The right discount

The right discount. Is there such a thing? I can already feel the CFOs of consulting firms start to twitch…

When we ask clients about the prices consulting firms charge, the perception is usually negative. I can’t remember a client we’ve interviewed who’s explicitly said they’d be willing to pay more—and why would they? They don’t want to give an inch to consulting firms that would, they suspect, take a mile. When we ask clients to rate the attributes of firms, from their capacity to innovate to their global reach, their price point consistently comes bottom.

Part of the reason—most of it, probably—stems from the fact that clients underestimate the cost of consulting work from the outset. Our research about pricing earlier this year revealed that 75% of clients we surveyed in the US came up with their “first reasonable estimate” of the price of a project before they’d spoken to any consulting firms, with 45% reaching this estimate before even working out what the project would involve and how much it would cost them to do if they did all the work themselves. Assumptions were based not on estimates provided by potential suppliers but on previous consulting projects. Assuming that consulting projects, like lightning, don’t strike the same place twice, this means that clients aren’t comparing apples with apples: Just because a supply chain project cost X doesn’t mean that a strategy project will cost Y.

Frustrating though this is from a consultant’s point of view, there’s no avoiding the fact that selling work almost always involves pushing the pricing stone uphill. There’ll always be pushback and resentment on the client side, even if it’s unwittingly of their own making. And one of the many implications of this is that, while price per se is not the most important factor in deciding which consulting firms to shortlist (it ranks ninth out of the 15 characteristics we ask clients about), when it comes to winning the work, discounts are important. In fact, 52% of US clients say that discounting is the most important factor, and a further 44% say that it’s a significant factor but not the most important. Only 5% say that it makes no difference. What this reflects is that many clients, when looking to hire consultants, start off with a shortlist of five or six firms. Choosing those firms depends on a whole host of factors, of which price is one but by no means the most dominant—for the record, that’s the ability to innovate. However, once they’ve been through the process of evaluating these firms, they’re usually left with a couple, one of which has the edge, although both could do the job. At this point, the procurement team is invited into the room and charged with getting a discount. Most procurement people are simply looking for a firm’s “best” (i.e., lowest) price: Not least to meet their own personal targets, they need the preferred firm to give them a token discount. And that’s what happens; indeed, it happens so often that most consulting firms take it into account when setting their rates in the first place. However, the second-choice firm can leapfrog its rival by offering a bigger discount—the question is, how much? Our research suggests that if you want to be certain of winning the project then the magic number is 30%. Up to this point you run the risk of pitching a discount that doesn’t win the work but does create a precedent for future pricing discussions—see my earlier point that past projects set price points.

Our advice is, by all means, offer a token discount when you need to secure a project you’ve effectively won. If you haven’t won the work and really want to, then you need to offer a substantial discount. Offering something in between exposes you to future risks without a guaranteed return.

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