Written by Joel Barolsky and Colin Jasper*
Most pricing literature focuses on how to price a product or a discrete service. Far less has been written or researched on relationship pricing. This creates a significant challenge for those involved in pricing professional services as many arrangements between buyers and sellers are relational rather than purely transactional.
By relationship pricing we mean a pricing arrangement that covers multiple transactions over a period of time and where there’s some commitment from the client and from the firm to do business together.
The most dominant form of relationship pricing is discounted hourly rates. Many firms offer their priority clients discounted rates as both a symbol and a reward for a more valuable relationship. Similarly, many clients seek to lock-in discounted hourly rates for a period of time by setting up preferred provider panels via tender.
There are a number of problems with this approach. Firstly, there are few incentives for the firm to invest in a new service delivery model or in technology that could significantly reduce cost. Typically within the discounted hourly rate model, major cost reductions over time result in reduced firm revenue without improved profitability. While in the short-term this appears to benefit the client, in the long-term it significantly slows the pace of service innovation and the potential for step-change efficiency improvements.
Secondly, there are few incentives for the firm to provide breakthrough ideas and service that delivers a quantum improvement in the client’s business. With a discounted rate model, the only reward for truly outstanding results maybe the chance of a greater share of wallet or just a good vibe.
And lastly, the total system costs are often significant, especially in “second bite” panels where clients ask panel firms to re-compete for discrete projects. In these instances, the client has to go through a process of briefing firms, addressing issues, receiving proposals, assessing proposals and informing all parties of the outcome. Each of the panel firms has to invest significant time and effort in preparing and presenting their proposals. If one properly accounted for all this non-value adding activity by each participant for every transaction, it’s painfully clear that over time the whole arrangement is lose-lose.
Incentivised retainers
One form of relationship pricing that is worth exploring in more detail is what we call incentivised retainers. It doesn’t suit all circumstances or relationships but has a number of elements that set the scene for better outcomes for both the firm and the client.
At its most basic level an incentivised retainer has these characteristics:
- An underlying intent to achieve the strategic objectives of both parties
- A joint focus on ensuring quality outcomes
- Agreed incentives for the firm to improve their performance on things that matter to the client (eg. end-customer satisfaction, speed, consistency, reduced rework, reliability, managed risk)
- Agreed incentives for the client to help the firm reduce their costs
- An efficient and effective process to deal with matters outside of the agreed scope
- On-going processes to ensure a positive and constructive relationship.
Some interesting examples of these retainers or variations of this theme include:
- A client whose primary focus was not to exceed their annual budget entered into a retainer arrangement with a single firm at 95% of the budget. To encourage the firm to find cost savings, the contract was offered to be renewed at 95% of the previous year’s budget. While both firms have the option of exiting the relationship at the end of each year, the arrangement has now been running successfully for several years.
- A client gave one firm all the work of a particular type on a medium-term transparent retainer arrangement. This arrangement encouraged the firm to invest in new processes and technology that radically improved cost-to-serve. Having greater cash flow certainty allowed the firm to make these investments and to date it has yielded significant benefits to both parties.
- A client wanted to encourage genuine competition for a long-standing incumbent firm. They had established a panel, however this had minimal impact in changing the buying behaviour of a broad range of instructors who had deep relationships with the primary provider. An innovative competitor entered into a retainer arrangement based on agreed resources in order to provide the client with a credible high quality, cost effective alternative to an embedded incumbent provider. Individual instructors could continue to use – and pay for – their preferred firm. Alternatively they could access the innovative competitor at no charge, as the retainer was paid centrally.
- A client sought greater price consistency from one project to the next. An incumbent firm with significant historical data was able to analyse past projects, classify them into three categories, and provide a staged fee structure for each category. They then converted their pricing from hourly rates to task-based billing – at a price-point that was neutral to both parties – in order to meet the client’s primary objective.
- Firms who put a proportion of their remuneration at risk, at the sole discretion of clients, based on their overall satisfaction across a range of projects over a set time period.
- A client who wanted the flexibility to utilise a range of firms at different price points offered annual retainers to multiple firms. Selected firms were encouraged to work together on a range of projects to maximise the value to the client. Retainers were reviewed each year based on the client’s perception of the contribution made by each firm during the prior year.
