A hard truth that most design firms don’t understand is what you charge for your services is a marketing issue and the price you set will communicate to your clients whether or not you believe your firm is of value. The amount of money a client pays you is equal to the degree of respect they have for your firm’s unique talents. What can you do to enhance your client’s project that will enhance its value?
A Little Perspective
According to PSMJ’s A/E Fees & Pricing Survey, the median hourly billing rate for an A/E firm project manager in 2008 is
$115. This is a pathetically low figure in comparison to the hourly rates of other professionals. What’s the average number of years an architect or engineer spends engaged in formal training? At least five years. This, coupled with an average of 15 years spent learning from experience, should convince you that you should be charging more money for your services. How much does liability coverage cost? Even the billing rate of $150 per hour for an A/E firm principal is mediocre. Consider that hairdressers charge $30 to $50 for a 30-minute haircut. That’s $60 to $100 per hour, and they typically have one year of education and little or no liability.
In negotiating a price that truly reflects your value, you may present yourself on the “offense” or “defense.” As in sports, who scores more points? Offense or defense? Similarly, in design, if you show the client every little cost you have, are you on the offense or defense? Design professionals typically expose themselves by exposing all their costs and then spend all their time justifying those costs.
When it comes to pricing, most people are either lumpers or splitters. Lumpers lump everything into one rate. Architects and engineers are typically splitters. They’ll charge$89.23, “due to multipliers.” Why charge the 23 cents, and why give an explanation? A typical design office breaks down expenses for each and every staff type, creating a bookkeeping nightmare. What is the difference between technician No. 1 and technician No. 2? Why not charge one rounded price for all technical people, a higher price for principals and a lower one for clerical: $100, $150, $200? Do not provide reasons and do not provide backup, just present the hourly price. Offering explanations gives the client reason to ask for justification, putting you in a defensive position. Why open your books up to clients?
Here’s a radical suggestion. Divorce your accounts receivable system from your invoicing process. You don’t need reports of your balance to the penny. If you have fewer than 50 people in your firm, you are wasting your time with a general ledger.
Present a Value Price
There are several ways to ensure that a firm’s position is offensive, not defensive. Here are two ways you can present a value price to your client.
1. Judgmental value pricing. This approach is based on “what I believe is reasonable to charge.” In judging “what is reasonable,” account is typically taken of the best available cost estimates, the reputation of the firm or particular individuals, and some assessment of value likely to be perceived by your client.
Judgmental value pricing requires experience and courage: experience to assess how the client will respond to what you offer, experience in presenting what you offer without overwhelming the client, and the courage to act on your judgment of the situation.
In such cases, you should charge one rate for all technical people in your office, as previously suggested. In presentations to the client, don’t give separate prices for each person-the clients will want the most talented person for the lowest price.
If you must present several billing rates in your presentation, at least use numbers that end in two zeros for simplicity. Differentiate costs when you don’t want to use a certain person. For example, clients often want to have the CEO working on their project to guarantee quality. If you price the CEO at double the price (or even more) of the project manager, the “shopping” client will then question why the CEO has to be on the project.
These are ways of ensuring that you, not the client, retain control. If you have the courage, use judgmental value pricing.
2. Component Value Pricing. This method takes a total value to be delivered and divides it into components. For example, ABC Design uses perceived value to set the price on its equipment. It prices zoning at $26,000, discounted to $22,000 for valued customers, though a competitor offering similar services charges $20,000. And ABC will get more sales than the competitor because when a valued prospective customer asks an ABC representative why he should pay
$4,000 more for its services, the representative counters with the following: $20,000 is the zoning price if it were equivalent to the competitor’s package. $3,000 is the price premium for the superior service ABC offers for zoning, which includes (list four items).
$2,000 is the price premium for the fewer changes/faster processing record of ABC for obtaining zoning. $1,000 is for ABC’s guarantee of completion of all zoning activities within six months or less.
$26,000 is the price to cover the value package. ($4,000) your discount because you are a valued client $22,000 final price
This is a useful technique in large-scale projects where an overall value statement would be difficult to explain. This approach is therefore particularly relevant when the value delivered is complex and individual elements can, in the client’s perception, be valued at a reasonable level. However, it does place a firm back in that undesirable “defensive” position.
Given the identification of component value elements, component value pricing is essentially a more complex version of judgmental value pricing.
What Are You Waiting For?
Sometimes designers will take work because of promises or speculation: “Do you know the design awards we could get?” or “You should see the next project they’re going to have!” There is no guarantee in this business that a client will choose your firm again. Get paid what you deserve, market a price to match your desired image and set prices based on the value of a service, not on its actual cost or the number of hours it takes to complete.
Frank A. Stasiowski, FAIA, is president of PSMJ Resources Inc., Newton, Mass. For nearly 30 years, the company has offered published information, educational programs, in-house training and management consulting services to A/E/C professionals worldwide.
For more information about design firm billingrates, check out the PSMJ A/E Fees and Pricing Survey at www.psmj.com/publishing/products.aspx?v=item&i=370.
For an authoritative guide on the strategies and tactics of value pricing, see PSMJ’s Guide to Value-Based Pricing for A/E Firms at www.psmj.com/publishing/products.aspx?v=item&i=143.