Integrating Professional Services Pricing And Product Pricing
Writing of this post started with a simple question: How do we integrate professional services pricing and product pricing? Putting on our best consultants’ hats, we dove headlong into answering that question with frameworks, tools and practice rules. Somewhere mid-process, it dawned on us that clients seldom approach us with that question. More often than not, our clients want us to help them optimize their services revenues, margins or both – whether they be Professional Services, Managed Services or Support Services. The integration with product or other service revenues needs to happen, but is a decidedly secondary consideration.
The business group that contracts with us inevitably wants us to maximize their financial performance. We can a do this, but it often prompts us to ask: “is this the right thing to do long term? Is this in the best interest of the client? If we do this, what adverse consequences might we prompt?”
This isn’t news to most people, yet the governance and controls used by most services organizations sub-optimize for their particular function, and we are routinely asked to optimize for the function that is engaging us. “Don’t worry about total solutions, bundling, or how we engage overall with a customer; we’ll get to that later, and we’ll just handle such situations now as one-offs or exceptions”.
This may seem like an internal issue, but we see consequences you’re your customers who can sense the multiple, conflicting priorities, and aren’t happy. They’re demanding higher levels of performance from you, and they don’t want to carry the risk of putting it all together from your various functions.
Sub-Optimize For Particular Service Functions
Some services they see as necessary evils; others, they understand the value you provide. That by itself guarantees differences in what your customers are willing to pay, and based on their price sensitivities, what you should charge, when you should charge, and how you should bundle. Attempting to maximize the margin on each transaction, by each line of business, increasingly comes at the expense of the customer experience and the tolerance of your customers. It’s not how your customers want to buy, and that by itself means it’s not in your interests to continue to do so. It certainly does not maximize total overall revenue from each customer, or total overall revenue at an acceptable margin.
So if each customer transaction shouldn’t be treated atomically and optimized as such, then are we saying that we need to bundle across functions and potentially lines of business? Products and Services, on the same proposal, on the same quote, focusing on the same outcomes, to the same customer? Increasingly, yes.
For those “necessary evil” services, or those which the customer does not sufficiently value, it may be necessary to bundle those into the overall solution, and yes, margin may need to be shared from the less price-sensitive products to the highly price-sensitive services. Similarly, if the customer highly values the outcomes, products and services may need to be highly discounted to get the deal, and margins are made based on future performance payments. This is where good analysis and offering design comes in to defend your high margin offerings by tying them to salient benefits and tangible value.
Varying Value Dependencies
What your customers value depends on many factors, including what stage of the customer engagement cycle they are in. Increasingly, TSIA’s LAER Customer Engagement Lifecycle (Land, Adopt, Expand, Renew) is being used, either explicitly or implicitly. Using this approach, how you price your offerings based on what customers value in the Land phase often looks very different from what they value in an Adopt or Expand phase, and different still in a Renew phase. If transactions in each of these phases are treated atomically and without regard to what occurred in the past (and what could occur in the future), then revenues and margins will be lower and likely more volatile than if they were adjusted with the overall solution and program in mind.
LAER requires dynamic pricing that looks across functions, across lines of business, and across customer engagement phases. We find many of our clients doing this on an exception or override basis, outside of their current systems. Implicitly, they know it’s important and they work across LOBs for the greater good of their company. As such situations have been larger and more frequent, they realize the need for dynamic pricing, optimized across functions, across LAER, using systems support, consumption analytics and predictive models. Often they are surprised when we help them determine how large a potential this is and how readily they can achieve them.
Just to be clear – we are happy to help you optimize your services revenue. It’s the bulk of our work now and the foreseeable future. For you, it’s a high-return endeavor, easily justified with improvements flowing directly to your bottom line. However, confronted by the changes in how customers buy, the need to align with what they value, and your changing business models, we suggest that you look more broadly into better offering design, including dynamic pricing. Yes, you will have to interact with other functions and lines of business, and there will be greater uncertainty, but customers have shown that’s where the big money is. Along this path you will win more deals and attain higher margins.