How Transparency in Service Organizations is Changing the Game
Recently, I had a pretty unpleasant experience with a security provider that made me realize the importance of an equitable pricing strategy.
One Man’s Trash is Another Man’s Treasure: The Perception of Value
Before taking a deep dive, let’s get our feet wet and assess the fundamentals of our mercantile world. The idea of money dates back to the issues that arose through the barter system when people couldn’t agree on the worth of goods and services in exchanges or didn’t have any desired commodities to complete the transaction. As such, the concept of purchase implies that someone will spend a given amount of money in exchange for a good or service that they perceive carries a certain value.
Some may perceive purchasing a service as a time-saving investment, adhering with the common metaphor, “time is worth money”. Others may see a competitive advantage in introducing knowledgeable expertise and benefiting from a faster, greater chance of success. Irrespective of the rationale, there is always an evaluation of the perceived value of the service.
Perceived value can also be impacted by context. These days are a great example of that, with the shortage that the world is experiencing on different fronts. This can be seen within the automotive industry. From my perspective, the value of a given car is the same. However, during a time of shortage, if I need a new car, I might attribute more value to a brand that is currently available than I normally would, due to the perceived added value of immediate possession.
To summarize: Consumers purchase based on individually perceived value. This can be impacted by external factors, such as how the delivery of a good or service affects this perception of value, as well as the intrinsic value of the good or service.
A Red Flag: Inseparability and the Subscription Model
The four most prominent characteristics of a service are:
- Intangibility: Intangibility implies that services cannot be experienced or consumed before the point of purchase
- Inseparability: Services cannot be separated from their providers.
- Perishability: Unlike physical goods, services cannot be stored or inventoried for later sale or use
- Variability: The quality of the service depends on the service personnel providing them, as well as where, when and how. Service quality is difficult to manage or standardize.
Any pricing strategy that doesn’t follow the principles defining a service is trying to tweak the idea of a service in order to increase profits without providing any tangible value to the consumer. This is especially true when this model is used in the professional services industry.
Let’s focus on “inseparability” and its relationship to the subscription pricing model. When purchasing goods, production and consumption are discrete processes. For example, people would find it completely ridiculous to pay for a restaurant meal they didn’t consume or for a car they never received. Alternatively, why is it that many find it normal to pay for services that were not rendered when it’s in the form of a lump sum amount – or so-called “subscription”?
Is a Subscription-Based Pricing Model the Way to Go?
Let’s circle back to the recent bad experience I had. Over the last few years, legislation has forced businesses to adapt and restructure their strategies in order to ensure compliance with industry regulations. For midsize companies, such as Big Bang, being aware of the legislation available and establishing effective procedures to ensure compliance has been a hot topic. Depending on the sector, this is something that is most often better handled by external providers.
The advisory service we chose to work with was priced as a subscription service. Under this agreement, the work to be done was conditional on changes in legislation or ad-hoc requests for support on our side. Meanwhile, the price and invoicing were fixed regardless of whether their services were used or not! To say I was utterly surprised would be an understatement. It was like paying for an annual gym membership, only to use the shower a couple of times a year – but much more expensive. And I don’t mean a ‘couple hundred dollars per month’ more expensive, I’m talking about sums that amount to hiring a full-time in-house specialist and paying them a hefty annual salary.
Pricing Strategy in the PS Industry
The fairest pricing strategy for professional services, respecting the interest of both the provider and the customer, is that of time and material, a.k.a a pay-as-you-go-pay-as-you-use strategy. This way, the customer is only being invoiced and required to pay as they are benefiting from the value they receive. In most cases, if the value of time spent is not perceived as expected, the customer even has the ability to have specific discussions on the matter.
All in all, the problem with pricing strategy is not the actual cost of the service, but rather how that price is linked to the delivery of its value. It’s important to be transparent about fees and invoicing in order to build a strong, trusting relationship with the customer. This is why at Big Bang, we suggest our clients go with the time-and-material statements of work. We bill for the time worked, nothing more. If a customer is technical and willing to participate, the project can be completed in fewer hours than estimated, which is then reflected in the invoice.