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| Solutions for Our Times |
| For further information and to receive complete copies of any of the white papers you see here, Contact Al Uretsky, Managing Partner Estrella Partners Group, LLC Tel.: (623) 594-9283 auretsky@estrellapartners.com |
| Professional Services Pricing Models; Value Based Pricing vs. Traditional Pricing Approaches By Al Uretsky Managing Partner Introduction There are various ways to bill for IT and Management consulting services, most commonly, Time & Materials (T&M) for headcount, Fixed Price (FP) per milestone or engagement, and Value Based Pricing (VBP). Each of these methods has their own risks / benefits to both the services provider and the client organization. I am not an advocate for any one engagement pricing model vs. another. Every engagement needs to be evaluated on its own merits. The appropriate model depends on a number of factors, some of which are; the maturity of the relationship between the services provider and the client organization, the level of experience of the services provider in the particular solutions area in which they are engaged, the type of solutions that are being delivered, the economic and environmental climate, and the region and geographic location in which the services are to be provided. When evaluating the different potential pricing methods in which an engagement can be structured and contracted, the services provided should consider not only what is in their best interest for closing the sale, minimizing project risk, and generating greater levels of profitability, but more importantly what is in the best interest of their customer and their long- term relationship. My philosophy has been that if a services provider treats their clients as if they would want to be treated, with all due respect, honesty, and fairness with quality work products, then as a result, they will have a satisfied customer and be viewed as a Trusted Advisor. A client’s final pricing model should be reflective of the expertise they are receiving, taking into consideration, level of experience, geography, competitive factors and revenue optimization. Traditional Pricing Models Traditional pricing models for consulting services are usually either Time and Materials (T&M) or Fixed Price (FP). Time and Material engagements are where a services provider will charge a client based on the level of effort, quantified by time in terms of a hourly or daily rate, as well as any key material in which the services firm requires during the engagement to deliver such prescribed services such as; particular hardware / software, tools, methods, etc. of which could be considered additional charges. The difference between the uses of Hourly vs. Daily rate is more than just terminology. Some people will often equate a business day of 8- hours to be equal to a daily rate, but that may not necessarily be the case. For example, if a consultant works an 8-hour day at $100/hour for $800 vs. a consultant that is working on a $800/daily rate, may differ if the hourly consultant then works a 10-hour day or even 12-hour day, now equating to $1,000-$1200 in service fees if billed on an hourly basis. The daily rate is an approach to put a cap on the daily cost, assuming you are not working with resources on a part-time basis and that they are working a minimum of an 8-hour professional day. For further information and to receive complete copies of any of the white papers you see here, contact Al Uretsky. |