By David A. Fields
Look no further than the gas pumps to see the extraordinary, often nonsensical, choices made by shoppers reacting to comparisons. Prominent signs proclaim each brand’s current price per gallon, making it easy to compare among alternatives. And people will drive miles out of their way or wait in line for what amounts to a dollar or two off their total bill.
You may be tempted to dismiss such behavior as irrelevant and only applicable to low-impact decisions like choosing a brand of gasoline or even a new computer. However, the truth is the vast majority of choices are strongly influenced by comparisons.
If you harness the power of comparison, you can increase your margins, the number of projects you win overall and your revenue per project. Below are five self-contained pricing strategies that make the most of comparisons. First, let’s review a few assumptions:
ASSUMPTIONS—THESE FIVE STRATEGIES ASSUME:
• You separate fees from effort. In other words, if you charge your clients based on the number of hours or days you (or your team) works on the project.
• You offer more than one alternative to your prospect; such as, 3 to 4 prices for different bundles of benefits.
• Your higher-priced alternatives deliver commensurately higher value. The assumption is you’ll offer more value in your bundle of approach and benefits.
• Your prospect has at least a vague, “expected fee” in mind based on the objectives and the possible alternatives.
PRICING STRATEGY #1: THE TEASER/TRAILER
>> When to use it: When you’re confident you’ll win the immediate project at hand, and you have your eye on more projects with this client. For example, a medical devices client asked us to help assess whether they should launch their products into a new market. The immediate project at hand, which we knew they would give to our firm, was the assessment; however, if the assessment went well there was a downstream opportunity to use our team to develop a “market attack plan.”
>> How to use it: Price your first alternative to win the project (within reach of the expected fee); this is your anchor. Price the second alternative slightly above the first alternative and add value—you may just win the second alternative and get a richer project than you anticipated. The third alternative is priced very high and includes additional phases that preview the work you’d like to do with your client down the road.
This strategy has the added benefit of making the second alternative look like a great deal in comparison.
>> Why it works: The client reviews the third alternative and thinks, “We’re not ready for this,” but the seeds of the next project have been planted.
>> Example: ALTERNATIVE 1: Assess market need—$125,000; ALTERNATIVE 2: Assess market need, with low intrusiveness and higher robustness—$155,000; ALTERNATIVE 3: Assess market need and build market attack plan—$275,000. In this case, the client chose the basic assessment and hired us to build the market attack plan.
PRICING STRATEGY #2: THE PILOT
>> When to use it: When your prospect is signaling a lot of hesitancy and/or you are sensing credibility/outcome concerns, and it’s possible to conduct a small piece of the project independent of the rest. For instance, a number of years ago we approached a large, chemical manufacturer we’d never engaged with before to propose an idea for a unique contract management process. They were interested, but I sensed hesitation.
>> How to use it: Price your first alternative within reach of the expected fee. Construct another alternative as a pilot project that accomplishes roughly 10 percent of the overall project, with fees at around 15 percent of your anchor. Often I will suggest that a large portion—not all—of the pilot fees can be applied to the full project.
>> Why it works: Pilots reduce your clients’ financial exposure, make it very easy for them to do business with you, and gives you time to build trust and credibility.
>> Example: ALTERNATIVE 1: Corporate cost savings initiative—$300,000; ALTERNATIVE 2: Corporate cost savings initiative plus six months’ support—$360,000; ALTERNATIVE 3: Pilot cost savings project with one division—$45,000. The client hired us to conduct the pilot.
PRICING STRATEGY #3: THE SKY ANCHOR
>> When to use it: When you’re sure your fees are going to be well above the client’s expected fee, and that expected fee is not based on the cost of internal resources. For instance, a consumer products client was looking to restructure their sales organization and we knew the fee the VP of sales had in mind was substantially less than the fee we thought was reasonable for the value we’d be creating.
>> How to use it: Price your first alternative at the fee you think is fair, reasonable and acceptable. Set the fee for your second alternative significantly higher. Not insanely higher, but make it a big gap. Your third alternative is priced slightly above the second alternative; a small gap.
>> Why it works: The second and third alternatives shift the client’s reference point to a much higher point and your first alternative looks like a very reasonable investment.
>> Example: ALTERNATIVE 1: Organization redesign— $250,000; ALTERNATIVE 2: Organizational redesign plus personnel recommendations—$405,000; ALTERNATIVE 3: Organizational redesign, personnel recommendations and 90-day success plans—$445,000. After expressing interest in the full-bore, third alternative, the client did admit that the fees were initially a bit shocking. Though, in comparison, our basic organization design seemed very reasonable, and that’s what he signed on to do.
PRICING STRATEGY #4: CALL & RAISE
>> When to use it: When you are up against competitive consultants who will be offering standard, run-of-the-mill solutions. A small, Midwest manufacturer called in search of sales training on consultative selling and they immediately let us know that they were looking at other firms too. In fact, they claimed other firms were quoting this training at $25,000. This, obviously, was their anchor price.
>> How to use it: Price your first alternative at a fair price, reasonably near your competitors. You don’t have to match them, especially if your basic approach is substantially superior. However, don’t delude yourself; if the competitors’ inferior approach will satisfy the client, then your advantages may only be in your own mind. Price your second and third alternatives with fairly even gaps above the anchor.
>> Why it works: Your clients see you match what the competitors offer, at a competitive price; however, they also see you go the extra mile and suggest high-value paths to success that the other consultants didn’t even consider.
>> Example: ALTERNATIVE 1: Basic sales training—$35,000; ALTERNATIVE 2: Sales training plus creation of on-boarding processes—$65,000; ALTERNATIVE 3: Development of a new go-to-market approach, including sales, marketing and customer service—$95,000. The client hired us for Alternative 3; almost four times the fee he had in mind.
PRICING STRATEGY #5: TENEMENTS VS. TOWN HOUSE
>> When to use it: When you’re sure your fees are going to be well above the client’s expected fee, and that expected fee is based primarily on the cost of internal resources.
>> How to use it: Price your first two alternatives at a very low fee (and, of course, offer commensurately low levels of service and/or value). These are your anchor. Price your third alternative at a substantially higher fee that you think is fair and reasonable for the value you are providing.
>> Why it works: You are highlighting that their internal resources are, ostensibly, inexpensive but also low value. If the internal resources were sufficient, the client would have already accomplished their project’s goals.
>> Example: ALTERNATIVE 1: Summary of competitive compensation—$20,000; ALTERNATIVE 2: Competitive summary plus list of options—$28,000; ALTERNATIVE 3: Transformational compensation approach—$80,000.The client realized her team could never develop a truly transformational plan and signed for Alternative 3.
The same mental triggers that influenced your prospect to wait in line ten minutes to save $1.30 at the gas pump are in play when you present your proposal later that day. She probably isn’t even aware of the role that comparisons are having on her purchase decisions; however, if you play it right, those can help you win a bigger, richer project.