Posted , in Business model
Does price integrity matter?
Anyone who has seen it up close can understand why the Colosseum holds the record as the world’s most visited tourist destination. As consultants around the world jet off on their summer holidays, it’s a fair bet that more than a few of them will end up there. But after seeing the sites of Rome, where will they go next?
Statistically, a lot of them will go shopping. The Colosseum might hold the number-one spot, but the rest of Italy’s top five most visited attractions? All four of them are designer outlets. Tourists and locals alike flock in droves to the mega outlets at Serravalle and Castel Romano in the hopes of picking up Prada handbags and Armani jeans at a fraction of the price they’d pay at home.
We all love a good discount. And that’s as true when we’re talking about multimillion-dollar consulting deals as it is when we’re talking about high fashion. It is hard to overstate the psychological allure of a good deal—particularly when dealing with products and services ordinarily seen as being on the pricey side. So it is easy to see why discounting plays such a crucial role in the consulting industry—particularly in the US. Our research suggests that as many as two-thirds of US projects are discounted in one way or another—be that firms offering clients reduced day rates, or agreeing to knock 10% off the cost of a fixed-price deal. And clients will readily admit that these discounts play a crucial role in their buying decisions; many businesses have whole teams of procurement specialists who are KPIed, in part, on whether or not they can extract discounts from suppliers.
In other markets, however, consultants seem to be more wary of the practice. In central and northern European markets, for example, consultants tell us that while they might occasionally be willing to throw in a discount to get a deal over the line, they’d rather not do anything to undermine their price integrity. After all—they reason—if everyone knows that their firm always offers heavy discounts then the initial price tag they stick on a proposal becomes meaningless. Better to be honest and upfront with customers and quote them a price that accurately reflects the value of your services.
So who’s right? Does price integrity really matter—or should firms be willing to sacrifice it at the altar of dealmaking? Well, there are some reasons to think that the Nordic approach may be better for the industry in the long term. Discounting not only increases customers’ scepticism of your standard prices, but may also impact perceptions of quality: Studies have shown that consumers given a discount when buying nutritional supplements report fewer positive health benefits, even though they’re taking the exact same pills.
Remember those outlets in Italy? Many fashion brands that supply them will go out of their way to make sure customers don’t know they’re there—some will only send product if they get guarantees that the outlet won’t advertise it. They know that there is only so much discounting a product can sustain before the cachet of being a “luxury brand” starts to slip away.
But some will keep sending product nonetheless. At the end of the day, if everyone else is playing the discounting game, your options are somewhat limited. Suppose one firm offers to complete a project for $80,000, and another presents a price tag of $100,000 and then offers to throw in a 20% discount: Our research suggests that a substantial number of clients will go with the latter, regardless of the fact that they’ll be paying the same amount in either scenario.
So no one should begrudge firms for their discount-driven pricing strategies, particularly in markets like the US. But the firms at the top end of the market—especially those who rely on the aura around their name to generate business—should make sure that when they offer clients discounts, they do so with full knowledge of the risks they are incurring. Aggressive discounting can be an effective way to win work, but needs to be done in the context of a longer-term strategy governing how much price integrity you want to maintain—and how much you are willing to lose.