Determining your pricing strategy for professional services is no easy task. While it’s important to remain competitive, you also need to be careful to not give your valuable services away for free. So, how do you determine what to set your pricing at so it holds up in the market place and positively impacts your bottom line? In this post, I’ll explain how you can use the TSIA Market Rates Study to answer some of your top questions related to pricing in professional services.
The Trouble With Selling Professional Services
A common pain point I hear from TSIA’s professional services members is that they receive a lot of pricing push back from the sales organization that their prices are too high. While this is sometimes true, it is more common that PSOs aren’t charging enough for their services, and in some cases, end up giving them away for free. Why does this matter? You’re throwing money away and missing out on could-be revenues. (Tweet this!)
From a sales perspective, product representatives who are well versed in selling products may not necessarily understand the value of services.They see services as complicating, and even lengthening, the sales cycle, so they would prefer to give them away. Pushing back against this stigma with data-backed research is a lever that professional services organizations can use when having the inevitable “PS pricing” conversation with sales.
Answering Top Questions About Market Rates for Professional Services
Pricing has become a really hot topic for PS, likely because there seems to be no real clear data on it. Though every PSO knows that price is a fundamental driver of financial performance, many are only able to gather incomplete pricing information from competitors, partners, sales orgs, etc. (Tweet this!) With no reliable set of market rates to reference, it’s no wonder they have trouble getting an accurate view of how to set pricing. Fortunately, TSIA conducts an annual PS Market Rates Study, which addresses concerns and debunks pricing myths held by the PS industry.
The report provides professional services organizations answers and solutions to key questions like:
- Are my PSO’s list rates in line with industry benchmarks?
- Is the shape of my rate card in line with the industry?
- Are we discounting too excessively relative to industry benchmarks?
- Is there an opportunity for us to improve pricing performance?
- Are there table stakes or best practices that we are not engaging in that could help achieve better pricing performance?
The market rates study is a tool that was primarily designed to establish an industry standard set of benchmarks relating primarily to hourly market rates by rate type, position, level, delivery type, and country and to identify pricing best practices that PSOs can employ to improve their pricing performance. Though the complete study is only available to TSIA members, here’s a sneak peek at some of our latest observations.
List Rates vs. As-Sold Rates
"Pricing begins with the rate card, and the role of the PS manager is to set the proper list rate for PS, pricing performance. The market benchmark for what customers are actually willing to pay for PS is the as-sold rate, which is sometimes called the 'actual' or 'realized' rate." —TSIA PS Market Rates Study
In this year’s study, we’ve collected over 30,000 different list rates, and nearly 29,000 as-sold prices between 2010 and 2013 from roughly 70 companies. This database resulted in list prices that ranged from a few dollars per hour to hundreds of dollars per hour.
However, when comparing list rates to as-sold rates, we noticed a significant per-hour price gap, which can be attributed to discounting. (Tweet this!)
List rates can be presented to customers on a rate card, and then discounted from there in order to reach an agreeable deal. They can also be an internal tool used by sales as a starting point for negotiation with a customer. Either way, the rate as sold is almost invariably lower than the rate listed on the rate card. Clearly, some companies discount very little, or not at all, but it’s always interesting to see the difference between the listed and as-sold rates, which is the discounted rate. The main takeaway from this is, if list rates are far below industry benchmarks, and unless discounting is kept to a minimum, as-sold rates will continue to land low and you’re left leaving money on the table.
Learn More About Pricing Professional Services
To learn more about how you can be more prepared to talk to your team and your sales organization about how to price your professional services, be sure to register for my upcoming webinar this Friday, July 17, called "Market Rates: How Competitive is Your Strategy?" I look forward to seeing you there!
About the Author
Bo Di Muccio is vice president of professional services research for TSIA. He is also the chairperson of the TSIA Professional Services Advisory Board. Keep the conversation going with Bo by emailing him at email@example.com.