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Bo Di Muccio
Determining the right pricing model for IT professional services in the technology industry is neither simple nor easy. While it’s important to remain competitive and convey the value of your services, these goals must be balanced and aligned with the overall needs of company growth and customer success.
In this post, I’ll explain how you determine what your professional services pricing model and pricing parameters should be, with the help of the TSIA benchmark data.
If your Sales organization is saying, “Professional services rates are too high!” you are not alone. Of course, while there are times when professional services rates can be too high, in general, many professional services organizations (PSOs) actually don’t charge enough for their services, or even give it away. Why does this matter? Professional services is “dilutive” and “just a sales enabler” anyway, right?
How much of a 'business' should your professional services organization be so that it is best positioned to help drive product growth, customer adoption, account expansion, renewal, and customer value and success in general?
There are many factors that can impact professional services pricing, including geography, role, level, and delivery type. But ultimately, the real question in play is as old as the tech industry itself: how much of a “business” should your professional services organization be so that it is best positioned to help drive product growth, customer adoption, account expansion, renewal, and customer value and success in general?
The approach you take to pricing professional services depends on how much you need it to resemble a business, at least partially. The ends of this continuum are depicted in the graphic below.
(Click image to enlarge.)
A business must price its wares in such a way that there’s enough money to pay for costs and investments while also leaving some level of margin. That is, a proper business is profitable by design with a pricing model that aligns to that principle. On the other hand, if the professional services activity isn’t expected to be profitable overall—in other words, not a business—pricing is another matter entirely.
In short, pricing should be determined based on your professional services charter, strategy, and financial model, and set within the context of industry-validated pricing benchmarks and parameters.
In practice, professional services pricing can and does just “happen” in the absence of systematic, deliberate analysis, modeling, data, etc. But that’s not the way a business should operate. Pricing should be the rational outcome of a process of vertical and horizontal alignment around the company’s professional services objectives, including a clear idea of the target financial model for professional services and solid data about what the market will bear.
As a professional services leader, you know that price is a fundamental driver of financial performance. But sometimes you may only be able to gather incomplete pricing information from competitors, partners, Sales teams and the like. Many lack formal pricing processes or a regular pricing review cadence.
When you have no reliable set of pricing benchmarks to reference, it’s no wonder you might have trouble getting an accurate view of what the proper pricing bumpers are, let alone what programs or processes you need to have in place to manage price performance.
To address these business challenges, TSIA runs two different studies that collect unmatched, actionable data on pricing practices and performance.
Let’s take a look at some key data points from the TSIA Core Professional Services Benchmark Study to explore answers to the following common Professional Services member questions:
One way to wrestle the first question to the ground is to compare the as-sold average blended rate performance of high-margin PSOs with lower-margin PSOs. In our benchmark, we track a group of professional services organizations that we call “Margin Pacesetters.” These comprise the top 15% of the benchmark sample as defined by PS net operating income.
So, how do professional services pricing rates benchmarks compare between the most highly profitable PSOs and the rest?
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It should surprise exactly no one that professional services profitability is strongly correlated with market rates. But taking this basic, intuitive correlation as a starting point, you end up with some pretty useful guidance:
How do the Margin Pacesetters execute in such a way to consistently drive these dramatically higher rate outcomes? Based, again, on the TSIA Core PS Benchmark Study, here’s a selection of things we know about this:
In short, driving higher market rates and looking and acting like a business (not a non-profit) exist in a virtuous, self-reinforcing cycle. This also means that if you’re more to the left of the “professional services as a business” continuum, your rate bumpers are demonstrably lower and that you can get away with, for example, discounting or sales practices that are more lax. Either way, you align your business, you are, well, aligned. And aligned somehow is always better than not being aligned at all.
To learn more about how you can be more prepared to talk to your team and your Sales organization about how to price your professional services, contact TSIA today to discuss the benefits of membership in our growing Professional Services community. From business strategies and frameworks to the deep-dive industry studies I listed above, TSIA has the data-backed insight you need to improve your professional services strategy. I look forward to sharing my research with you and answering any questions you might have.
Post Date: April 15, 2019
Bo Di Muccio, Ph.D., distinguished vice president of Professional Services research and vice president of TSIA advisory delivery. He is also the chairperson of the TSIA Professional Services Advisory Board. Using his nearly 15 years of experience in technology industry research, analysis, and consulting, Di Muccio develops and delivers research and advisory programs that help some of the world’s leading technology companies build and optimize their professional services business.
The Technology & Services Industry Association (TSIA) is dedicated to helping technology and services organizations large and small grow and advance in the technology industry. Find out how you can achieve success, too. Call us at (858) 674-5491 or we can call you.