How Positioning Can Affect Your Pricing Structure For Services
Pricing for professional service firms can be difficult, especially when you’re fighting for clients. Difficult situations or disruptions, such as the coronavirus pandemic, can throw you off and leave your business misaligned with your intended positioning. If you have found yourself in this situation, you may be working with clients you should never have taken on in the first place. This article will be focusing on how to align your business to create a solid pricing structure for services.
Pricing Structure for Services – Why Positioning Is Vital For Your Firm
Business positioning is a term used to describe where your business stands against other players in the industry. This is a way for your business to establish a unique identity and fill a particular market’s need. A well-positioned business can help you remain distinguishable and resilient when markets get tough.
If proper business positioning hasn’t been on the top of your to-do list, now is the time to start. You don’t want to end up with a weak client and market profile, as well as a swath of internal conflicts that arise due to clients you may be unfit to handle.
Likewise, it will be impossible to create a solid pricing structure for services without proper positioning and identity. Building a strategy framework starts with finding your firm’s identity and challenges first.
Professional firms can run into a number of challenges without clear client mixes, especially because typical corporate top-down approaches don’t work for this format. Service firms generally evolve pretty quickly, so it’s the professional’s job to deliver consistent skill and value.
However, clients can also greatly affect a professional’s growth and experience. So, it’s imperative that you choose to take on the right clients for your skillset along with the skills you want to develop.
Levels of Practices
There are several levels of practices your firm may fall under. This is crucial to understand in order to position yourself properly and create an effective pricing structure for services. Keep in mind that these aren’t clear cut, and some firms can span more than one of these categories. However, these serve as foundations for understanding your position.
Positioning can be shifted as needed since firms and client profiles are subject to change over time. Economic environments can also be a major influencer of where your firm sits at any given time.
Routine practices mainly specialise in, as the name suggests, routine problems. These can usually be dealt with through economical and quick services that have a low margin of error. Firms that handle routine practices usually have lower costs and margins, yet higher leverage.
Complex procedure practices typically deal with more complicated problems. Projects typically have several parts, and while these aren’t the most high-profile cases, they require a much more systematic approach than the routine level. Costs are still relatively low, with moderate to high leverage.
Expert practices require professionals with a lot more experience than the previous two levels. These issues are quite major and require years of expertise dealing with similar issues, as clients typically have none. Margins and costs are higher, with moderate leverage.
Deep expertise practices handle the big guns, so to speak. These firms deal with large company issues such as mergers or acquisitions. This requires years of experience, the most updated theory, plus the ability to creatively problem-solve unique and complex issues. Clients pay high prices for these firms’ ability to develop innovative solutions, and leverage is low.
Elements of a Pricing Structure For Services
Professional services generally use this formula for their pricing structures with adjustments based on their type of practice:
Profitability = Margin x Rate x Utilization x Leverage
Your margin includes profit divided by revenue. Rate equals your revenue divided by the time billed. Utilisation is your time billed divided by the number of professionals involved. While leverage is the number of professionals divided by the number of partners.
Deep expertise and expert practices use 50% margins, while complex practices use 35 to 50%, and routine levels use 20 to 35%.
Leverage is low for an expert to deep expertise practices because senior professionals have to be at the forefront of cases, while professionals in routine practices can easily pass cases on to junior professionals, therefore leverage is high.
Implications of Incorrect Positioning on Your Pricing Structure for Services
As we have mentioned, taking on clients despite their mismatch to your skills and practice can lead to a whole lot more problems down the line. These clients might expect you to carry out a different type of practice, creating pressure and confusion.
This can also create a misunderstanding of value, giving your firm difficulties when the time comes to collect payments. Unclear positioning can give clients a vague perception of what your services are worth, which is hard to correct.
Incorrect positioning can often come from desperation for new clients, which leads to firms taking on clients that should be seeking lower level practices. It can also come from misplaced arrogance, which leads to firms taking on cases that should be going to higher-level practices.
Importance of Correct Positioning on Your Pricing Structure for Services
The importance of proper positioning is that you understand what your professionals are capable of, as well as which clients will benefit your business the most. This will increase your value and clarify perceptions of how you are valued.
By doing so, you can leverage pricing properly, and not be short-changed for your services. The ability to command value is key to thriving as a professional service firm, no matter what the situation is.
As your firm evolves, you’ll also need to adapt your positioning. Understanding the different levels of firms can help you recognise when you need to rethink your positioning or your client profile.
In conclusion, positioning is vital to understand when creating your pricing structure for services. Professional firms can leverage correct positioning to their advantage, thereby allowing them to price their services correctly.
As firms understand their positioning as a practice, they can choose clients that will help them grow as a business. In uncertain times, businesses must invest in strategies that can help them remain competitive and resilient.
For a comprehensive view on building a great pricing team to prevent loss in revenue,
Are you a business in need of help to align your pricing strategy, people, and operations to deliver an immediate impact on profit?
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