The 3 Types of Pricing Consultant Firms
So you decided you need a better pricing strategy, and since your company does not have internal expertise in pricing, the plan is to hire a pricing consultant firm. This decision is good, but at the same time, you may worry about how much time and resources from the company, such as a consultant, would need to do the work.
In this article, I will summarize a pricing consultant's main activities and the number of internal resources companies typically allocate for the consultant to do the work they are hired to do.
Not all companies have a pricing function, but many large companies do. Mid-sized and mid-sized companies might hire price consultants to improve the pricing function or special projects. Smaller and mid-sized companies might employ a pricing consultant because they realize that, without focusing on pricing, they leave money on the table.
There are essentially three kinds of pricing consultant firms:
- Those that focus on the process of pricing.
- Those that focus on analyzing sales transactions.
- Those that focus on understanding a market's willingness to pay and its purchase decision behavior.
Pricing Consultancy Types 1 and 2
In the first two pricing categories, the pricing consultant firm has to be involved with their clients in tremendous detail. A typical project consists of understanding a company’s business process, finding ways to improve it, and implementing the improvements. Then they have to train staff members and possibly install new software.
Much of the pricing process is about understanding a product's or service's cost. A consultant must draw on a considerable amount of corporate resources to determine what development, marketing, sales, and admin costs must be allocated to a product or service. It may take years to accomplish. Split over time and multiple people can take away resources that could be used to drive the company forward.
Likewise, with a process called Price Waterfall, the entire process from list price to money in the bank is investigated in detail. There are always small profit leaks in just about any company. It can be that the salesperson uses the wrong price list (think using the lower price for seniors when selling to non-seniors), has an old price list, or gives away the wrong quantity discount. Or the wrong shipping cost, tariffs, or tax rate is used. For companies selling internationally, it may be that an incorrect exchange rate is used or the wrong metrics. For example, a customer orders something based on the price per kilo but gets the price per lb. If manual processing involves, then retyping something has an error rate of about 1%. Mistakes like this can go in the customers' favor, which means the seller won't hear anything about it. Or it could go in the company's favor, and the customer will complain! Then there are off-invoice rebates, kick-back, or buy-backs that may not be easily accessible to different customers, orders, or products. Some companies provide SPIFFs (commissions to resellers' salespeople.) Finding these profit leaks requires substantial efforts from the pricing consultant firm and the company.
Sales transaction analysis is about understanding the relationship between sales volume and gross margin for various attributes of how your company goes to market and the market itself. What this means is to understand that relationship for:
- Different sales channels
- Different sales territories
- Different sales managers and salespeople
- Different discount rates
- Different lead generation channels (if known)
- Different brands (if appropriate)
- Different product families and products
- Different product quantities sold
- Different product bundles
- Different payment terms and history for returning customers
- And other variables that make sense for your company and are available to your company.
Consequently, sales transaction analysis identifies underperforming products in terms of margin, underperforming pieces of the sales and marketing organization, and especially the sales organization, where the organization can hold prices and discounts too much. This provides an opportunity for the company to train people better and understand where profits are leaking out throughout the organization.
Conducting sales transaction analysis takes considerable resources, often several person-months, from the company and the price consultant. Much of this time is not spent doing the actual analysis; it is spent finding the data, "cleaning" it, and formatting it so it can be used.
Pricing Consultancy Type 3
Finally, the price consulting we do in my company hardly takes time from the company.
The process used for willingness-to-pay research is online digital polling in a marketplace. And for that, a research design has to be created. The research design is an instrument used to capture and understand what variables affect customers’ willingness to pay, such as:
Different market verticals
Different product and service features, functions, and benefits
Different marketing channels and messages
Different sales channels and methods
What pricing strategy leads to the lowest sales friction and highest sales and revenue
This is to understand which customers to target, what product or service to focus on, what marketing and sales strategies to use, and what to set pricing at.
And here is a huge difference. Price consultants that work with internal processes and data need considerable support from the company to understand their processes and data in detail - person-months or more in some cases. Albeit spread over time and several people. But still a lot of resources. But price consultants that work with external willingness-to-pay data hardly need time from the company. The research design must be targeted in the most appropriate way, which may take a company a few, one to maybe three person-hours, depending on its complexity. But this is a far cry from the person-month of company resources needed when internal processes are used.
Working with data internal to the company typically generates revenue improvements of one to three percent. Price consultants working with willingness-to-pay research generate results that typically transform companies. Typical results are a doubling of sales growth and 25% higher margins. I know outliers that have doubled revenue. Or another outlier that has grown ten times in a few years from the actionable information furnished from willingness-to-pay research.
What kind of pricing consultant firm would you like to spend your money and resources on?
Request pricing consulting services to find growth opportunities today.
