Value-based pricing is an increasingly important profit factor. In the traditionally cost-driven services industry, however, many organizations find it surprisingly difficult to implement.
The digital age offers consumers a range of advantages, including greater price transparency. Consequently, it’s more critical than ever for companies to think intelligently about how to improve their pricing approaches. Macro trends such as labor shortages, automation, and software- and labor-delivered services drive up the urgency for companies to use value-based pricing, which considers both value and customer needs—not simply cost. This could involve pricing by the number of floors in a building or the number or type of rooms per floor cleaned, for example.
Within services industries such as jansan, HVAC, plumbing, and electric, the shift to value-based pricing can seem overwhelmingly complicated but understanding where to start can help successful businesses take that first step toward implementation.
What makes pricing so challenging?
Several factors come into play.
A spectrum of project types requiring varied time commitments, levels of expertise, equipment, supplies, and personnel, makes it difficult to achieve a desired profit margin for each project. For this reason, understanding your customer segments, their specific needs, and how pricing should differ across them is crucial.
Proper scoping is a major part of pricing and is often absent from a services business. It is important to understand not only the materials, processes, and people required but also the factors that define completion and how they differ from project to project. Doing this efficiently and effectively can improve speed-to-quote (vital in some industries) as well as customer satisfaction.
For example, a client in the custodial industry recently improved scoping by transitioning from a custom quote for every location to a process that considered the number and type of rooms cleaned, day of week and time of day of service, and geographic location. This change automated the scoping process and was seamlessly implemented with a real-time digital pricing tool.
The risk of overrun is real, and costs such as skilled labor and equipment rentals add up. Finishing a project on time is a must—so managing capacity and scheduling becomes critical.
Often, increasing prices during peak times and differentiating prices based on lead times can be an effective lever to manage capacity constraints and avoid overscheduling and understaffing, both of which can create longer completion timelines.
Indications of a pricing problem
From our experience working in the pricing industry, we’ve identified four symptoms that could indicate you have a value-pricing issue at your organization.
1. Not understanding why a customer picks your company over competitors
In order to price based on value, you need to know your company’s value drivers. These are the elements of your services that make customers want to choose you to do the work. Interestingly enough, when ranking a company’s value drivers, customers put price as low as third or fourth place, meaning that there are almost always other drivers that are more important to them.
2. Using the same pricing and service packages for all customers
Adding to the complexity of pricing is the fact that different customer segments value different drivers—which means you shouldn’t treat all segments the same. Understanding the segments that exist and how to cater to them specifically is essential to optimizing pricing across the business.
3. Revenue-obsessive bidding strategy
Most companies have no bid prioritization strategy, and if they do have one, it’s “bid on everything.” Over time, it becomes increasingly important to prioritize the projects and use pricing as a lever to guide the business strategically.
4. Extreme margin variation across similar jobs.
An absence of consistency in margin typically means that the quoting process is not structured enough to address and include the major drivers of value.
Addressing the value-based pricing issue
Here are four steps to address the value-pricing issue.
Step 1: Identify value drivers.
Common value drivers for jansan and facilities maintenance include quality of service, speed, and versatility. A conversation with your sales department is a great way to understand these drivers as well as how the company performs on each one. For each service, you should be able to identify a baseline value, independent of input costs, with an appropriate price metric that aligns with value.
Step 2: Identify your customer segments and their needs.
Segmenting customers can be an overwhelming process with underwhelming results, unless that segmentation focuses on customer needs. Start simple and use a short customer survey or sales workshop to split your customers into a few key needs-based segments, then create a differentiated offering and price for
For example, a jansan company may segment customers based on any number of the following variables: frequency of clean, depth of clean, ongoing versus scheduled versus spot jobs, request for proposal versus established relationship, and high opportunity (when there’s plenty of room for growth) versus low opportunity (when you already have much of the business).
Step 3: Create a bidding strategy that puts company goals and profit first.
Bidding on projects with only revenue in mind can quickly lead to a lack of strategic focus and an influx of low-margin jobs. Determine your company goals: Are you looking for growth or for profitable growth? Are you going after new or existing business? Which of your services are you trying to expand and which are you trying to move away from? With these goals in mind, build a framework that helps you understand when and how to bid.
Step 4: Track and estimate project profitability via KPI dashboards and predictive modeling.
One of the simplest ways to get better at pricing services is to conduct after-action reviews of both highly profitable and unprofitable projects. To do this, you first need to track profitability—key profitability indicators, or KPIs—in a way that’s easy to understand. Then you need to investigate and determine the factors that caused these anomalies. Sophisticated firms are supporting their decision-making by using predictive modeling to estimate cost or the likelihood of overage
Services pricing presents unique challenges that make the task both difficult and fun. In a traditionally cost-driven industry, it’s vital that leaders think about the pricing strategy within their company. Although there is no end to the level of sophistication companies can bring to their pricing, simple and early changes to the process can make a huge impact on topline growth.