Pricing the Consulting Project
There are a number of forces that influence the pricing of a consulting proposal.
Understanding the Value Created
The first consideration for a consultant when pricing a project is the consideration of the value the project will create for the client. Process efficiency projects generally have specific metrics that can help identify the value.
For example, a process improvement project that increased productivity by 25 percent would be fairly easy to quantify (if current output of 25 units per day were increased by 25 percent, the output after project implementation would be 31.25 units per day). Calculating the value of this project over a year would be the daily improvement multiplied by the number of work days per year times the contribution margin for each unit. In this case, if we assume that there are 350 work days per year and the contribution margin is $5 per unit, the increase in value resulting from the consulting project would be $10,937.50 (increase of 6.25 units per day × 350 days × $5 per unit).
Marketing strategies and new market studies would use similar approaches to determine the projected value of sales increases and related profits if a consulting project is successful.
This calculation is one basis for setting the price for a project. The value can be a multiple of the value for a specific time period and used as a rationale for justifying the proposed price.
This proposed price must also consider the following.
Competition
It may not matter what a consultant wants to charge if their proposal has competition from similar proposals from consultants with similar capabilities. The price offered by the competition will have a significant influence on the price a consultant will be able to charge unless a way can be found to differentiate the proposal from the proposals from the competition. Offering financing or other supporting programs such as training or superior support services can accomplish this.
Budget
In every pricing situation the customer’s budget has to be a major consideration. If, for example, the typical customer spends × percent of their budget on all consulting services, a consultant would need to be aware of the share of total spending that would be consumed by the proposed consulting project. To justify a large budget allocation will require more effort to clearly demonstrate the value of the proposed project.
Knowledge
If a consultant offers service in new areas of expertise, it may allow the ability to charge a premium price. Premium pricing and high profits will attract competition and competitors will work hard to educate clients on alternatives. If a consultant can hold on to the “knowledge differential” through patents or other protections, premium pricing can be protected to some extent. Be prepared to have a strategy when this advantage is lost.
Cost to Produce
A clear understanding of the costs involved in producing and delivering the consulting service plays an important role in pricing. Understanding the costs well enough to find alternatives to drivers of variable or direct costs can have a significant impact.
Cost to Market
Marketing costs can represent 50 percent of a consultant’s cost. Finding the most efficient means to distribute and promote the service can provide a real competitive advantage in pricing. Grass roots relationships-based marketing through local community, civic and professional groups have provided some firms a way of introducing services to key individuals that become fans and promoters.
Funding for Operations
One of the drawbacks to pricing a consulting project based on its direct costs of labor and materials is the inability to properly consider the cost of ongoing administrative and support operations. Here the lack of understanding costs can result in charging a price for a project that does not cover the associated increase in administrative costs, repair and maintenance, or capital expenditures. One solution is to include an overhead cost factor into the direct cost calculations for each project.
Market Positioning
It is important to remember that the price can suggest value to the client. Priced too low, a consulting project can be viewed as poor quality and of limited value. High pricing can support the image of a high quality product for discerning clients if all of the other marketing components are aligned properly. Establishing a high consulting price usually requires successful consulting projects that are endorsed by major clients. Attracting those high profile clients usually requires that a consultant has cultivated relationships over time and has expertise that is sought after.
Availability
An important consideration in pricing is the availability of the consulting service and the ability to find substitutes. If there are markets that do not have easy access to consultants then a premium pricing strategy can be employed.
Pricing can be critical to a consulting project and ultimately a consultant’s ability to survive and succeed. Approaching pricing as a minor marketing tool can be dangerous. It is almost never a mistake to take the time to consider all of the factors affecting a product’s pricing strategy.
Additionally, it is important to consider how a pricing strategy might affect the ability to sell a project. Several strategic considerations follow.
Reacting to the Competition
Basing price on a competitor’s pricing approach is fraught with hazards.
In many instances pricing is driven by the sales department and is a reaction to the competition. This reaction assumes the competition knows the market better and has a superior marketing strategy.
When reacting to the competition, it is important to understand that the consultant is being drawn into a game whereby the play is governed by the competitor’s rules. The consultant is playing the competitor’s game and changing the strategy to conform to those rules. The consultant’s hope is that he can play the game better or that the competitors can’t play their own game very well.
A consultant is better served by setting pricing according to the value delivered to the client.
Pricing to Increase Volume
Lowering price to increase sales volumes can have an adverse effect on the overall marketing strategy.
Pricing can be driven by financial need and the belief that dropping prices will increase sales volume and profitability. This approach is based on the belief that the consulting service has positive price elasticity. Positive price elasticity holds that as prices drop, demand increases enough to insure that the lower margin per unit sold is offset by increased sales volume to the extent that overall profit actually increases.
Using reductions in price to increase volume usually works for a commoditized product that has wide use. This approach usually fails if the product is designed for a specialized use or if the marketing strategy is designed to differentiate the product from others in the marketplace. For differentiated products such as a consulting service, the volumes and profits might increase with a price reduction but the value of the efforts to differentiate the product is lost.
Consulting projects would not likely be considered for a volume pricing strategy. However, a consultant might offer a lower daily rate if there is a prolonged engagement or a regular scheduled consultant review.
Pricing Based on Direct Costs
Marking up a product based on its direct cost may not recognize the value of the product when compared to other market alternatives.
Pricing can be based on the information provided by cost accounting that suggests that if direct costs are covered then profits can be made. This is indeed valuable information but pricing based on direct costs only concerns itself with the costs of direct materials and labor to produce the product. This strategy is often used when adding a new product to the product mix and is influenced by the need to give the new product every opportunity to succeed.
It also heroically assumes that the established product mix covers fixed costs. This assumption doesn’t account for subtle increases that are difficult to measure such as rent, utility and administrative costs, which are usually considered fixed.
Bundled Pricing to Increase Sales
Bundled pricing is an excellent way to increase sales volume, create a stronger relationship with customers and provide a barrier to competitors.
The most viable market for a new consulting project offering is a firm’s established customer base. The sales relationship already exists and there is trust between the client and the firm. A new consulting project offered by the firm will receive the benefit of this relationship but there may need to be an additional incentive for the client to purchase the new service. One approach is to provide a discount for the new service when there is a combined purchase. Insurance companies, Internet and telecommunications companies, to name a few, use this approach.
This approach has the added benefit of discouraging customers from switching to competing brands since the customer would lose a discount and the competitor would find it difficult to match the discount with just one product.
Conclusion
The importance of pricing can be lost when faced with aggressive competition, financial challenges, or a changing industry landscape but it is important to remember that pricing can be as important as any marketing strategy employed when positioning your company.
For a pricing strategist, it is important to consider the vision and mission of the organization. A vision of high quality and customer service will affect pricing strategy differently than an organization with a low price, low support service orientation.
It is important to understand that pricing does not stand alone from the other elements of marketing and support services but pricing helps enhance the value of those attributes.
Revenues and profits that could be realized from specialized knowledge, unique design, and promotion based on quality can be lost when the pricing strategy is poorly employed.