh painting, it's likely that you and your clients will begin with divergent perspectives on the right price for your services.

Instead of focusing on the monetary or other benefits they stand to gain from consulting work, clients tend to evaluate price by scrutinizing how many hours consultants put into projects.

One client objected to a proposal to improve sales force productivity that included 10 consultants, billed at a substantial hourly rate, for 12 weeks. By focusing on the number of hours and the hourly rate, the client was ready to cancel the project as too pricey. Once the client and consultant worked together to calculate the estimated value of the project outcome, the proposed fees were found to be less than 2 percent of the conservatively estimated benefit the client would achieve.

Whatever pricing approach you ultimately choose for a project, your first objective is to help clients get a realistic understanding of a project's benefits and what those benefits are worth. Then the consultant's fees can be assessed in the context of that value.

Even when clients factor in the value of benefits, most will still push for the best possible deal. For decades, consultants have trained clients to expect negotiable prices, so anticipate some pushback on price. No matter how compelling the cost benefit, clients will always want to pay less.

► Dilemma 2: You Can Never Know Everything

When clients and consultants evaluate price, both are influenced by gaps in their respective information. Both sides have unresolved risk, making it difficult to evaluate proposed fees. Clients know that it's impossible to judge the true quality of consulting work until projects have been completed, so they try to mitigate the risk of imperfect information. Clients usually insist that:

► Price be fixed and predictable before the project begins.

► Tsrms of payment will stretch out until the project is completed.

► They get to interview and select the consulting team members.

► The client is the final arbiter of what defines project completion.

Conversely, consultants know that even after the most detailed, up-front discovery process and analysis, surprises can cause their profits to evaporate. Therefore, pricing must take into consideration whether project success is achievable in the client's environment.

Consultants must assess whether the client's team can pull off the job and the client's organization is prepared to accept the changes the project will bring. More important, consultants must be sure that the project scope and schedule are not so aggressive that they overrun fees. Consultants must account for these risks in determining price. To protect themselves, consultants should look for pricing strategies that provide:

► A variable and flexible pricing structure

► Some payment up front

► A fixed, achievable schedule

► Commitment to additional fees if extraordinary circumstances arise

Even when there's a track record of past performance, what the client and consultant don't know about their risks creates a fundamental conflict between them, which can result in lengthy fee negotiations. What's called for is open, frank discussion of the risks on both sides that will lead to price agreement and allow the project to be launched.

Consumers buy in a certain fashion, whether it's a major appliance, a vehicle, or home furnishings. They gather information about the product from the Web, magazines, print and television ads, and their friends. Then they comparison shop: They compare prices, options, features, colors, availability, delivery schedules, installation charges, warranty, and vendor and manufacturers' track records.

Then the analysis begins. Consumers ask, "Can I afford it?" "Are there less expensive, comparable alternatives?" "Can I get the model I really want for less money elsewhere?"

If buyers of consulting services could ask essentially the same questions, their task would be far less complex. But consulting services are customized for each project, so it's tough to use the same rules as for buying a dishwasher or a television.

Another complication is that, despite a client's effort to specify project needs, each consultant will respond with a different proposal, approach, and price. It's not unusual to hear a client say that one firm's proposed price is twice as high as a competing firm's bid.

Sorting out differences in price and options can be time consuming and unpleasant for clients. Consultants can simplify matters by describing, in quantifiable terms, a realistic estimate of the project benefits. With that information, clients have a solid basis for comparing your price with your worth.

The secret to winning projects is not having the lowest price, but the highest perceived value. Spend as much time calculating a realistic contribution to client value as you do figuring out your fee, and make sure the client understands both. You'll make your client's decision process simpler and tip the scales in your favor. So the right question is not "How much does it cost?" but "How much is it worth to the client?"

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