I know a bunch of people who are consultants to firms, advising them about internet, social media and other marketing inputs. These people are really experts and not the general mass of wannabes who seem to flood the world recently. In my discussion with them I realize they always find themselves not able to price correctly as per the services they deliver. I was thinking about this and it leads me to the think that they essentially have two problems.
First, these consultants are facing classical Porter's bargaining power problem. Their clients have high bargaining power and they are unable to match that. Further, the barriers to entry are super-low. Hence there is a lot of competition in this area which has a wide spectrum of people starting from the top experts I refer to above to plain cheats who don't have a clue about either social or media. The client does not have the expertise or mechanism to separate the wheat from the chaff.
Second, the customers perceive some risk because of which they underpay. One source of risk that is clear to me is lack of skills or understanding to measure performance (what will they do) and deliverables (what will clients gain as a result). Since clients perceive the lack of understanding as risk, they tend to underpay for the product to reduce it. Thus, if a web consultant has diagnosed "clutter" as reason preventing website sales, then she is not perceived to have contributed as much to deserve the payment she seeks.
Naturally the prescriptions must be simply to increase bargaining power and develop measures of performance and delivery. The key question is how? Here are some suggestions:
- Dealing with uncertainty: Like I have said before, the only cure of uncertainty is certainty or disclosure.
- Improving diagnosis: I believe my friends must draw from medical practitioners' business model. The diagnosis is first part of problem and money spent here is almost always never disputed. The diagnosis has to elaborate and chargeable. Without diagnosis, they should not submit their quotations. Quite a many times, some consultants intuitively know the problem just by looking at the website or execution of social media strategy etc. and tend to skip diagnosis. I think the more the stress is laid on diagnosis the better.
- Pricing diagnosis: One problem faced with diagnosis is that clients have low expectations from websites and online sales or its impact on off-line sales. Hence they do not want to spend on diagnostics as much. Here, alliance with diagnostic services providers or technologies should help reduce the price for the consultants.
- Reducing performance uncertainty: Once diagnosis is reasonable then the solutions will have better visibility allowing my friends to explain what they are going to do and why. This should allay the performance uncertainty.
- Dealing with deliverables: Almost all clients these days measure the consultant's input in terms of what happens to their deliverable (say online sales or subscriptions etc). With these in mind, the clients formulate terms of reference for the consulting bids. The part the clients don't understand is that between deliverable and their terms of reference is a huge gap which consultants do not control. The problem is the consultants do not always communicate this to clients clearly. The agreement on deliverables must tie-in with what is controllable for the consultant.
- Take this example (given by one expert friend): If a website creates 10,000 hits, has 10% subscription rate hence creates 1000 subscribers. Further it has 10% conversion rate which makes 100 people buy a product worth (say $100) leading to revenue of $10,000. Further, assume the profit margin is 30% then profits from the website will be $3000. Then, each subscriber is worth $3,000 / 1000(subscribers) = $3. Each hit is worth $3,000/10,000(hits) = 30cents. So what will be your deliverable? Will it be conversions? Will it be subscriptions? Or will it be hits? The answer, as I mentioned earlier, depends on what is controllable for the consultant. If she can control the hits, then she should measure hits. If she can control how many will subscribe then that should be measured.
- Organize into a firm or Agency: A member of the collective group is more likely to have better bargaining power. The internal structure need not be that of a firm. However, it can be a collection of individuals with a common name. (This is more perceptive rather than actual). Having a brand umbrella should help. Tip: Size connects with bargaining power.
- Reputation: Clearly if Guy Kawasaki or Chris Brogan or Robert Scoble is advising the client they will pay more. So reputation will increase bargaining power. Some improve reputation with customer testimonials, others with referrals, others with interacting communities. Tip: Fame or recall = bargaining power
- Sub-branding the knowledge: The diagnostic methodology, the solution, core ideas within the communications need to be branded with scientific backing either as papers presented in conferences or as well-publicized concepts (think pagerank). These could be product-type brands (like pagerank) indicating pre-packaged solutions or service style (like aroma therapy brands) that indicate customized solution and delivery. Tip: Knowledge = bargaining power.
So let me know what you think.
Note: For more discussion on importance of bargaining power and risks as it relates to firms read my book Understanding Firms - A Manager's model of the Firm.