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When price is no longer a differentiator
Everyone thinks they know everything about pricing in consulting. “Segmenting the consulting industry is very simple,” a senior French consultant once told me, with one of those quintessential gallic shrugs. “There are very expensive firms, less expensive firms, and cheap firms.”
That attitude might have been just about defensible 10 years ago, but it would be difficult to justify today. True, clients’ overall sense of the importance of price, relative to other factors they take into account when deciding which consulting firm to use, hasn’t changed much. In our most recent survey of around 3,000 senior executives in six major consulting markets around the world, 6% said this was the attribute that mattered most, up from 5% in 2017. Last year, price came out as the 9th most important attribute; this year it’s moved up to 8th. Those changes are within the margin for error: What we see in our surveys and hear from clients we speak to, is that price is a qualifier, a guide to whether a firm has understood the scope and scale of a project, and a reassurance that they’re not being ripped off. While there’s clearly a minority of clients to whom price is genuinely critical, most think about price only to be able to put it on one side in order to focus on more important aspects: ‘Innovation and the ability to implement’ top this year’s list.
Price has always been more important on the supply side. That’s not just for the obvious reason—the need to protect margins—but because many firms have sought to articulate their position in the market by reference to their price point. When firms talk to us about being, or aspiring to be, in the premium segment, they’re not talking about quality or value (they perhaps should be), but about fee rates. They are, or want to be seen to be, expensive.
But defining your competitive set in terms of price is increasingly dangerous in today’s market. “I don’t see why I should pay $5,000 a day for advice around strategy,” one chief operations officer recently told us, “but I’d pay $10,000 a day to someone who can guarantee our systems aren’t going to be hacked.” He paused, then said: “Actually, I’d pay more than that.” Cybersecurity is clearly an extreme example—every passing day brings new stories in the media that remind us of how vulnerable we are, and the potential for reputational damage for organisations is huge—but his comments are still symptomatic of wider changes in what clients value and are prepared to pay premium prices for. “Premium priced” firms, historically strategy firms, are finding that fee rates for some of their traditional services are falling. The classic example here is due diligence. Once the high-margin mainstay of many strategy firms, its price point has fallen as the process has become more codified, and looks set to fall much further as human analysis is increasingly done by machines. Some strategy firms have continued to work in this space, perhaps because they see it as a necessary concomitant of higher-end M&A work, or perhaps because it still generates important revenues for them. But big firms have lost share to cheaper, mid-sized firms, and the cheaper, mid-sized firms now face the challenge of responding to automation that allows a technology services company to do the lion’s share of their work.
Price is now like an anchor, which, instead of being set firmly in the seabed, is being dragged along the bottom by strong winds and choppy waters. Differentiating yourself around your historic price point isn’t a viable strategy any more. You might have dropped anchor in a safe harbour 10 years ago, but the chances are that you’re being pulled into rougher seas and surrounded by a different set of ships.