Tag Archives: Services

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Professional Services: Do you know the difference?

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[Updated 1/21/11] A few weeks back, I was having a great discussion with my friends (and fellow Twitter #ProfServ chat moderators) Alan Berkson (@berkson) and Kelly Craft (@KRCraft) regarding our December 23rd, 2010 #ProfServ chat on Value Pricing.

As we discussed and dissected the Value Pricing chat, and how it had evolved over the course of the hour, two themes kept floating to the top of our discussion: 1) how to deal with Professional Services that had become “productized” (sold on a fixed-price basis in a product-like manner), and 2) at what point does a Professional Service cease to be a Professional Service and become a mere service-related add-on to a product sale.

Why is this important? Because almost every industry, from Hardware to Software to true/pure Service industries, uses the term Professional Services, but in slightly different ways that often result in confusion on the part of many consumers. Clarifying these issues helps both set proper expectations across market sectors and can also be useful for service providers in determine pricing strategies  – especially in situations where services are customized verses productized. More importantly, many enterprise customers (especially in large corporations or government organizations) have different pools of budget money for items such as products, support services and pure consulting or business advice services.

PRODUCTS vs SERVICES

As we worked through this discussion process, we found that defining a product was the easy part – any fixed, material good that is sold on an as-is or semi-configurable basis.

But the definition of a Professional Service, or even a hybrid service/product (and the line where a Professional Service becomes a product) was a bit more difficult, including the debate over similar-but-different services such as a barbershop vs. a hair salon or a neighborhood kid with a lawnmower vs. a professional landscaping firm (outstanding service doesn’t necessarily make it Professional Service).

“Un-professional service is not the opposite of Professional Service,
it’s just poor service.”

Let’s use software as an example:

  • Having a software developer design a custom software application is clearly a Professional Service.
  • Purchasing an off the shelf application is clearly a product sale.
  • But what about when you purchase an application and somebody installs it for you? Professional Service? Not in my opinion. It’s product + install.
  • Does it become more of a Professional Service if you purchase software and somebody customizes it for you? Perhaps that is a bit closer to a Professional Service, but not, in my opinion, if the software costs $50,000 and the customization is included in the price or if the actual customization fee is nominal.

THE ISSUE OF MARKET SECTORS

This issue becomes more complicated (and important) when you consider the definition of Professional Services across different market sectors – especially with firms that offer a combination of products AND services. For example, many product vendors have Professional Service Groups who provide both pre-sale on-site surveys and design services (usually part of a product sales strategy) as well as post-sale configuration and support (usually part of an ongoing customer support/retention strategy). But their overall goal is to sell products – making money on services is a value-add or bonus (although many firms treat their service organizations a independent profit centers). As such, I would consider this to be a product-oriented firm with supplemental services offerings.

In contrast, let’s take a look at the business services sector (I’ll include strategic planning for business operations, marketing, social media and public relations as good examples here) where a service is being offered, but often results in some type of fixed deliverable (a report, a strategic plan, marketing or advertising materials, etc.). In this situation, I’d clearly lean towards describing any material deliverable as being more of a result of the services being provided, and thus treat this business as a more of a services business than a product business.

TOSSING IT INTO THE CROWD

After some good back and forth on this particular subject, we opened it up to the members of  our Professional Services Roundtable group on LinkedIn which generated some additional, valuable discussions. We further discussed the topic on our January 20th #ProfServ chat, which brought out even more opinions -all equally valid but many differing considerably in scope and open to a wide range of interpretation.

“I may not be able to define a Professional Service, but I know one when I see one”

Through all of these discussions, from the original conversation with Alan and Kelly, through the LinkedIn group and into our Twitter chat, there was one constant: while we could all come up with consistent/agreeable answer to the question “What are some examples of Professional Services?” (Attorneys, Civil Engineers, Architects, Consultants, Agencies, Strategic Advisors, etc.), we were unable to agree on a clear-cut definition of just what is a Professional Service and what are the defining criteria.

Even trying to scope the issue through a series of questions was helpful, but didn’t lead to any general agreement:

  • Does the ability to value price contribute to the definition of a Professional Service?
  • Does the way you view your consumer help define a Professional Service (does a “client” denote more of an ongoing Professional Service relationship than a one-shot “customer”)?

TOSSING IT TO THE BIGGER CROWD: YOU

In a way, this entire exercise reminds me of US Supreme Court Justice Potter Stewart’s oft-misquoted statement from his 1964 opinion on an obscenity ruling, paraphrased here as “I may not be able to define a Professional Service, but I know one when I see one”.

Maybe we’re looking at this from the wrong perspective. Instead of trying to come up with a unified description of Professional Services, perhaps it’s more important to answer the question “What is the need for Professional Services?”, a point brought up by Marcio Saito (@Marcio_Saito) during our last #ProfServ chat.

In that regard, I feel confident in the notion that (with a tip of the hat to Geoffrey Moore and his excellent book Crossing the Chasm) Professional Services fill the gap between what a consumer needs and what is available .

So now I’m tossing the question out to you. If you’ve got an opinion or a thought on this issue, please voice it – we’d all welcome your input as we continue to delve into issues of what it means to provide Professional Services.

To keep up with all my posts, you can subscribe to my Email feed or RSS feed.  If you found some value here, or have an opinion, leave me a comment. I appreciate your feedback.

And thanks for reading – Fred.

