The cost and value equation - getting the pricing right

• Understand the perception of value  

  The truth is that clients and providers of professional services look at pricing in completely different ways.  The professional practice tends to focus on process whereas the client is focussed on results.

  Different pricing models include hourly rates, fixed and capped fees, contingent fees and value based billing.  All will have their place, but the circumstances of each case need to be considered, and the most appropriate method selected to enable both the practice and the client to be happy they have secured value.  Above all, it is important to recognise that an hourly charge rate is not an indication of value but is an internal management measure of cost.

  So how do you assess the level of value delivered to a client?  Perhaps there is an education piece here in how we communicate with our clients.  The client will only be focussed on the end result, and often will have no concept of the level of work required to get there.  If time is taken to fully explain the process at the outset would this affect the client’s perception of the work being done for their benefit?  The answer is probably yes.

• The importance of clear communications and scope  

  If during the course of the work, we keep in regular contact with the client, explaining where the process has reached, and notifying them of any problems encountered or delays which are likely to occur, then this keeps the client informed and keeps the value perception high.  It is usually when we don’t explain what is going on and the client calls to chase that the value perception is damaged.

  Detailed and careful scoping of work in any fee quote is also important.  Clients may well shop around, but are they comparing apples with pears?  Are you doing more than your competitors and not making this clear in your quotes?  By setting out in detail what you will do, this will enable clients to get comparable quotes, or alternatively the service you offer will set you apart from the competition.  

  Work scoping is also important in terms of securing additional fees when things don’t go as planned.  This is particularly vital where a fixed fee arrangement is in place.  Set out clearly and in detail what you will do, and also any work the client has agreed to do. Be clear about what the fee does and doesn’t cover. Ensure there are timetables included. If a client agrees to provide information by a certain date and then doesn’t deliver, resulting in additional pressure for you, then you have a basis on which to agree additional fees.

• Understand your client  

  We have talked here about client service to aid value perception, but there is another dimension to consider and that is the changing nature of the clients themselves.  We are in an time now where some clients will look to buy specific services, without wanting or needing a strong relationship with their service provider. 

  These clients will not perceive value in a traditional client relationship and will certainly not be prepared to pay for it. This needs to be taken into account when pricing for this type of work, and also in ensuring that you are not including unnecessary services which are simply not important to the client. This is the market where fees will most likely be quoted on a fixed basis and will be very highly competitive with low margin.  Clients are unlikely to want to pay a higher price for service unless and until they have a bad experience elsewhere, so don’t make the mistake of building this in to your pricing.

  The challenge is to understand the buying behaviour of each client or potential client, and how they perceive value. This will enable you to agree the most relevant method of pricing and to secure a competitive level of return for both your practice and the client.

The six key points

• balance the needs – professional practices focus on process whereas clients focus on results
• the hourly charge rate is an internal costing measure, not an indication of competitive and commercial price
• keep clients informed to raise the value perception
• scope work out in detail including responsibilities for both your practice and the client
• know your client or target and be clear on whether they want a service or a commodity and then price your work accordingly
• above all, be prepared to be flexible in your method of pricing and involve the client in the process.