A few years ago, a high technology vendor surveyed 400 sales reps, asking what was the most important factor in winning a deal. Overwhelmingly, the answer from the salespeople was “price”.

At the same time, the company surveyed 400 clients and potential clients, asking the same question. Their number one answer: “reliability”. In fact, price ranked only sixth on the list.

The high-tech company’s proposals, of course, were focusing primarily on price. Even though the vendor had a great story to tell on their reliability, with several important differentiators which clearly set them apart in the industry, the most important factor in client decisionmaking wasn’t highlighted.

In a competitive market, it can be very difficult not to feel that price is the most important factor. (And, sometimes, price is very important). But don’t ever just assume that price is what matters most.

The best way around the “price trap” is to clearly determine what differentiates you from your competitors - and then offer an alternative vision.

Copyright 2001 Julian Midwinter & Associates Pty Ltd

Pricing is fiendishly difficult. Lawyers and other expert professionals don’t much like talking about it, but service pricing can vary widely.

Because of the ego, status, and power with which charge rates are imbued, it can even be difficult to get realistic information.

Traditional pricing tends to start on the supply side: by working out cost of production, plus adding required profit, supplemented by some market analysis, and adding a little for the “special” features of the particular firm.

In many law firms, pricing starts and finishes with “what have we been charging? - let’s just move it a tad, without making waves”.

Pricing this way doesn’t take any real account of demand factors. At its core, it ignores intelligence about the wider market and individual consumers.

Some researchers (including Julian Midwinter & Associates) have found that overlooking consumer intelligence may result in underpricing of around 5%.

And, that’s 5% which drops straight to the bottom line !

Getting to grips with how different clients respond to price is tough. But these are tools and techniques can take you a long way:
• in-depth, qualitative client research
• sophisticated data modelling
• industry analysis.

Price optimisation is all about trapping client perceptions of value and predicting how they will respond to price changes.

It runs counter to an old-style financial management preference for price standardisation.

While not as “neat and tidy” as uniform, across-the-board price schedule, there’s profit to be found - and clients kept - by taking the price optimisation track. The trick is identifying which clients will pay more for exactly what services, and what pricing parameters will stimulate clients to migrate to other providers.

Take your first step towards price optimisation by summoning the courage to have straightforward discussions about price - with all your stakeholders.

Copyright 2006 Julian Midwinter & Associates Pty Ltd

For many prospective clients, the fastest and easiest way to tell you that they’re not proceeding with your services is to say “sorry - the price is too high”. Sometimes this is the entire story. Other times, it is simply a quick way to avoid saying what’s really the problem - or, even thinking through why they’re not comfortable to go ahead with you.

Occasionally, it won’t even be true.

Price may, indeed, be the reason you’re missing out. If it is, you’d be well advised to find out more, rather than just leaving it at that. If price isn’t the real problem, it would also be a great idea to learn more.

So, when you are at the receiving end of the “it was your price” line, try asking for some more information. It may be illuminating.

Showing genuine and respectful interest in how your prospective client came to their decision can be a great relationship builder.

Careful probing, intent listening, and fair interpretation will give you valuable insights into:
• competitive pricing
• parameters within which your prospective client is making their decision
• how this person/organisation assesses value
• how to frame future pricing proposals to resonate with your market.

You’ll uncover all sorts of information, perhaps including one or some of these factors at work.

Competition has heated up - a new entrant or established competitor has decided to compete hard on price to win work.

A competitor is offering work below their cost of production. Maybe it won’t last long, maybe they’re in trouble, or maybe they’re just “loss leading” to win a new client in the expectation that future work will be at a better rate.

Your competitor is offering an essentially different service or solution. Maybe you weren’t properly briefed - alternatively, they may have missed the plot completely.

Your inclusions may be different. Perhaps you’re including unnecessary items outside the brief, or maybe the competitive alternative is shortcutting and neglecting essentials.

The prospective client may not want the “Rolls Royce” level of service you’re offering. The economy four-cylinder model may be what they have in mind, at that price level.

They’re not making a “like for like” comparison. Maybe your prospective client doesn’t want to - more likely, they don’t know how.

A competitor has come up with an alternative service and price which does the job at a price you simply can’t match. Time to look hard at your work process, technology, and overheads to identify opportunities for efficiency gains.

Market price has changed. What was the “going rate” may be no longer - perhaps not the right market segment for your future.

Maybe you simply didn’t sell yourself well.

If you’ve put the effort into a proposal, and then missed out, you owe it to yourself and your firm to find out why. If price is cited as the culprit, take a couple of deep breaths and patiently find out more to inform a better proposals and more compelling selling in the future.