Limited only by imagination
The opportunity to establish incentivised, relationship-based retainer arrangements is limited only by the imagination of the participants. While many firms offer creative arrangements, not all meet the specific needs of the clients. In our experience, the best arrangements have been created by firms and clients working together to find mutually beneficial solutions. What are the most innovative arrangements you have seen?
* Colin Jasper is Director of Jasper Consulting and one of the world’s foremost experts in professional services pricing
business development, client loyalty, client relationships, key account management, marketing, Measurement, professional service firms
The two sides of the client loyalty coin
In Articles, Commentary on 29 November 2013 at 12:32 pmCASE ONE: I continue to book and fly with Qantas but I would not recommend them to others. My desire to accumulate frequent flyer points is stronger than my need for a more customer-focused airline.
CASE TWO: One of my clients has lots of raving fans but is struggling financially. He gets great feedback, but for various reasons, his customers are not spending more with him.
These two case studies support Don Peppers’ argument that there’s an important distinction to be made between attitudinal loyalty and behavioural loyalty. Client recommendation or advocacy, as measured by the Net Promoter Score (NPS) is really just an ‘attitude’, it is not really an indicator as to whether the client will give you more of their business. My loyalty to Qantas is behavioural but it’s not backed up by a positive attitude towards them. Put simply, there are two sides to the client loyalty coin. The goal in your firm is to have clients that give you BOTH a good rap and a good Dollar.
The New Client Loyalty Matrix
Plotting attitudinal loyalty and behavioural loyalty yields a New Client Loyalty Matrix:
So what are the strategic implications of this new Matrix? Here’s my initial list, but I’d welcome your thoughts and comments.
At a minimum, you should measure both dimensions of loyalty for all key clients. I think most firms will have reasonably good data on attitudinal loyalty, but many will just use historical financial performance at the indicator of behavioural loyalty. I’d argue that getting deeper insights into future behaviour and the true nature, degree and predictors of client commitment is a frontier few have forged.
Just measuring and focusing on NPS drives clients towards Quadrant VII. The goal should be to get your key clients towards Quadrant IX.
Most new clients start out in and around Quadrant V. It would be an interesting piece of analysis to track the progression of all new clients with say the first 18 months of being with the firm and see where they land up, AND WHY?
Most of your best referrers would be in Quadrant VII. It’s worth having another look at these and other fans with closed wallets and seeing whether there’s something the firm can offer them that would be of value. In other words, move them right on the Matrix. To illustrate this, one mid-tier accounting firm found that its traditional referrers were a happy hunting ground for the firm’s personal wealth management and SMSF services.
Your most vulnerable clients are those in Quadrants III and VI. They may be giving you most of their business at the moment but their heart’s not quite in it. Their spend with you might be as a result of a long-term contract or a company-wide directive such as global panel alignment. Relying on these type of arrangements for your client’s loyalty might have short-term benefits, but in my experience, it usually ends badly.
One needs to understand the specific drivers to get a client that’s in Quadrant V or VII and shift them over time to Quadrant IX. Providing great service, good value and being nice guys might get to Quadrant VIII but more structural or deeper strategic interventions would get you to IX. For example, negotiating some type of an incentivised retainer arrangement could get you there.
The best opportunities for growth will most likely will come from your competitors’ clients that are in Quadrants III and VI. Their behavioural loyalty to your competitor might be more to do with perceived switching costs than any other factor. If your offer includes paying for these switching costs then suddenly you’re in the game. As an example of this, one law firm got a prospect to switch by offering discounted “getting to know you rates” for the first three months of a relationship as recognition of these switching costs and to symbolise their willingness to invest in the relationship.
True commitment
In some industries, it is almost impossible to create truly committed clients. For example, servicing public sector organisations that are bound by strict probity requirements might make “Consider” the highest level of behavioural loyalty. I think the implications from the Matrix still hold up, you just need to adjust the scale to what’s possible.
Your call to action
Your immediate call to action is to take a fresh look at the questionnaires and discussion guides you are using to solicit feedback from your clients. Are they asking the right questions to adequately measure both attitudinal and behavioural loyalty? Are they providing insight into the things your firm needs to do to, the actions to be taken to get the client in or around Quadrant IX?
My other challenge to you is to plot all your firm’s top clients on the Matrix and stress test your whole client portfolio. Is it sustainable? Where are the points of vulnerability? What broader capabilities do you need to develop to get better at driving both types of client loyalty? What does your overall relationship capital base look like and what could you do to make it more valuable?
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