Why Value Pricing is the Only Way to Survive

Frank Stasiowski, FAIA
Posted on: 01/23/18
Written by: Frank Stasiowski, FAIA

photo-1462774603919-1d8087e62cad-190288-edited.jpegIn order to stay competitive in today’s marketplace, architecture and engineering professionals must price their design services according to value, not cost.

This is a concept known as value pricing.

In value pricing, price is determined partly by the value the client perceives in the service to be delivered, and partly by your cost and profit considerations. 

Value pricing doesn’t mean low-ball pricing—that’s a losing strategy. In fact, more than 40 percent of your competitors have raised their prices in the last 12 months, and they’re getting what they ask for. Who do you think is better prepared to survive into the 2020s, the cut-rate shop, or the one that offers service and value so extraordinary it has to turn customers away?

If you aren’t one of those shops, then your firm will flounder in this decade unless you are willing to change. Doing the same old design work and charging clients the same old way, for the same old level of profit (or less), is simply a path to doom.

You must be prepared to radically realign the way you do business, if you are to succeed into the 2020s.

The Successful Design Firm of the Future: What’s in, What’s Out 
Value pricing isn’t obvious at first glance. No A/E firm declares itself a “Value-Priced Shop,” and no client says “This job’s important to us and we’re willing to pay value prices.” Instead, value pricing is the “secret sauce” that enables one A/E firm to prosper over another.

The future is yours to control, but only if you aggressively mold your pricing, business development, and service structure using the tactics necessary to prosper in this decade. Your firm must develop a strategy for its own prosperity that does not knuckle under to economic and societal forces, but takes advantage of them.

Isolation is Out. Alliances and Networking are In. If there is a firm that has an absolute lock on a given practice and in a given geography, I don’t know of it. The traditional design-bid-build model is giving way to more collaborative models like design-build, integrated product delivery (IPD) and public-private partnerships (P3)s. Designers and engineers are on equal footing, sharing risk, rewards, accountability and liability. Smaller, specialized firms are making alliances with larger ones.

Consulting is In, and Traditional A/E Practice is Out. The 2010s and 2020s will see successful firms move out of design production and into client consulting. Firms that have weathered the economic storms of the last 20 years did so in part by tackling a variety of smaller, more “non-design” study projects helping clients in hundreds of ways heretofore unheard of by most design professionals.

Chameleons Will Prosper. Clients’ demands and the rapid shifting of market needs have propelled a new breed of design professionals into existence in the 2010s and 2020s. The “chameleon firms” capable of switching services, people, markets, and geography are emerging as the firms of first choice.

This is not a matter of trying to be all things to all people, which is a losing strategy. Nor am I denigrating the power of finding a niche; every firm should have a niche, a market or service in which the firm is the clear expert and the de facto choice for clients. Rather, a chameleon firm adapts its strategies to invent a continual stream of new services for clients, and attunes its strategies to every whim of their clients.

Time-Plus-Cost is Out.  About half of design firms still operate on a time-plus-cost basis, and that model is doomed. Efficiency killed it. Every best practice we developed and every productivity tool (e.g., computer-aided design [CAD] and building information management [BIM]) enabled us to work faster, which means fewer hours to sell on a given job. That in turn has created a time pressure from clients who know how productive a firm can be, so expect faster and faster delivery.

While about half of firms still sell hours, that is considerably down from the early 1990s when about 90 percent of them did. The other half (and generally the more profitable half) has moved on to lump-sum agreements. Among those firms is a small but growing number that are bold enough to turn away clients who refuse to sign those agreements. They can afford to be that bold. They are full-service consultants who provide inarguable value. Fortune favors the bold, quite literally.

Fewer Firms, Shifting Share, Strength in Networks. The number of design firms is shrinking. In the five-year period leading up to 2013, it plummeted from 150,000 to 138,000 (U.S. Census Bureau statistics). With about 1.3 million employees across 138,000 firms, those firms have an average of nine employees. That suggests a high number of sole proprietors and small shops, but these are not minnows, swimming among sharks.

With no more overhead than a high-speed Internet connection, and broad networks of contacts from which they can cherry-pick talent for a given project, sole proprietors and micro-shops are well-equipped to design a perfect team and snatch clients away from a larger, more bureaucratic shop.

They successfully sell the idea that their small size means more value to the client. For the price-sensitive client, a small firm with its minimal overhead (perhaps it has gone virtual and has no office) can handily underbid a larger, overburdened competitor. Clients value small-firm responsiveness and speed, and pay for it.

Trust is All. Clients are not cheap; they are willing to pay for excellent design and service. But their criteria for excellence are high, and include predictable cost and delivery. Delivering value ensures success, and predictability (and by extension, trust) represents value to a client.

Service is no longer just an essential element for the small firm; in order to stay competitive, firms of every size must provide nearly incredible levels of service to their clients.

When you’re valued, you can charge more because clients know that you’re top-notch, that you deliver, that the service you provide is far beyond that of any competitor around. That’s because you’ve done the research to make sure it is.

VPInew_2013_proper-2.jpg

About the Author: In his more than 40 years leading PSMJ Resources, Frank Stasiowski, FAIA has authored dozens of books and manuals serving the business needs of the architecture, engineering, and consulting (A/E/C) industry, including eight bestsellers on management. His recently re-released, The Value Pricing Imperative for Design Firms, details what A/E/C firms need to do to develop and implement a competitive pricing strategy today, and in the future. In addition to being the Founder and CEO of PSMJ, he is a frequent speaker at numerous prestigious A/E/C industry events, including PSMJ's upcoming Growing and Optimizing the Mid-Sized Firm: An A/E/C Senior Executive Retreat.

 

ser-400x400.jpgOur annual A/E/C Senior Executive Retreat is a unique invitation for a focused group of non-competing senior-level executives to come together and share ideas, explore data, and develop solutions to some of the most pressing challenges holding their firms back. Taking place February 12-16, 2018 at the The Pines Lodge in Beaver Creek, Colorado, its theme is Growing and Optimizing the Mid-Sized Firm. Whether you think your firm is "mid-sized" or not, this is your chance to dig in and develop action-oriented strategies for your firm to succeed...and to enjoy some of Colorado's best skiing! 

Register Now!

 

You also might be interested in these blog posts by Frank A. Stasiowski:

Classic Mistakes: 3 Steps To Lose a Client

Client Service Strategy to Guarantee Repeat Clients

What’s So Special About Writing a Proposal?

How to Maximize Profits With Value Pricing

 
 
 
SUBSCRIBE TO BLOG:
September 15, 2020

CARES Act Revises NOL Rules and Opens Door for Unclaimed R&D Tax Credits

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides companies and individuals with a host of tax saving opportunities. We previously discussed the benefits..

Read More
September 10, 2020

SDNY Court Invalidates Parts of Recent DOL Guidance

A recent court decision has thrown into question some key federal government guidelines on COVID-related sick leave and family leave that AEC firms are following during the..

Read More
August 27, 2020

Is There Life After a Private Equity Investment?

M&A activity in the A/E/C space is far from dead right now. To the contrary, it remains quite active as many firm leaders continue to wrestle with long-term ownership transition..

Read More