On the 3rd Wednesday of each month I discuss topics most relevant to clinical research services and technology providers.
Below are 5 pricing myths that have stood out to me recently in my work with service providers and technology companies across the clinical research industry:
Myth #1: Price must = Cost + Target Margin
Price should reflect a combination of the value you offer, competitive awareness, and the cost to provide your service or product. Simply setting your rates and price on a formula [Cost ÷ Target Margin] often leaves money on the table and creates illogical outcomes (e.g., the Project Director rate is lower than the Project Manager).
Myth #2: Price must be supported by labor / effort
Complex services and products involve specialized staff and infrastructure that your clients benefit from having access to (and thus don't have to carry the cost to maintain on their end). The primary benefit is the access and availability, not whether the staff member spent 2.25 hours for that client last month, or the software module was accessed by 13 users. Look for opportunities to charge out more offerings at flat, fixed rates ($X per month, $X per project, etc.) instead of assuming every price has to tie back to how much effort is involved.
Myth #3: Past performance should drive current pricing
Price for the future, not the past. Build your pricing around your new and upcoming processes, expectations, and ambitions. Past performance only reflects how your past systems, processes, people, SOPs, specifications, etc. performed, and should rarely guide how you intend to perform in the future.
Myth #4: "Risk sharing" is riskier than discounting
Clinical research companies are often hardwired to avoid risk at all costs. This mindset leads to head scratching decisions such as offering a 10% project discount when the client actually prefers a risk-reward scheme of the same magnitude. A 10% guaranteed discount is by definition a worse outcome than those alternatives. Don't let the terminology (but it's called RISK sharing!), legal caveats, or perceived lack of control muddy the logic here. Discounting is riskier than "risk sharing.
Myth #5: Small projects need to be charged on a time and materials basis
Over the years I have found that smaller projects are more loosely defined in scope and less frequently go through competitive bidding. Outsourcing people get nervous when they don't have 4 bids to compare against, and service providers mistakenly believe small projects are far easier to manage internally, so the parties agree to a "fair approach" to just charge for hours worked.
Yet one of the great ironies, especially for larger organizations, is that small projects are often as administratively burdensome to manage as larger projects. Compounding the issue is that small projects often have worse timesheet compliance (leading to revenue loss) because staff are focused on the larger projects.
Bottom line- if you have enough information to say the estimated budget is $68,523, then send a fixed price of $68,500 and say 50% is due on contract signature and 50% in 45 days. List enough scope assumptions to justify a conversation if things get out of control. Get the contract signed and make life easier on yourself (and more profitable).
Next Tuesday (27-Sep), I'm hosting a webinar "Beyond Bid to Spec: Winning Price Strategies in Hyper Competitive, RFP Driven Industries". Register here.