Some time ago, I was talking with another consultant about the pricing of software implementation services in our industry. He was trying to convince me I should charge what LabWare charges as my same charge rate for those services. His rationale was that, as a consultant who is an expert in LabWare LIMS implementations, I should charge what they charge since I’ve got as much or more experience than their people. Additionally, I do get quite a lot of complements about my professionalism and abilities at working with customers in many aspects beyond just doing the implementation, he pointed out. However, it’s not just about experience and adding-value to the customer. Since then, a couple more people have insisted I should be charging the LabWare rates for my services using that same logic, but there are a lot of factors that go into pricing and, although it might not necessarily make sense at first thought, there are reasons why junior people might end up costing more than senior people, depending on the situation.
Typically, services cost the most coming from the vendor that sells the software product. That is because they have the highest overhead. They must fund the new features, software development, quality testing, user group meetings, and an endless list of other things. Most of the cost of these things probably goes into the cost of the licenses and the support costs, but some of it is also reflected in the cost of the services. Also, to keep things simple, software vendors often charge a single charge rate for all their people regardless their expertise or ability. Some software vendors have two charge rates, even then, it is not always to reflect the expertise of the people being sent out, but sometimes to reflect the types of services they are selling (project management versus implementation people, for one example). Also, customers are sometimes willing to pay more for the software vendor’s services because they can be bundled into the cost of the entire implementation and kind of hidden from their Purchasing department by doing this.
Now, add onto that all the other overhead that any other business has, such as healthcare insurance and other employment costs, salaries, marketing costs, and the plethora of other fixed and variable costs, and you can imagine that there can be a significant overhead to running any business. Combining this with the software development costs that the software vendors have and it is easy to understand that they typically have the highest overhead.
Past that, the larger services companies have the next highest overhead because larger businesses have more laws to comply with (business with more than 50 employees typically have more laws that apply to them).
The smallest businesses, such as mine, should have the smallest overhead. However, they still have overhead. For example, I still have legal costs, accounting costs, marketing costs, and a variety of costs, just to name a few. But I don’t pay for an outside office, and that is an example of why my costs are less, as one example. I mention this overhead, here, because it relates back to the articles I’ve written about the fact that subcontracting must cover each level of subcontractor’s costs. Everyone has overhead.
Another factor affecting the price is that of “markup.” Markup is a figure past the actual costs to deliver the resource. Markup is what allows the company to make a profit. Sometimes, we talk about markup as including the costs, other times as merely being the profitable portion of the charge rate. In any case, there must be a profit tacked-onto the actual cost of delivering the services or the service provider will not make money and there would be no point in providing the services.
Much of the issue of “markup” has to do with the strategy of the services provider. Some of this is a “quality versus quantity” issue. Some providers would prefer to deliver a volume of consulting resources and will typically charge less for them. Other companies provide fewer resources but charge more money for each person and focus on delivering a higher quality in each of their resources.
Occasionally, companies are charging as much as they possibly think they can charge until the customer complains or threatens to get rid of them. Some would call this a greed-based strategy. Others would say that it’s merely a supply and demand world, where one can charge as much as they want for their supply as long as there is a demand for it.
My Own Strategy and the Travel Issue
Although we don’t publicly discuss our prices for services (if you didn’t notice this, notice it, now, that you cannot usually go onto the Internet and find consulting services prices listed), my actual strategy is no secret and fairly straightforward. So, I’ll use it as an example.
As I already mentioned, a small company such as mine does not have a huge overhead. Thus, my prices would not be as high as that of the software vendors’ services. Despite whatever experience I have, many customers know that we have this kind of tiered system and would not expect a small company such as mine to try to charge those same higher markups.
What I personally do is to charge specifically just what I think my expertise is worth as my rate and to cover just the fixed and variable costs of running my business. I do not include extra costs, such as travel costs. I do this for these reasons.
- Customers can compare my charge rate against those of other people with similar experience to compare what it is they are really getting for those rates.
- Customers can make a true comparison of what travel costs them. It helps make it easier for them to decide whether they want to bring on a local person. It helps the customer decide whether it’s actually less costly to hire an employee and train them. It makes it possible for them to decide whether they can and want to save money by having people travel less.
But there are others that build all travel costs right into the charge rate. Thus, there are sometimes no savings from using one of their local people or by having their people travel less. It makes it difficult to compare what the customer is getting for their money, as well. Thus, comparing prices is extremely difficult much of the time.