Pricing increases often are a point of conflict at growing service firms.
Management, the typical scenario plays out, has decided to implement a price increase. The employees providing the service become concerned their bosses will be pricing everyone out of work. Viewing themselves as advocates for the clients, they may try to argue against a price increase, but more often they act out their disagreement by reporting fewer hours of billable time for each client in an attempt to nullify the increase.
This passive, yet aggressive resistance is destructive for several reasons:
- At a time when the firm needs to be unified, a rift develops between management and service professionals. Pricing increases make clients look at the firm more closely than ever. Clients could conclude the increases are needed to pay for mistakes caused by poor communication or disagreements within the firm. They could develop even greater concerns about the quality of the firm they are paying.
- Many service professionals have not been shown all of the details behind client billing, so they do not know how many hours to withhold to achieve their desired results. Confused record keeping and inconsistencies are the more probable outcomes.
- Clients are inadvertently taught to expect too much.
- The service professional loses value to the firm. According to all of the firm’s records, productivity and return-on-investment levels have declined for that professional.
More than one good professional has lost a job over this point of conflict. It’s a shame because anyone who cares that much about clients has much to offer a growing service firm.
How can managers of growing service firms prevent this from happening?
Service professionals need to understand what goes into running the business including the logic behind pricing and billing. Knowledge of the financial equations helps account executives be accountable, make better decisions about subcontractors and estimates, educate clients, and not resent their bosses.
Interestingly, we’ve noticed managers of growing service firms become less willing over time to discuss finances with key service professionals. As the firm’s capacity to pay managers reasonable salaries improves, they become less willing to disclose financial figures.
Yet, service professionals can comprehend numbers. They can understand explanations about how the firm probably owes the company’s founders more per hour to make up for the years they went with little or no pay to create the business.
However, without explanation, the service professionals are left to assume the owners are greedy and indeed, have something to hide.
I don’t advocate total financial disclosure to all employees, but there usually are key service professionals who need to know more about what goes into making their firm tick. They can be shown the portion of the firm’s figures that relate most directly to their work, so they see the connection between their behavior and decisions to the bottom line.
A professional who speaks out on behalf of clients is not necessarily a threat to management. That energy can be redirected through increased understanding of the financial aspects of providing service to the clients.
Some managers won’t share financial information because they don’t want to teach their employees so much that they leave to directly compete. In most cases, it’s not the divulging of financial data that leads a service professional to leave a firm. In fact, an increased sense of belonging could encourage them to stay.
The more they understand the logic used in their company, and the more they believe in their managers, the greater their loyalty to them.
Pricing decisions should not be made in a vacuum. It can be the focus of a highly productive participative process within the firm. Busy managers often forget price is a component of marketing strategy. Service professionals can be helpful in researching competitors’ prices. They can also provide some advice about the clients: What do they value? How should they be approached? When would be the best time for a price increase?
If service professionals feel their expertise is valued, it’s less likely they will sabotage a price increase.
The causes of price increases are also good material for participative analysis. Service professionals can be asked to consider their own company as though it were a client. What would the service professional recommend to a client company if it had increased costs and internal resistance to price increases? How should the company decrease costs and justify its cost? Some cost increases are prompted by inefficiencies that can best be addressed by the service professionals.
Clients need to be educated and given updated information so they know what they are getting for their money. Price always needs to be justified and associated with benefits valued by the customer.
Expectations for productivity and delivery of service tend to increase exponentially as service firms grow; there is a myth that firms automatically achieve improved economies as they grow, but larger firms are expected to have email, facsimile machines, modern computer systems, better office space. Similarly, the demand for employee benefits increases as the firm grows.
Perhaps, most importantly, managers of service firms need to know when they have a pricing problem (marketing issue), when they have a profitability/cost/spending problem (financial issue), and when they have a productivity problem (management issue). Raising the hourly rate may not solve the firm’s problems, and it could inadvertently create additional frustration.