Pricing For Increased Profit In A Professional Services Firm

On Thursday February 14th I had the privilege of delivering the opening keynote at the 50th anniversary annual meeting of the Association Management Company Institute in St. Pete Beach Florida. Titled The Consultant with Pink Hair and based on my book, it was focused on how to shift from operating as a generalist firm to an expert firm.

It was one of the best run conferences I have attended in 30 years (which makes sense given that it is run by, and for, companies that manage all things association – including conferences) with industry leaders from around the globe in attendance. As always one of the perks of such a conference is to hear what the other experts in the professional services world are sharing. There were many great presentations but I’d like to share the knowledge presented by two of the speakers.

Mark O’Brien the CEO at Newfangled Web Developers delivered a great day two keynote about creating the conversion focused website titled Sites That Sell. Word in the hallways was that it was a conference highlight and one of the best AMCI presentations in 20 years – ranking right up there with past presentations by David Maister – and I would agree. If you want your website to deliver more and better potential client opportunities buy Mark’s book or read all the great free content at Newfangled.com He does a better job than anyone I’ve met to track the detailed path from a web search by an unknown potential client, to the signing of a contract with that new client. I guarantee that everything you think you know about B2B search and SEO will be turned upside down. Fair disclosure – Mark and I share the same publisher but that’s not why I mention him here. I mention him because he has great insight into the professional services firm website and how it integrates with a strong sales process. One of the best quotes from Mark was the following: “Marketing is long-term prospecting”. I like that he connected marketing to sales – not branding or awareness-raising – but to the very important goal of making a transaction happen.

Another really valuable presentation was delivered by Dr. Albert Bates. Al could easily be a stand-up comedian if he so chose but instead he created the Profit Planning Group which does profitability research for over 50 trade associations. His presentation titled Triple Your Profit was based on his bi-annual survey of over 60 association management companies and is a great proxy for understanding how to drive profit increases in all professional services firms.

His presentation reviewed the financial statements of the median firm within the study to illustrate the specific quantifiable effect on profit of several variables including an increase in sales volume (with the same price), an increase in gross margin, and lower expenses such as payroll as a percent of revenue.

One of the very interesting points was the effect of a price increase. His data showed that an increase in unit price (hourly rate) is the only management improvement that transfers 100% of the improvement to profit – making a price increase the most efficient profit raising strategy. All other adjustments by a professional services firm are moderated by other related effects. For example an increase in sales volume at the same price usually has a corresponding increase in variable cost, and even the effect of a decrease in expenses is moderated by other factors.

Al’s analysis focused on tripling the profit of the median firm – a firm where half of the other firms in the industry are doing better and half of the other firms are doing worse. In his study that firm had total revenue of $1,500,000 and profit before taxes of $75,000. With only a 10% increase in unit price a total of $150,000 was added to that profit making it $225,000 or 300% the original profit of $75,000.

Why did I find this so fascinating?

We all know that experts have higher prices than generalists (usually more than 10%) but Al’s research is the clearest model I have seen quantifying and mapping the relationship between prices and profit.

So what does this mean to you?

Set a 10% price increase target and then create a plan to define, communicate, and prove an expertise based reputation in your market place to justify and achieve that price increase.

 

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The Consultant with Pink Hair

"This should be required reading for consultants AND their clients - especially the part about RFPs." - Blair Enns, Win Without Pitching

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