Copyright 2006 Julian Midwinter & Associates Pty Ltd

As I write eTips each week, it’s often the product of business development challenges and behaviours I’ve observed among our clients, or learned second hand. Now, I need your input on the eTips topics you find most relevant, how eTips can improve, and what you’d like more of.

This week, please take this brief, three to five minute survey, and tell me, and the whole JMA team, what you think.

As a thank you, you will be entered into a draw to win a bottle of fine wine.

Of course, if you have any queries or other comments, do get in touch.

Thanks for your support and important feedback.

Linda and the team at Julian Midwinter & Associates

Properly dimensioning individual financial and strategic contributions to success of any professional services firm requires assessment of more than simple personal fee production.Absolutely, measuring personal billings matters: we mustn’t lose sight of accountability for direct, current contribution to revenues and financial health of the firm.

Just as assessment of the strategic health of the professional service firm must take account of factors beyond financial performance in the current period, so individual contribution to fee earning needs to take account of more than mere personal fees rendered this month, last month, and this year.

For some firms and practice groups, two or three simple metrics are sufficient. But in many areas, a wider range of contributions are worth measuring.

All of these are worth considering and will take you a long way to gaining a comprehensive picture of contributions to your firms’ fees.

Current year personal fees

• actual personal fees - which is the thing which is most likely to be accurately measured right now
• fees billed subsequently uncollectible and/or written off - which reflects poor relationship management, inadequate project control, misunderstandings and communication failures, client disappointment, deficient billing practices
• personal fees trend line -
   o Are you going in the right direction ?
   o Is this an impressive performance coming off a low base ?
• current charge rates
   o standard, achieved
• number of chargeable hours to produce fees and current realisation rate
   o Are you going up the value curve, or not ?
• number of annual working hours to produce fees - that is, the true effective realisation rate
   o What is it taking in business development, client relationship management, practice administration, and people management to produce these fees ?

Current year work group fees

• actual work group fees - total fees for all team members
• work group fees trend line
• work group realisation rate - that value curve thing again !
• current realisation rate
• true effective realisation rate.

Approximation for real gross profit (before partner returns, but after taking into account all other production costs including financing) for fees, measured for:

• individual professional
• workgroup
• practice group
• firm
• trend lines for each of these.

So often, we find that professional service firms love what’s simple. However, a single simple metric is a “rear vision mirror” take on what’s going on with an individual fee earner or workgroup, reflecting the business development effectiveness of the past.

Looking at actual fee production in isolation:

• hides or disguises important realities
• encourages short-term focus on the single behaviour being measured (fee production now)
• fails to track the behaviours and strategies which correlate with future financial and strategic success.

At its worst, relying on the traditional single fee production measure:

• breeds cynicism - “the firm says it wants me to go and spend time getting business, and to spread it round the firm, and to leverage our relationships for the firm as a whole, but the only thing it measures and the highest medal of honour goes to the highest personal fee earner ”
• encourages focus only on making one’s own fee target
• rewards client-hugging
• may be a disincentive to fee sharing and leveraging relationships for wide benefit
• encourages short-termism
• discourages medium and long-term investment
• may not value business development efforts and success of non-partner lawyers as they aspire to progression.

Getting assessment of financial contribution to the firm is difficult, especially as size increases.

It’s healthy to emphasise “now” - we have this years bills to pay and need to be attractive and financially healthy to realise future potential. But measure widely rather than narrowly to track what really matters to the finances of the firm.

Copyright 2008 Julian Midwinter & Associates

The game keeps moving on. Yesterday’s best practice in professional services pricing may be today’s problem, and a big loser tomorrow. Pricing is an important part of keeping business and winning new work. But there is no point in searching for a pricing panacea - it doesn’t exist …

Here’s the way it is in many (probably most) market segments, where there are a number of sources of competent professional service advice:

• clients want predictability and controllability of price - they also want economy, but economy alone won’t make up for unpredictable prices

• clients want to clearly understand the basis of your charges

• it follows that many clients want to use that understanding to take action to control their expenditure with you

• clients yearn for alignment between the price they pay and the value they finally derive

• mostly capped fees are losers - no possible upside, and only downside for you as a professional

• event costs or segmented fixed project fees can be winners, so long as you are clear about what is (and what is not) included in each event, project segment, or fixed fee

• blended fees continue to have some appeal to a handful of clients mostly those who already have a philosophical predisposition for “democracy” and eradication of hierarchy

• some clients who are so familiar with what standard services should ultimately cost, and who don’t really mind exactly who does the work, are also fond of blended fees - but even more of these same clients are quite happy to stick with hourly rates

