Pricing For Services – II

In the July 1, 2010 blog entry, we discussed one model for pricing services. Most professional service firms handle service prices based on billable hours. There are three popular methods for setting hourly rates. The first is applying a cost model where the coach sets a profit objective, figures in their fixed costs and divides the remaining amount by number of hours to reach a price point. Another method for arriving at a dollar amount is market value. Market value is the price paid for coaches with similar experience in the same market for comparable services. Most professionals research the current "going rate" and then adjust their fees based on how they believe they fit into the market. Finally, one can base the hourly fee on what a coach would earn as an employee of a major corporation that has staff coaches. To make a fair comparison, the coach needs to consider salary, benefits, expenses and profit.

The above model for pricing services places a cap on the revenue earned. Traditionally, the only way to increase the revenue earned is by increasing the hourly rate or increasing the number of billable hours, both of which have fairly firm upper limits. Successful professional service firms get around this by hiring junior associates who generate excess productivity over and above what they are paid. The excess productivity in the form of revenue accrues to the senior partners.

The authors of the Blue Ocean Strategy book discuss what they refer to as strategic pricing and target costing. The right strategic price ensures that buyers not only will want to buy a particular service, but will also have the ability to pay for it. The strategic price is generally aggressive and designed to appeal to most mainstream buyers. After a firm has arrived at its strategic price, it deducts its desired profit margin to arrive at its target cost. To hit the cost target that supports that profit, a firm has three options. The first is cost innovation. Cost innovation finds ways to trim costs by eliminating superfluous service features, which are not highly valued by buyers even though they might be industry favorites. A second option is partnering, which allows one to leverage another firm’s expertise and economies of scale in order to deliver a service at a lower cost to buyers. Finally, when the target cost cannot be met through the above efforts, a third option is pricing innovation.

How can these ideas be applied to coaching? Many personal coaches charge as much as therapists and many business coaches charge as much as consultants. While the role of coaches differ significantly from therapists and consultants, the prices charged often don’t. Moreover, many clients may not be able to distinguish how coaches differ from other professions that offer, what initially appear to be, similar services. If a coach can ethically serve a client instead of a different type of professional, a better value proposition could be the prime factor that influences a clients selection. Group coaching is gaining in acceptance and can offer some distinct advantages over one-on-one coaching. When priced strategically and packaged appropriately, group coaching can generate higher revenue for the coach while providing clients with lower costs and at the same time maintaining what clients value most.