When I talk to professionals about price communications there appears to be some confusion between two separate activities. First, there needs to be a pricing strategy – I’ve addressed this in various blogs (see, for example, http://kimtasso.com/the-pricing-and-value-of-legal-services/) – which might include premium pricing for a skimming strategy or a lower price to achieve rapid penetration. Establishing a pricing strategy is typically a marketing activity – it is fundamental to profit – and draws on a variety of knowledge including finance, economics and buyer psychology.
Second, there needs to be guidance (and possibly training) for all professionals about how to communicate about price with clients on a day-to-day basis. Often, professionals confuse clients’ desire for clarity and certainty about price as a demand for a low price. As professional service markets endure more commoditisation, the ability to differentiate and craft compelling value propositions increases.
So. I’ve summarised 10 tips on price communications for professionals from recent training sessions where we have discussed and role played various price communication scenarios in both consumer and commercial markets.
1.Understand that cost and price are two different things
The hours you record to complete a piece of work are, in the main, of no interest to the client (professional qualified clients such as in-house lawyers or finance directors may have a different view). This is your cost of completing the work and of little relevance to the client.
The client is interested in the value they receive – the solution to a problem, the end of a dispute, the protection of assets, the saving of money, the reduction of risk or the avoidance of threat. The less value that the client perceives then the more resistance there will be to price. If the client perceives a high value or the issue is of strategic importance, there will be less price resistance.
For example, if it costs you £100 to save the client £5,000 will you charge £100 or will you charge more? If it costs £5,000 to save the client £100 you are not going to be able to charge all the costs.
2. Welcome price discussions
Many professionals fear questions about price from clients. It makes them defensive. But sometimes clients do not know what else to ask about if purchasing an unfamiliar professional service. So you should focus on developing rapport and demonstrating an interest in the client and their issue before rushing to answer an early price question.
Similarly, questions about price are often indicators of the clients’ intention to buy. They are signalling to the professional adviser that they are interested in buying and are now focused on getting the right price.
3. Explore the clients’ willingness-to-pay
Harvard Business School’s strategy master, Michael Porter, wrote almost thirty years ago: “Value is what buyers are willing to pay.” Willingness to pay is an economic concept that, qualitatively, measures a buyer’s motivation to purchase and, quantitatively, measures a buyer’s maximum purchase price. In both cases, the buyer’s measurement correlates directly to his/her perception of value, which is directly influenced by branding and value propositions.
In order to understand the clients’ willingness-to-pay you need to use empathy to understand their perspective and the context of their aims and requirements.
4. Ensure your pricing aligns with other communications
Many professionals will invest time, money and effort creating a reputation or profile that positions them as leading experts. This is effective at attracting the right sort of new clients. You then need to be consistent with your approach to pricing to avoid confusion or undermining or contradicting the value proposition that has been created.
So if you have promoted your service as top of the market and aimed at a particular high value segment of the market, then your discussions about price must be consistent with that positioning.
5. Be alert for different types of buyers
Different types of buyers will adopt different strategies for price communications. Styles might include, for example, price busters, deal hunters or value buyers. Professional buyers may have different motivations such as achievement, influence, affiliation or security. Other research identifies: loyal buyers, opportunistic buyers, best deal buyers, creative buyers, advertising buyers, chisellers and nuts and bolts buyers.
Understanding these different types and styles and knowing how to deal with them will equip you for different types of price discussions.
6. Provide clarity and certainty
There are a large number of research studies that show that clients are interested in understanding the different components of price and want to have control, options and certainty. Thus we see the popularity in “unbundling” services – especially using technology. Therefore you need to outline the price of different parts and combinations of work and provide clients with options about how they might reduce the cost by tackling some elements in a different way.
7. Increase the value perception
In order for clients to understand the value of the work you do, you will need to explain how the service you are providing is different and better to the available alternatives. You need to explain the benefits that they will receive. This again requires empathy skills.
One of the reasons that firms invest in brands is because brands increase the perceived value. One of the reasons why professionals strive to become known as the leading experts is because it increases the perceived value.
It is often helpful to use storytelling to convey the value that other clients’ received in relation to the price that they paid for your services. Stories are one of the most effective ways to communicate as they enable the client to connect emotionally with the information.
The psychology of persuasion is discussed in other blog posts (see, for example, http://kimtasso.com/book-review-small-big-small-changes-spark-big-influence-steve-j-martin-noah-j-goldstein-robert-b-cialdini-persuasion-science)
8. Be confident
Clients will detect from your non-verbal communication if you are nervous or uncomfortable about the price. And they will then be more likely to challenge you on price. Therefore, you need to either be confident or appear confident when talking about price.
If the client presses for a discount and you fold easily, it creates doubt in the clients’ mind. You need to remain calm, confident and firm in your price discussions. Whilst you may need to negotiate, there will be occasions where you will need to walk away if the client is not prepared to pay the price determined by your overall pricing strategy. There is more information on this here http://kimtasso.com/be-more-t-rex-client-management-with-dinosaurs/
9. Trade concessions when negotiating price
To avoid undermining trust and your perceived value, if the client persists in pressing for a reduction in price then you should trade concessions. For example, only reduce the offered price in exchange for narrowing the scope of work – for example, by suggesting that the client undertakes some aspect of the work themselves. Typically, unbundling services enables you to do this more easily.
It helps to remember lessons from the project management triangle where a change in price requires a change in either the timescale for delivery or for the quality or scope of the final product.
10. Provide early warning if the price looks like it might change
Ideally, the price you provide at the outset is the one that clients pay. Your estimating and project management systems should enable you to keep the cost of the work within the parameters enshrined in the fixed price quoted.
However, if the client requires changes to the original instructions or brief and/or issues arise that require additional work (manage scope creep carefully) then this must be discussed with the client in advance so that they kept informed, can make choices about how to proceed and are not faced with nasty surprises.
So, to summarise, there are several principles of pricing:
- Pricing should be based on the value to the customer, not the cost to you
- Prices should be tangible, so your clients can see what they get for what they pay
- Prices should be comparable – on terms that you control
- If you want to change your prices, you should reframe the service or products
- Price differentiation is the key enabler of profit
- Pricing communication shapes the client’s perception of value
- You must be prepared to lose some sales to increase profits
Lawyers will find the Legal Ombudsmen guide on a good costs service helpful http://www.legalombudsman.org.uk/?portfolio=an-ombudsmans-view-of-good-costs-service which states ““Since we opened, costs have been the single most common reason for people contacting us. Costs issues represent 20 – 25% of the problems people come to us with”