Problems with Pricing

Posted: September 15th, 2009 | Author: Scott Simpson | Filed under: Economy, Leadership, Strategy | Tags: , | 2 Comments »

One inevitable effect of the recession is that more firms are chasing fewer projects. Hence, the odds of success are greatly diminished, and those firms that do win new commissions often have to discount their fees, sometimes substantially, in order to secure the work. To compound the problem, firms that have shed staff are spawning their own competition. The same qualified people who used to be employed can now compete on a much lower cost basis, which further drives down prices.

Since most projects have a lifespan of several years, this not only affects profitability in the near term, but it has long-term consequences as well. When the recession subsides and work becomes more plentiful, projects that suffer from low fees run the risk of becoming orphans. To recover financially, firms will be tempted to concentrate on the newer, more profitable projects at the expense of the older losers. This can cause quality problems, ultimately affecting the overall reputation of the firm.

In this challenging economic climate, careful consideration of fees is critically important. If you are forced into taking deep discounts to secure new work, don’t just give up the ship. Instead, the prospective loss must be well managed. Decide in advance how much you are willing to risk — and lose — in order to do the work. Budget the loss just like any other cost, and then stick to the budget. Don’t let the losers get out of control. Remember that each dollar of loss must be earned back later with profits from new work, so every loser places a very heavy tax on your future.

Despite low fees, never stint on quality. Whether or not a project eventually makes money, it must be done well. Each job done is a brick in the wall — it becomes a permanent part of your professional reputation. You cannot afford to install any defective bricks because they will be there for all to see for years to come.

Finally, and most important, avoid competing on price wherever possible. Every firm has a value proposition. What’s yours? Be able to communicate it clearly and convincingly to clients as well as your own staff. Demonstrate why choosing your firm is a smart decision and how you can deliver more value than the competition. Be specific. Remember that a low price is not always a bargain … it’s the results that count.