By Robert Wagner, HoganTaylor Partner & Advisory Practice Lead
The number one way to improve profit margins in your services business is to increase prices. Ron Baker, the guru of value pricing for professional service firms often cites the results of studies conducted by AT Kearney and McKinsey stating that a 1% increase in price will yield a 7% to 11% increase in profits1. The studies indicate that increasing pricing is far more effective at increasing profits than cutting costs or even finding new customers. Unfortunately, many service companies have a timid approach to their pricing strategy, despite providing top of the market service and an outstanding customer experience. Their employees are worn ragged because delivering at the highest levels every day is hard work. And because their prices are set to compete with all the other market participants, they win more opportunities than they can possibly fulfill well.
But pricing your services is so much more than just maximizing profits. There are many more reasons to be bold in pricing your services.
Six Benefits to Boldly Pricing the Work You Do for Customers.
- It raises the value of your brand in the eyes of the market
If you provide better services and more value than your competition, then your prices should reflect it. Smart customers will pay for value. We all have paid more than “market price” for a service that was of high value to us. Furthermore, if we had a great experience with that service provider, we will continue to use them, fully knowing there are less expensive alternatives. Our customers will do the same. By setting your pricing commensurate with your service levels, you are supporting the reputation of your brand in the market.
- It forces you to deliver high quality results every day
By being a price leader in your markets, your organization will be encouraged to deliver the highest quality and most responsive services in the market as well. We often make excuses for not giving our absolute best to certain clients because they are not paying us enough or do not appreciate the work we do. When prices are set boldly, we put all the pressure on ourselves to deliver, and if we have the right people and the right culture, we will deliver.
- It shakes out those clients who will never appreciate your value
Some customers are not driven by quality and responsiveness. They probably should not be your customers. If your value proposition is based upon delivering high impact professional services that improve your customers’ businesses, and you deliver those services on time and per the agreed scope of work, then you should work only with those customers who truly value that level of service and are willing to pay for it. It has been proven over and over that customers who are primarily focused on “getting the best price possible” are usually the customers who have unreasonable expectations, nit-pick the work product, or abuse your employees. Aggressively pricing your services will move those customers to your competitors who can then spin their wheels trying to please them.
- It allows you to work with fewer customers
One of the barriers of providing market-leading service is trying to support too many customers. Having fewer, but larger, engagements with customers who value your work allows you to focus intently on those customers and create solutions that exceed their expectations.
- It allows you to find the ceiling for your prices
Inherent in a bold pricing strategy is that you will not win every opportunity. In fact, you will likely lose more than you win, at least initially. Eventually, your win rate will increase as you learn to chase only those opportunities in which the target understands your value proposition and is willing to pay for it. Many service companies never discover there is room for an increase of 5% to 20% in their prices because they never test the market to find out. All too often, they fall into the trap of pricing their services with the rest of the market, even though they have a more talented workforce, better processes, and a superior customer experience. More aggressive pricing will allow you to find the top of the market for the service that you are delivering.
- You are worth it
Far too many service providers are willing to be paid much less than what they are worth. Usually out of fear, we let the average service providers in our markets set our prices. We fear losing deals, losing customers, or maybe we just fear charging more. If you continue to invest in yourself, in great people who work with you, and in the systems and processes that deliver great service, then you deserve to be paid for it, and customers who share your values will gladly do so.
Resolve today to take a bold approach to the pricing of your services. Be willing to lose opportunities with customers who will never appreciate the value you bring to their business and who will drag you and your people down with unreasonable demands. If your service levels do not support higher prices, then go to work on improving quality and responsiveness. Believe in yourself and your people and get paid appropriately.