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5 Best Practices to Improve Your Services Pricing

Paul Sansom< Paul Sansom May 26, 2022

Moving from cost-based services to value-based services, improving your organization’s pricing, and bolstering cost recovery is no easy task. But implementing these best practices can help you build a healthier business and put your services organization on the path to profitability.

If you’re a pricing expert at an expensive management consulting firm, and you are asked to improve profitability for a large construction firm by moving from a cost-based services model to a value-based services model, there are three paths you might find yourself on:

  1. Oversimplify the company’s problems and turn in a repackaged version of what they currently have
  2. Overcomplicate and deliver a solution that no one can understand, replicate, or implement
  3. Give up after a month and quit the firm to sell artisanal jams on Etsy

In the pricing world, the monolithic term services is used to describe everything that is not a product. Construction of a new stadium, installation of a new water heater, or management consulting hours could all be classified as services. Therefore, services are often lumped together by pricing experts despite being wildly different for a myriad of reasons including:

  • Level of complexity
  • How the services are contracted
  • How the services are delivered
  • The experience level of the provider
  • How customers perceive the value of the services
  • And more

With so much variation and complexity, its somewhat understandable why services companies have yet to receive much focus from the pricing community. Moreover, it’s easy to see why the industry cannot or will not move beyond cost-based pricing models.

But is it completely the fault of pricing experts? Or do services companies share the blame? In the last decade of working with large service providers, I can definitively say yes – much of the blame falls on the shoulders of the companies themselves. Many services organizations lack the data infrastructure, technologies, and commercial maturity to move beyond cost-based pricing to a value-based structure, understand their level of differentiation, and price themselves accordingly.

Most of the companies that say they price based on value lack the systems and processes in place to deliver a value-based model. Instead, that classification is given through process of elimination: they think they are not the cheapest, and they know they’re not always cost-based, so they must be value-based.

So where do they begin? It is a long and winding road to improve an organization’s pricing and bolster the often-solitary pillar of cost recovery. While there is no magic bullet, there are a few best practices and system improvements you can implement, both quickly and over time, to put your services organization on the path to improving your profitability and building a healthier business, regardless of the service you provide.

1. Foster a Crawl, Walk, Run Mindset

Remember that long, winding road I mentioned? This is a marathon, not a sprint. It’s a transformation, not a project. A crawl, walk, run mindset will need to be with you throughout the entire journey.

2. Build a Robust Infrastructure of Cost and Performance Data

Strategic pricing requires a robust data infrastructure. You need to be vigilant about setting data quality standards and expectations. It is imperative that you actively review and assess the cost and performance data flowing into your system. Of course, managing this data is a full-time job, so you’ll want to create dedicated positions on your team to execute. As you fill these important roles, hire professionals that understand database management and the unique nuances of your company’s services.

When it comes to cost and performance management, you’ll want to prioritize the following:

  • Create and utilize detailed, activity work codes
  • Eliminate or reduce work codes where employees can dump wasted time
  • Track project-related overhead costs and monitor your cost-to-serve
  • Conduct active reviews of your organization’s performance estimates vs. actual performance and perform RCAs for any major disparities
  • Track rework, its impacts, and estimate correlation to direct and indirect opportunities, costs, and customer retention
  • Utilize benchmark studies to gauge how you’re performing against the market

3. Institutionalize Analytics and Feedback Into Pricing

We have 35% margin expectations, so why did we end in the red this quarter?

Far too often, companies do not fully understand their cost-to-serve or pocket margin as they relate to their customers. Pocket margin, in this case, refers to what is left in your pocket after all direct and indirect costs have been subtracted from what you have earned. Improving how your direct and indirect costs are allocated to your clients will give your organization the ability to see the true profit and identify where you are leaking margin. You’ll be able to provide clarity to your organization around how much you spend trying to win and retain a customer’s business, and whether your prices reflect that. Instituting a feedback loop that evaluates your pocket margin per service and per customer will help you improve your prices for individual customers or for large groups of customers.

4. Use Segmentation Analysis to Uncover Willingness-to-Pay Disparities

Why are we charging ABC 30% less than XYZ?

Willingness-to-pay is a difficult metric to gauge in the services world, and its one that many organizations are afraid of putting to the test. Fear of angering or losing a client is so pervasive that internal conversations are far more likely to be about lowering rates than raising them. An effective segmentation analysis will help your team see the disparities in service pricing across your customers, regions, offices, and other dimensions and help them understand why you are charging company ABC 30% less than company XYZ. Segmentation analysis puts you on the path toward understanding which segments of customers are willing to pay which prices for which services.

5. Rethink Your Sales and Business Development Incentive Structure

Our entire sales team met their sales goals, so why aren’t we more profitable?

If your entire sales team have met their sales goals, and your profitability is stagnant, it is probably time to rethink your sales and business development incentive structure. Traditional revenue targets will fail to drive better margins, especially in the competitive markets most services companies find themselves in. Consider instituting sales and business development KPIs around customer loyalty, margin, new logos, and service expansion to drive profitability and value. Layering in these new types of KPIs will influence your commercial organization to focus more on high margin, differentiated engagements that prove the value of an organization like yours.

Many of the concepts I’ve mentioned in this article reflect the technological, commercial, and analytical canyons that exist for services companies that want to build a bridge towards improving their margins. For many organizations, these concerns are far easier to overcome than the cultural roadblocks that hold them back from lasting improvement. That’s why in my next post, I’ll dive into how you can change the culture around how your organization pursues, achieves, and measures success. In the meantime, implementing these best practices can help you unlock commercial excellence and put your services organization on the path to profitability.