Creating a professional services pricing model

A friend of mine came looking for some general feedback about how people approach billing for professional services. They were selling to enterprise clients, mostly in financial services and insurance, and were starting to see more and more of their time and resources spent on integrations, configuring and delivering hardware, and offering ongoing support past the sale.

I’ve helped spin up a handful of hardware/software PS teams. Some general guidance on this is below:

  1. Structure your pricing against 3-4x fully-burdened cost. Rates may be different per employee role. Think hourly rates, hours per project, etc. Here’s a personal example of pricing:
    1. In a past life, I showed up as a fully burdened cost of ~$140k. I was billed out at $225-275/hr in a direct model.
    2. Napkin math on $140,000 against 2080 business hours per year is $67, times 3 and we’re at $200 an hour. 
    3. But you aren’t getting 100% billable utilization, you’re getting more like 60-80% depending on the business. A lot of law firms follow an 80% billable time model, meaning partners need to spend 80% of their time on billable activities.
    4. 80% of 2080 is ~1660, $140k/1660 is ~$84, times 3 is $250…
    5. Thus we’re back to our range of $225-275/hr.
  2. In Enterprise IT, it’s common to see a 3x rate for a direct model and 4x for a channel distribution model. The latter is due to margin pressure and additional risk.
  3. Whether project management billables are based on an hourly rate, included in the overall rate card, or charged as a percentage of each project is largely up to you; note the “percentage of project” option is one I’ve seen more in the construction industry than anywhere else.

For deeper reading on professional services billing, I strongly recommend reading SPI’s annual “Professional Services Maturity Benchmark” reports. These give an outstanding level of detail on all-things professional services: business models, metrics, packaging, pricing, talent, financial metrics and modeling, and more. It’ll give you a lot to work with in terms of strategic planning and reverse-engineering your models, metrics, budgeting, etc.

About the Benchmark:

In 2007, SPI Research developed the PS Maturity Model™ as a strategic planning and management framework. It is now the industry-leading performance improvement tool used by over 15,000 service and project-oriented organizations to chart their course to service excellence. The PS Maturity™ model helps executives compare and analyze their own performance so they can build consensus around the actions to take, and where to start, while quantifying the benefits of change. Analyzing the benchmark data by vertical market, geographic region and organization size gives PS executives an accurate comparison to their peers and the market at large. Over 3,000 firms have completed SPI’s benchmarking surveys over the past ten years.

You can find the 2019 report at https://www.kimbleapps.com/resources/2019-professional-services-maturity-benchmark-download/

If you want to compare against the 2018 report, you can find that at https://www.kimbleapps.com/resources/professional-services-maturity-benchmark-download/

Differences in AE/AM sales comp

A friend of mine asked about differences in customer acquisition cost (“CAC”) relative to new customer acquisition, upsell, and expansion. When I said there’s loads of material on why expansion CAC is less than new logo CAC with respect to marketing costs, he said what he was really interested in were differences in sales comp plans and their effect on CAC.

We narrowed our conversation down to the two comp plans of Account Executive, a role typically responsible for new customer acquisition, and Account Manager, a role typically responsible for upsell and expansion.

I’ve seen a handful of differences between AE & AM comp. Using an AE comp plan as a starting point, AM roles typically have:

  • 30-50% of AE on-target earnings (OTE)
  • 70-90% of AE quota
  • Less-aggressive OTE split with 60-70% going to base

Then there are different ratios in the sales units – e.g. all the people supporting the different sales roles. The AE:SE ratio may be 2:1 or 3:1 while I’ve seen as high as 8:1 for AMs. AE Managers might have 4-6 AEs while AM Managers may have as many as 8-10 AMs. All of this has a major impact on the cost of doing business (inclusive of CAC).

Behind every great seller is a system

The best salespeople are the best because they use systems and are constantly learning new things to improve those systems.

Many of them don’t even know it until you really dig into their day-to-day and their weekly or monthly activities.

They’ll say it’s all habit.

They aren’t wrong. It’s habit for them.

They’ve simply practiced their own systems so much, or for so long, that it’s second-nature.

If you’re new to the world of sales, I urge you to explore all the systems you can. Your company may have a system that works. Learn it and use it.

At the same time, be a student of other systems.

Here’s one I’ve just started studying. This isn’t a pitch, I don’t sell sales training. Not yet at least.

If selling is rooted in your ability to influence one or more people into believing your products and services will solve their problems, you need to become a student of the systems of influence.

Who are the experts on influence as a system? Playmaker Systems, LLC

Check them out.

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