Tracey Shirtcliff, founder and CEO of SCOPE Better
CFOs know better than anyone how a poor pricing strategy can impact a business. The problem is that pricing isn’t usually within their remit, despite the fact that they spend their days firefighting the issues that poor pricing creates. It’s a frustrating scenario, which is being made even more difficult by the uptake of emerging technologies. While AI, ML, and automation hold significant potential for professional services businesses to enhance efficiency and grow, they all also hold the potential to negatively impact billable hours, making it even harder for CFOs to balance the books, let alone maintain sustainable profits and margins. That’s one of the reasons why so many CFOs are currently pushing for a move towards a new pricing model.
The difficulty with professional services pricing
Pricing has always been a contentious issue in B2B professional services. Because it’s viewed as an integral bargaining chip – a tool to secure sales – many companies don’t so much have a fixed pricing strategy as a vague set of parameters that sales teams can use in a fight to the bottom for pitches. Even before the advent of AI and other technologies, this caused endless problems for CFOs as they sought to balance unnecessarily falling profits and reduced margins in the name of customer acquisition. When you introduce emerging technologies, however, the problem is significantly magnified. Not only do you have poor customer loyalty thanks to unstable pricing, but when you introduce time-saving tech, such as AI, to a company built around a time/effort-based pricing model, you immediately reduce billable hours. This is the problem that professional services CFOs are now dealing with.
How AI is impacting professional services pricing
We all already know the primary benefits associated with the onboarding of AI. How can it add speed and accuracy to a range of core operational processes, from research and data handling to ideation and image creation? It’s taken longer, however, for most people to latch on to how this process acceleration will impact profits. Because when you rely on time/effort-based pricing, as most professional services companies do, anything that reduces the time it takes to complete a project will also reduce your billable hours. Which will lead to falling income, reduced profit, and a marked devaluation of your services. CFOs are very aware of this fact. So, it’s hardly surprising that so many of them are now advocating a move towards a new pricing model.
Identifying the ‘right’ pricing model
In B2B, pricing can be complex, and yet many companies spend as little as six hours on pricing in their lifespan, which is probably why so many end up simply following the crowd and adopting the time/effort model. The thing is, while time/effort-based pricing offers simplicity and familiarity, that’s pretty much all that it has going for it. It has no nuance, it provides no selling points, and it’s certainly not compatible with changing working practices. While there’s no such thing as the perfect pricing model in B2B, it’s safe to assume that there are better options than time/effort-based pricing and that’s where AI-agnostic models, such as deliverable/solution-based pricing can come in.
Deliverable-based pricing – also known as asset, solution, or output-based pricing – is rooted in the end value of delivered services. With value ascribed to each element of the company’s service offering, it enables businesses to create a comprehensive menu of services, from which sales teams can produce transparent pitches and quotes while showcasing the company’s services with no reference to billable hours. So as long as the promised assets are delivered, it doesn’t matter how they are completed – be that in-house, outsourced, or using AI. This can bring a range of benefits to a business and its clients.
The positive impact of a change of pricing model
Moving away from an ineffective pricing model can be transformative for a business. It’s not just the impact on billable hours and profit, although right now that is the main concern for the majority of professional services companies who are introducing AI into their practices. A strong pricing model can positively impact almost every aspect of a business.
Company culture – When you introduce a comprehensive pricing model to a company, you do two things to its culture. Firstly, you make the work of your sales team easier by removing the guesswork and harried calculations, which creates a less pressurised work environment. Secondly, you enhance your employee’s sense of personal worth. When prices change endlessly, to secure contracts at any cost, it’s easy to feel that your work carries little value. A change to a more stable pricing model can help team members to feel that they are valued and valuable, enhancing company culture and customer service.
Customer loyalty – Enhanced customer service almost always improves customer loyalty by default. But more than that, when you draw a customer in with a low price, it’s often impossible to maintain it for the long term. So, when your prices inevitably increase, the customer walks away. When you start with a clear, fully transparent pricing model, the customer always knows where they stand.
Brand reputation – When your prices fluctuate regularly, it creates the impression of instability and when you constantly reward new business while penalising existing customers by failing to maintain opening offers, you are simply giving your customers an open invitation to shop around.
Brand differentiation – All of these factors also contribute to brand differentiation. With deliverable-based pricing, you have the potential to change the way that your products and services are seen. Unlike any other pricing model, deliverable-based pricing can serve as a marketing tool, enabling you to actively sell your services and differentiate your brand simply through the way that you present your services.
How to implement deliverable-based pricing
Before you can implement deliverable-based pricing, you need to assign value to each element of your service offering. So, the first phase must always properly define those elements. To ensure that you are fully reflecting your business and answering your customer needs, this process shouldn’t be rushed. In fact, most companies benefit from making this a holistic process, bringing in the views of all company stakeholders, including frontline employees, because they know better than anyone else what your customers want.
Once you’ve defined your services, bringing in external professionals to support the pricing process can be a good idea. After that, you’re ready to roll it out, which is admittedly, often the most daunting phase.
In my experience, introducing a new pricing model to clients is best done incrementally. For me, that process would probably begin with a chat with my friendliest client, the one most likely to be open to change. From there, I would learn and refine the conversation, working through my client base towards those more likely to be resistant. The thing to remember, though, is that with proper positioning, many of your clients are likely to welcome the change. You just have to find the right angle.
The business landscape is changing. CFOs know this. Part of it is due to AI and other emerging technologies, but it’s also due to evolving client expectations. For professional services companies to survive in this climate, they need a versatile pricing model that can evolve with them. For many CFOs, that means deliverable-based pricing.
Tracey Shirtcliff, founder and CEO of SCOPE Better, the Pricing Platform designed for professional services.