UPDATE NOTE: This post was originally written, in a shorter format, as a lead-in to the January 20th, 2011 Twitter #ProfServ chat. After the chat, I decided to rework the post a bit to incorporate some of the insights gained from the chat as well as expand upon some of my thoughts that I was only able to briefly address in the original post.

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Value Pricing is more than just a Happy Meal

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I was talking recently with my #ProfServ co-moderators Alan Berkson and Kelly Craft about Value Pricing and all I could think about was McDonald’s. No, I’m not a fan of their food and haven’t eaten there in ages – it was their product & pricing strategy that kept coming to mind, what they call their Meal Bundles: the Dollar Menu, the Extra Value Meals, the Mighty Kids Meal and the every-kid-must-have-one Happy Meal.

McDonald’s became a leader in the fast-food services industry in part by bundling groups of items, offering certain loss-leader products and building a multi-faceted “loyalty” approach that kept people coming back for more (games like Monopoly and indoor play-houses are good examples here). Forget about the actual “cost” of their product, they created a fun “experience” that people are amazingly willing to pay for.  Even my son admits that their burgers aren’t as tasty as the ones that we grill in the back yard, but every time we pass a McDonald’s his 8yr old brain shouts “Can we play at McDonald’s? Can I get a Happy Meal with a toy?”

McDonald’s has Value Meals, not Value Pricing.

Thinking back, that is not that dissimilar from what we did at my first consulting firm. We offered bundled packages of services, we gave away a certain amount of loss-leader content (writing, white papers, telephone calls) and almost always included some type of longer-term retainer to monitor the progress after we had completed the initial effort (and build that long-term, come back for more, relationship).  But unlike McDonald’s, we had the ability to create a flexible pricing structure and we leveraged that as much as we possibly could.

In the beginning, our pricing structure was designed to cover our expenses and make a certain level of profit on each engagement. Across the board, our pricing was fairly uniform client-to-client. But over time, as our “brand” grew and our client base expanded, we gradually adopted a different approach that took advantage of the demand, or value, that we were providing to our clients. Rather than trying to maintain a certain level of profitability, we started to look at how much certain clients were willing to pay for our services. Gone were the fixed hourly rates, replaced by a flexible pricing approach that was different for each client. It was, for us, the beginning of Value Pricing.

Value Pricing is about finding a client’s pain and fixing it. More cure = more value.

In Value Pricing, the goal is to match your price to the level of value that the client receives from your services. Forget about what your competitors are charging, or what your costs/expenses are, focus on the value that you bring to the client. To be more precise, think about the value the client believes you are providing. If they believe the value you are bringing to the table is high, price accordingly. Conversely, if they believe the value you are bringing to the table is low, you probably shouldn’t be there in the first place.

Here are some guiding principles to Value Pricing that help define the concept as it applies to professional services:

  • Value Pricing is NOT the same as “Compensating for Value” in the financial market.
  • Value Pricing is determined and agreed to by the customer ‘up front” in advance of the actual engagement.
  • Deferred “bonus” payments – typically based on operational or sales improvements – can be considered part of Value Pricing if you really intend/expect to meet or exceed the clients goals.

For Value Pricing to work in the professional services sector, my experience has shown that there are several key items that need to be in place:

QUALITY

Your “brand” and reputation must equate to quality. If you aren’t bringing extraordinary quality to the table, you will never be able to convince a client of your true value. The interesting part about quality is that it goes well beyond just the service that you deliver, it’s something that must come through in all of your dealings with a potential client, before, during and after the engagement is over.

TRUST

If a client doesn’t completely, totally, without reservation trust you, Value Pricing is simply not going to work. Trust is most often conveyed through experience and references, but it is also something that you must proactively promote. How? Ask your past clients for that reference, the letter of recommendation, the endorsement. And when you get it, don’t hide it, put it out there. Especially in the era of social media, get that word out there. Or better yet, get others to promote it for you.

UNDERSTANDING

In order for Value Pricing to work effectively, you have to really understand the needs (and urgency) of the client. Taking this further, you need to think like the client – put yourself in their position and figure out where their real pain point is and how quickly it really needs to be solved. Often, what they really need and what they say they need are two totally different items. Many times I’ve gone into a potential client meeting to discuss a particular subject only to find that there is a different, perhaps more urgent, issue that needs to be addressed. In some cases, these needs are totally unrelated to the original need, in others, they are the root cause of problem they need fixed. The only way to figure this out is to listen to the client, analyze their business model and start asking questions. Sometimes you’ll be surprised at the opportunities the answers lead to.

GUTS

Here it is in a single word. Guts. You have to have (as my grandfather used to say) the “gumption” to take the risk and Value Price your services. I have yet to see a client offer to pay me more than I’ve asked for. If you aren’t willing to ask your client to pay based on the client’s perceived value, you are better off sticking with your standard hourly rate.

There are other factors that go into making Value Pricing work for your business, and being able to not only sell the value of your services but understand the perceived value that a client is receiving is not always an easy task. But when it is done right, it is a win/win for both you and your client.

What are your thoughts? Do you use Value Pricing as part of your business strategy? Has it worked, failed? Leave me a comment below and let me know. The more we share about our own experiences, the more successful we all become, and the level of client satisfaction that we deliver improves.


To keep up with all my posts, you can subscribe to my Email feed or RSS feed.

Thanks for reading – Fred.

UPDATE: Note that his post was updated after our last #ProfServ Twitter chat. @Provserv is held on alternate Thursdays at 10pm ET. Hosts are Alan Berkson (@berkson0), Kelly Craft (@KRCraft) and Fred McClimans (@fredmcclimans).

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