Your architecture or engineering firm has well-defined services targeting specific markets. The next logical step is to look at pricing and eliminate ad-hoc pricing that leads to stagnant growth.
“Design firms consistently leave money on the table,” explains PSMJ’s senior principal Dave Burstein, P.E. “In the A/E industry, most firms base their prices on costs, not value. Because we chronically underestimate the value we provide, firms are busy, but profitability suffers.”
Burstein offers five pricing errors your firm may be making that is keeping it from achieving better business results:
Try differentiating your firm from your competitors. Very few firms are truly unique in the value proposition they offer to their clients, Burstein says. “Unless you can truly offer a unique and differ product, don’t try to differentiate your firm from the others that a client is considering,” he says. Instead, “really dig into the client’s issues and develop a solution that is unique to your proposal.” This will offer clients more value and set you apart from the competition.
Offer consistent pricing across markets. This is a huge problem for all but the smallest firms (which may operate in only one market), Burstein explains. “Design firms seem not to understand that different customers perceive different value for identical offerings,” he says. If your firm operates in multiple markets, establish a separate pricing structure that correctly reflects each market’s willingness to pay for a service.
Establish pricing on offering not demand. Services offered are not the same as services accepted— especially by two different market segments. “Here’s an example,” offers Burstein. “A small structural engineering firm offers one service—structural engineering. They offer this service to two kinds of clients: architects (for which they produce plans and specs) and contractors (for whom they perform substitution analysis).” In this scenario the contractor clients value the structural engineering services much more than architects. “It only makes sense that a much higher pricing structure is justified for these clients who are contractors,” he explains.
Resist raising prices despite increasing costs. Year after year firm costs go up, but because of fear of push back, firms keep invoicing clients at rates that are several years old. Firms need to educate clients—and their own staff—on necessary pricing changes. Burstein recommends adding a simple clause to all proposals and contracts that helps avoid this problem. The statement is simply: “You will be invoiced using the standard billing rates in effect at the time the work is performed.”
Incentivize sales over profits. “I have seen this situation for more than I would like in our industry,” Burstein says. Firms are busy, but only with projects that have low profit margins. He suggests that business development focus not on the revenues of a single project, but rather on the lifetime value of a client. Reward behavior that you want to continue— building long-term relationships with those clients that will offer the firm value in the present and future.
Will 2020 be the year your firm makes more money by avoiding unprofitable clients and getting paid fairly? It’s time to find and fix problems in your approach to pricing, business development, unpaid scope creep, and unfair contract terms. A/E/C Pricing & Contract Negotiations That WORK is a power-packed online master class that combines PSMJ’s legendary A/E practice knowledge with the latest strategies that are driving superior results at firms just like yours.
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