Advice to services firms: Don't lower prices

by Beth Blakely | Jan 16, 2002 8:00:00 AM

Takeaway: Technology firms are feeling economic pressure to discount their products and services to be more competitive. Find out why, according to a study from the Information Technology Services Marketing Association, that may not be such a good idea.

Are buyers of technology services and solutions putting less emphasis on price?

A recent survey conducted by the Information Technology Services Marketing Association (ITSMA) suggests that may be the case.

In place of price, technology buyers are looking for solid technical skills, previous experience with the vendor, and unique value propositions.

It’s likely that buyers want services that drive revenue, profits, and cost savings, said Rich Staples, ITSMA's vice president of sales and marketing. The results suggest that consultants should:

Resist the urge to discount their prices because of the current market conditions.
Provide potential clients with detailed breakouts of their fees and services.

We interviewed Staples and got a peek at the study's executive summary. Here's what we learned.

Who was surveyed?
ITSMA conducted telephone surveys with 200 buyers at Fortune 1000 companies who had purchased solutions, including IT consulting and professional services. Each respondent was screened to ensure that they were personally involved in the purchase decision or solutions-firm evaluations.

How do buyers choose their providers?
Staples said that recent economic instability, which creates pressure for consultants to lower their rates, has also made many potential customers anxious about the survival of their own companies. For that reason, customers are more interested in business results than innovative solutions.

“(Customers) are more interested in you proving that you can demonstrate results and meet deadlines than in you being a low-cost provider," Staples said.

Staples suggests that consulting firms focus on understanding their customers' needs and desires for dependable, low-risk solutions and services.

ITSMA's recommendations for professional services firms warn against giving in to the pressure to discount, because price, according to the study, "has never been shown to drive customer satisfaction and/or loyalty. Any competitive advantage gained by slashing prices is sure to be short lived."

How does your pricing affect your ability to attract business?
The ITSMA study found that while clients want integrated solutions complete with hardware, software, and services, most prefer itemized pricing for each component. Figure A shows the pricing preferences from the ITSMA survey.

Figure A

Nonspecific, bundled, or "black box" pricing doesn't provide customers with the ability to comparison shop, Staples said.

"They want to understand the details behind what's in your price," he said. "It puts your solution in context.”

The study contends that buyers assess services using one or all of five methods:

Evaluating the business value being provided in terms of increased revenue, improved profitability, and new business opportunities
Comparing the price to the cost of doing it themselves
Comparing the price to a competitor’s services
Evaluating the cost as a percentage of product list price
Converting the price to an hourly rate

Contract terms
In addition to à la carte pricing, customers prefer fixed-price or time-and-materials-based contracts. Staples said clients don't sign as many contingency or results-based contracts because once they're ready to sign a contract, they're confident that the firm they've chosen can get the job done.

"Since clients are focusing on business results and minimized risks, they've already done a lot of the risk-based assessments," he said. "They're expecting that you're going to meet those primary milestones or come close enough. Therefore, all they see is the upside on it, so why share on the upside risk?"

Figure B illustrates the ITSMA survey results concerning buyers' contract preferences.

Figure B

Customers’ smaller investments may help consultants
Staples said that customers are "buying in smaller chunks that will show ROI from each individual project." If you're trying to penetrate a new account, that trend may help you get a foot in the door, Staples said.

TechRepublic members have also noted that trend in a recent discussion about whether the economic turnaround has begun. For example, member HDA said that business has increased in "mission-critical areas" and with projects that do not require large investments.

"As a service provider, looking at your target customer and your skills, what smaller, bite-size project could you do for these clients to get you in the door that would prove business results and show your competency to them?" Staples said. "It would give you a small inroad to that account and allow you to develop that account further."

More evidence
The Kennedy Information Research Group echoes ITSMA's results in a report titled "Pricing Trends Reflect Market in Turmoil." The report states that clients are reluctant to enter into value-based or performance-based contracts.

The current pricing trends "reflect a market in turmoil," with "providers taking on more up-front capital expenditures and throwing consulting services into the mix to win contracts," the report said. Other common contract-winning concessions include postponing price increases and "throwing in" added services at sharply discounted rates.

How are you handling the pressure?
Do you feel a pressure to discount your products and services? How are you dealing with it? Send us an e-mail or discuss your experience below.

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