PS Services Leaders: Time to adjust your pricing strategy?
The world economy has shifted from manufacturing to project-based, people-centric services businesses – delivering us the new services economy. It’s great news for professional services organizations (PSOs). It means new services-centric projects to deliver and make profitable and new opportunities for growth. As a services team leader, you should probably examine your current pricing strategies, and determine how well they are positioned to help you capture new market share and boost profits while keeping clients happy.
Here are a few key considerations to get you started in your pricing strategy evaluation.
1.) New markets? Do your homework.
How can you tackle a new geography, vertical, or industry without understanding what PSOs are currently doing there when it comes to pricing, compensation, billing rates, and utilization? Do your homework and benchmark your strategy and viability against your future competitors. This insight and data points are a primary focus of the 2018 SPI report for Professional Services: Global Pricing, Compensation, and Utilization Benchmark which includes pricing comparisons, pricing strategies, and utilization benchmarks gathered from more 150 services organizations representing more than 11,000 consultants, eight geographic regions, and 12 industries.
2.) Higher bill rates = happier clients
It’s often the case that the PS organizations with the highest bill rates and best price realization tend to reinvest profit into their employees which leads to a positive outcome for the business and clients. Highly skilled, well-paid, motivated and appreciated consultants undoubtedly produce the best client results. In turn, satisfied clients buy additional services and refer business resulting in increased sales and profitability. If you were ruling out a higher bill rate approach, consider these upsides.
3.) Find your pricing/utilization/profit sweet spot
If you are looking to maximize profit, which is better – raising rates or increasing billable utilization? The obvious answer is to increase both, but how much? The optimum pricing strategy is actually the calculation of ideal bill rates against your average utilization numbers to determine where your bill rate needs to be to realize a profit. For example, one organization might be profitable at an average bill rate of $275 per hour with average utilization of only 30%, while others can average a $150 bill rate because their utilization is 70%. However, you have to know how high of rate the market will bare and how high utilization can go without overworking your employees. The 2018 SPI pricing report mentioned above is a great resource again, providing formulas and insight on how to appropriately calculate your unique profit sweet spots and strategies for bill rates and increased utilization.
4.) Technology matters
Leveraging the right technology, like Professional Services Automation (PSA) solutions and Customer Relationship Management (CRM) software, help PSOs optimize operational effectiveness through increased visibility, streamlined business processes, and cost management – all factors for optimizing your pricing strategy. In fact, a combined CRM and PSA solution has become the lifeblood of many top services organizations credited for boosting utilization, increasing profitability, and protecting margins; and for helping keep projects on track and clients retained.
Pricing is important and should be developed with the right balance between cost and revenue. Do it right and expect accelerated growth and profitability – along with happy consultants and clients.