What price a price? (Or what clients really think about price and value)

Six years ago I visited India for the first time. I will never forget walking out of my hotel on to the streets of New Delhi to be confronted by the almost complete absence of everything I knew and understood. Having worked out the basics - which, for the western tourist, is largely a matter of learning how to manage an overwhelming tidal wave of demand for a share of your wallet - and figured out how to get from A to B, I quickly found myself in the position of trying to buy something . My prospective supplier, seeing me eyeing one of his cashmere sweaters, made his move.

"I make you very good price" the shopkeeper told me. "Very special price".

Good price? Special price? This was making me nervous already.

"Can't you just tell me THE price?" I asked, with magnificent naivety.

"Yes, sir, very good price", came the reply.

"No, no...what I want is THE price. Your cost, plus your usual mark up."

"Yes, sir, my cost plus usual mark up, sir. Very special price. How much you want pay?"

How much did I want to pay? What on earth did that have to do with anything? Why couldn't he just put a ticket on it and leave me to decide if it sounded reasonable? Now I had work to do, and I was surpringly unnerved by it.

The absence of a ticket is, of course, no more unusual to clients of consulting firms than it is to about three-quarters of the world's population, but it's no less a problem than it was to me on that afternoon in India. What I did was simply to work out what I'd expect to pay in England, turn that into rupees and halve it. And then halve it again. And round that down a bit. And chance my arm. What clients tend to do is something a bit more sophisticated.

Few have formalised their method either on paper or even in their minds, but what became obvious as we spoke to them is just what a consistent method there is.

Broadly speaking, of course, this is about a relationship between price on the one hand, and perceived value on the other. Price, in the minds of clients, seems to have two compoents to it: expertise (and specifically the scarcity of that expertise) and brand. If both are high, prices are expected to be high. If one is low, the price may be held up to some extent by the other, but if both are low then prices are expected to be low.

Perceived value may be a more slippery concept, but its component parts appear to be equally simple: firstly it's determined by the extent to which outcomes, from a consulting project, are tangible. The greater the tangibility, the higher the perceived value. Second, value is determined by leverage, or the extent to which the effect of consulting work is considered greater than the input. If both tangibility of outcomes and leverage are considered high, then value is perceived to be high.

Having got a feel for both of those, what clients are interested in is the gap between the two. Where prices are seen to be higher than value, clients will try to bring them down; where they're seen to be lower than value they'll allow them to rise. We wouldn't want to spoil the fun for those of you who want to rush out and buy our new report but what's fascinating is to see how that gap changes from one sector to the next, one country to the next, one function to the next and even one firm to the next (we've looked at the price value gap for 11 of the world's biggest consulting firms). It helps consulting firms to understand how much room for manouvre they're likely to have in negotiations with clients at a time when most are seeing prices coming under sustained pressure.

Indeed it's the sort of information that is leading people to understand the value our report may have for them (you can see where I'm going with this, can't you?) and us to put a price on it. A very special price? I'm saying nothing.