Pricing: How deep do you discount?

By Fiona Czerniawska.

How much do you have to discount your consulting fee rates for if you want to have an impact on buying behaviour? 5%? 10%? 20%?

Research we carried out five years ago suggested that small price cuts make no difference, except perhaps to the procurement manager who has the lonely and thankless task of demanding a price reduction just at the point when they’re going to sign the contract. Five-percent is neither here nor there to most end-users of consulting services, because their purchase decisions are based on other, more important factors. How credible is the firm they’ve chosen in this particular area? What’s its depth of expertise, or its track record of success? What’s the client-consultant chemistry like? Can they all work together in practice? Price is only important in so far as it gives these people a sense that they’re paying a reasonable rate, that they’re not being ripped off by an unscrupulous bunch of charlatans. In fact, fee rates that are too low worry them just as much as fee rates that are too high, because they suggest the firm hasn’t understood the scope and nature of the work involved, that they’re fielding their B team, and so on.

To have a measurable impact on client behaviour, you need to offer deep discounts on consulting services. Our research suggests that you can increase the amount clients will spend with you by a half (yes, you can), but only if you’re prepared to cut your fees in half. Don’t bother, has always been our advice.

However, the picture may be more complex than we thought. We’ve recently heard of strategy firms offering discounts of 25-30%, typically in response to some type of privileged access to potential work. They could, of course, have simply decided to buy their way into specific markets and/or client organisations—and most have the deep pockets to do so. More likely, though, is that they’re exploiting an opportunity in the marketplace—an open-mindedness among clients about which firms to use, especially for transformation work—to build capabilities and experience they’ve not historically been associated with. Dropping their fee rates gives them better access to work around technology and execution, for example.

Never mind the rationale: What’s important here is the percentage reduction. Strategy firms are full of smart people, and we suspect they’ve done some analysis of their own around this. Logically, what they’ll be looking for is the lowest level of discount at which they have impact on buying patterns—and that’s not 50%, which is what we concluded five years ago, but something around the 30% mark. This suggests that clients are more price sensitive than they used to be: In effect, they’re reacting more quickly to a price reduction. But it could also mean that they’re willing to pay more for some services: Implementation may historically have been cheaper than strategy work, but the gap may be closing between the two. And it’s this second reason that chimes most closely with what we hear from clients: Frustrated by plans that deliver few tangible results, clients are looking to consultants to deliver, and deliver more quickly.

Implementation has always been important, but for once we’re seeing signs that clients are willing to pay for it.