Beaton's research amongst 10,000s of clients of professional services firms over the last 10 years shows that perceived price is positively correlated with the value perceived by clients. Yes, that's positively correlated. In other words, the higher the price, the higher the value perceived by current buyers users of the service.
In these days of enormous price-down pressure on every firm in every profession, this finding – that perceived price is positively correlated with perceived value – warrants repeating. And explaining. And testing. And learning to use in practice. That's because it's seems at odds with everyday experience of firms.
Beaton's own research shows that the average price levels as clients perceive them have been falling for at least the last five years. This link shows our data for law firms; it is available and very similar for other professions too (to receive details, all you have to do is write to me at the email below).
The chart is an example of the driver analysis used in the Beaton Benchmarks (1). These reports provide firms with insights into their competitive positions and show their c-suite leaders how to maintain or improve their competitiveness and how to create and defend price-setting discretion.
These 11 drivers (aka attributes) explain some 75% of the variance in the dependent variable which represents how the clients perceive the value they receive from the (eight) firms in this particular set of competitors. The sum of the percentages represented by these 11 drivers is 100. In other words the top five drivers ('ease of doing business', 'understanding your business and industry', 'caring about their clients', 'cost consciousness', 'communicate effectively') represent 65%, or two-thirds, of what constitutes perceived value for clients (1). For more on cost consciousness read this excellent post by Mel Anderson.
Looking closely towards the bottom of the list you will see 'technical expertise' and 'perception of fees' or price are +4% each. This surprises many when they first read our reports.
Technical expertise is a 'given' or 'ticket to the game' – taken for granted by clients (until it's missing). There are many technically competent practitioners in every speciality and each profession has very high standards.
Price is a more complex and – in this era – a more important story.
Price is positively correlated with the value perceived by clients
Price level, as client perceive it, is positively, albeit at 4% weakly, correlated with the client's perception of value. In other words, the higher the price, the higher the perceived value.
"Price level, as client perceive it, is positively, albeit at 4% weakly, correlated with the client's perception of value" translates into this reality. For every 100 percentage points of perceived value, four (4) are derived from price. 'Ease of doing business with' represents 17.9% and 'understanding your business and industry' represents 14.3%, meaning they are approximately 4 and 2.5 times more important that price, respectively.
This means that price is a heuristic for value. Price signals value. If price is seen as too low, then value is suspect in some way. Of course if price is too high, then the value for the client isn't there and they will look elsewhere.
In other words there's a zone or range of tolerance for price. Like Goldilocks' porridge it should be neither too warm (high) or too cool (low). Determining what price is 'just right'. For an example of a scholarly article on this subject click here.
Implications of the positive correlation between price and value
In times when every practitioner is struggling with price-down pressures, these research findings are as vital as life blood itself. Leaders of firms need to ensure they understand the research. They need to understand how it applies to their firm. They need to put in place systems and invest in capabilities to deal with this new reality. And above all else they need to recognise the damage that excessive (what Beaton calls 'bad') discounting causes to perceived value.
Discounting is a major contributor to the commodity slide, about which much has been written. For inspiration you can read articles like this or you can watch this brilliant video. I recommend the video; it features Isadore Sharp, founder of the Four Seasons hotel chain.
I am indebted to a client of ours who told me about Isadore Sharp. Here's an excerpt of our client's email to his partners in preparation for workshop to receive their firms' Beaton Benchmarks report (to protect the author's identity, I have made a few minor changes):
"Check out this video, it is less than six minutes. Just before the two minute mark, Mr Sharp describes how Four Seasons is “selling value”. They are one of the leaders in luxury hotels worldwide and one of the most expensive. As he says, they led (not followed) the hotel/resort industry through $100, $200 … $1,000/night price points, because they provide value that people perceive and wish to pay for. In 2007, Bill Gates and a Saudi Arabian prince bought 95% of the company on a 50/50 basis, with Sharp owning the rest. You don’t get business partners like that unless you know what you are doing! In June, my spouse and I paid an astonishingly high amount to stay in a fabulous Four Seasons resort. We were happy to do so, because the overall experience/value warranted it. We are already dreaming about going back there and staying at other Four Seasons resorts elsewhere in the world."
What firm wouldn't die for a client testimonial like this?
(1) The reader should note that driver composition and weights (%s) vary somewhat for each competitor set and by profession, client sector and work type. Therefore this chart is a specific illustration of the general observation about the positive correlation of price and perceived value. In a recent analysis by Beaton's William Wong he showed that this positive correlation held in 27 of 28 situations studied.
Here are some more pieces on this vital topic
+ “We lost on price. We have to discount.” 5 reasons to still be sceptical
+ Two hard questions about law firms’ fee strategies
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This post was written by George Beaton, a director of Beaton Capital and Beaton Research + Consulting.