• many sophisticated clients only look hard at the headline rates for partners and key team members, realising that paying what’s asked for other team members is the price of getting the in-demand talent of choice onto their projects, and don’t care about the details so long as their work is done effectively for a total amount in the region they expect

• few clients can accurately tell researchers the full schedule of hourly rates for each team member, and many can’t specifically recall any prevailing hourly rates, but most all have definite views about whether they’re deriving value from their investment in your professional services

• “tiered hourly rates” can be winners because they help you to demonstrate alignment of interests with higher rates for work with an early result and a “profit penalty” for letting a matter go beyond the budgeted or targeted end point

• often, volume discounts don’t work - except where they’re given prospectively, without any comeback

• rebates are a nightmare for most professional service firms

• retainers can work well - which means thoughtfully constructed, carefully scoped, and accompanied by meaningful reporting and demonstration of value.

Of course, these generalisations change in the context of a market segment where you and your colleagues are truly scarce resources in a market hungry for expert input.
Intelligent pricing requires that you:

• work through specific situations

• clearly articulate your pricing objectives in each circumstance

• consider the range of possible pricing options

• realistically assess the advantages and disadvantages of each for you

• evaluate the attractiveness and drawbacks of each to the client

• select the best alternatives

• identify inherent risks and how to mitigate these

prepare fully for each price negotiation.

Copyright Julian Midwinter & Associates

Clients needs are ever-changing.

First of all, making you and your firm the right choice for a client means proving you measure up on:

• Competence.
• Service.
• Culture fit.
• Rapport.
• Reputation.
• Right price.

After that, you make yourself the right choice by showing how you will help your client succeed.

Confirm in your client’s mind that you’re the right choice by:

• Showing how your behaviour and actions will fit with your role.
• Showing how you will add value.
• Explaining why you can add value.
• Demonstrating that you will act in your client’s interests.

Seal the issue by demonstrating how you will, in turn, value your client.

That’s the point at which the ‘right choice’ is likely to be ‘chosen’.

Copyright Julian Midwinter & Associates 

Be strategic in pricing your services. To get the price right for any given client, consider these factors.

Analyse your client
Perceptions and characterisation of you, the needs, measures of value, why they choose you, price sensitivity, propensity to innovate.

Analyse competitors
Identity, location, profile, strengths, brand-value.

Analyse your practice positioning
Capabilities, strengths, efficiency, costs of production, brand-value.

Assess your bargaining power
Can your client get what s/he wants and needs.

Evidence of successful pricing strategies
“…. their pricing does not present us with any impediment to using them”.

“… we’re not paying for anything unnecessary…”.

“….they’re value at that price” - “we get value for what we pay …”.

Copyright Julian Midwinter & Associates

Competing on price is sometimes the black sheep of the marketing family. You can’t ignore price competition - and sometimes you should engage it !

Clients say “give us . . .”

Predictable fees.

Controllable fees.

A clear understanding of basis for your charges.

A relationship between your fees and our commercial outcomes.

Real disbursements only and at realistic costs.

Accountability.

Making sensible pricing decisions starts with a clear understanding of your costs:

Fixed costs.

Variable costs.

Opportunity costs.

Do you . . . ?

Understand - really understand - your cost of production.

Listen (really listen) to your clients and how they see price.

Take time to distinguish between clients concerns about the structure of your pricing and fee quantum.

Remain flexible and open to new pricing ideas.

Think and talk about pricing.

Frame price in terms of value.

Articulate the value or benefits delivered in return for the price charged.

Experiment with models linking prices to client perceptions of value. Remember, it’s perfectly respectable for good clients to care about price.

Copyright Julian Midwinter & Associates

Price sensitivity depends on market conditions:

Oversupply.
Supply/demand in balance.
Small oversupply.
Severe shortage.

Your pricing need not necessarily correlate with your production cost, but must mesh with your business strategy.

Beware “loss leaders” in professional services.

“Loss leaders” are where you reduce your price to a low level - even lower than your real cost of production - to win business.

Reducing price to “loss leader” level to retain or obtain a client can be dangerous. Beware !

It’s easy to be deluded.

It rarely works as intended.

Consider alternatives.

Learn to re-cut some work to fit within a price.

Price sensitive work tends to be

High volume.
Mass markets.
Little or no differentiation.
Huge profit opportunities for firms who get it right !

Price insensitive work

Unique, highly differentiated.
Specialist.
Innovative.
High commercial impact.
Brand, reputation dependent.
Low volume.
Huge profit opportunities, again.

Copyright Julian Midwinter & Associates