Tommy,

Very interesting giving free time versus discounting hours. For long term
engagements, we calculate a special rate for the client based on the
individual’s cost, reduction in BD time, high utilization, etc. The actual
discount varies. We can’t use a simple percentage.

Joe G.

Tommy,

The idea of free time is intriguing - I will have to give that some thought. When we see a need, we have occasionally discounted the rates for longer-term projects, but we don’t do that unless there seems to be a market need for it. This has occurred as an incentive (like you mentioned) or as a reward for customer loyalty, or as a market need due to local economy in order to secure the longer-term project terms (Canadian consultants vs. US consultant, for example, although that gap has been closing recently).

As a rule, though, we don’t discount. We have found it can lead to a spiralling expectation on the part of the customers that is hard to get out of for later projects where it would not make good sense. We would rather that it be part of specific project negotiations and terms, rather than an advertised rate reduction, for this reason.

Doug A.

I think an interesting variation on this topic would be to provide an agreed-upon amount of free time at the end of the project, but make the free time contingent upon the customer being fully paid upon all outstanding invoices within two weeks after the date at which the free time begins.

In this way, the customer receives a nice benefit, and you also receive a nice benefit in not having to chase
down payment for any outstanding invoices.

Becoming totally current on all outstanding invoices does not actually cost the customer anything, and my guess is that this type of arrangement would make your finance folks very happy !

Bill M.

I’ve used the free-time approach as well, and found it to be very successful.  I haven’t used it in this particular context, but instead use it to address budget issues.  When a customer has to meet a certain budget, the pressure is always there to discount in order to fit.  If you instead translate the discounted time they need into an equivalent amount of free time, you’ve established the higher rate for change orders and follow on work.  You both win—they stay within their budget, and you get to charge book rates in the future.

Chuck D.

Couple of options that I have seen, more or less are the same but can be positioned based on the nature of business and customer’s needs.
* tiered rate structure based on the volume.  e.g. 0 - 1000 hrs @ $x/hr; 1001- 2000 hrs @ $y/hr, so on and so forth; where y<x.

* x% of existing hours offered as credit toward future services, so as not to lower client’s billing rate expectations.

* offer x FTE(s) free or at a lower rate, if the volume is over a certain threshold.

Nitin M.,
Director WW PS

Tommy,

We do give discounts for larger work by reducing the rate up to 25% for the largest projects. In our type of services, that largest discount is for projects over $1M with the discounts sliding up in size up to that amount. We also are trying to use offshore labor on larger development projects to offer competitive rates while keeping the margins decent on the US staff.

There are situations where we have to be more competitive on rates for smaller projects due to driving product license sales or various customer satisfaction issues. It is in those cases where offering some ‘free’ days may make sense to preserve the rate. Once a lower rate is offered, it is hard to raise it back up. Offering a customer 2 free days on a 10 day engagement can provide the discount but make it seem as a special case due to product issues they may have encountered rather than lowering the price permanently.

Regards,

Dave M.

Tommy,

We’ve implemented banded pricing for our services and it’s proven to be very successful. The banded pricing was implemented FY2007 and our analysis has shown that it’s proven to be very beneficial for our business.

The pricing model we implemented was as follows:

1-3 weeks — 5% markup (same logic. short engagements hurt our utilization so mark them up to discourage and/or recover the cost)
4-10 weeks — standard price
11-20 weeks — 9% discount off standard price
21+ weeks — 17% discount off standard price

Hope this helps.

Israel

We have a tiered pricing system based on volume.  While the free hours is intriguing I’d be curious as to how free hours are treated for variable priced consultants (meaning that the price/cost of a senior person isn’t equal to that of a junior one). Perhaps this works best in situations where blended rates are the norm.

I do like the idea of rate protection but not sure it would work best for places where tiered skill sets are highly involved.  I have a feeling that highly skilled folks would get cherry picked.

For the record we do as others have suggested… we have rate discounts based on volume.  We’re looking at other strategies but this has worked well for us thus far.

Would welcome suggested reading on pricing strategies for services in the technical field.

Don S.

Thanks Israel.

That’s an interesting approach where you actually mark *up* the very short engagements. Obviously arithmetically that makes no difference, but psychologically I can see that it does.

Ball-park then, what proportion of your engagements would fall into the very short and marked-up region? Is it “really” just acting as a
psychological wall that you don’t ever intend clients to cross?

Tommy K.

Tommy,

I don’t have exact numbers handy but the majority fall into the 4+ weeks range. It’s difficult to say whether that is the nature of our business or the way our rates are structured, as there was too much change in our business at the same time that we restructured our rates. Part of this was also used to justify a price increase to our sales teams (we’re the services arm of a product company.) We raised our rates across the board, and then marked up the 1-3 weeks another 5%. Rather than positioning this as a 15% increase in our rack rate, we positioned it as a 10% increase in our rates across the board, as well as a 5% premium on very short projects. You’d be surprised how effective that messaging was. All in all, both customers and sales reps understood that a 1-3 week project caused additional burden on our team and don’t complain when they have to sell it.

Regards,

Israel

Hi all,

Regarding volume discounts or “free time” at the end of the engagement:

It is critical to understand the accounting practices associates with either of these techniques. Particularly for publicly traded companies, it is important to understand the SOX, VSOE, and revenue recognition policies inflicted upon you - ahem, I mean “necessarily prescribed” by your auditors and finance team.  Here are examples of some of the bad things that could happen:

- Discounting out of the 15% band could ruin your VSOE status or adjust your VSOE rate down in a future period.  If the VSOE rate adjusts down, some of your higher rate engagements may have to renew at a lower rate in the next cycle to keep them in the range.

- Including “free days” at the end will likely be viewed as a “concession” by the financial community.  This would likely cause ratable or deferred revenue recognition of your services revenue and/or any product revenue associated with orders that occurred around the time of the services order. 

- By either heavily discounting or giving freebies, you set an expectation with the customer that you are negotiating on price, not value.  You’ll need to be religious about holding to your discount table to be SURE not to set an expectation that there are exceptions.  You’ll have to control the behavior of the sales force on that one!

So how do we do it?  We do discount in exchange for volume commitments within the 15% VSOE range if possible.  If that is not possible, we take the deal as milestone to exclude it from the VSOE calculation.  In that case, of course, we are sure to keep the services deal separated from product deals by 45 days to keep the milestone consulting being considered multi-element with the product deal.

I suppose this is all a lot easier in a privately held company.

Paul H.

VP, Worldwide Consulting

Thanks Paul.  You’re right that SOP 97-2 impacts the private firm less. That said, if we’re trying to remain GAAP compliant, we do need
to watch those things. Anyway, I checked it out and for pure services (no bundling with software etc), with revenue recognized as the
services are delivered, VSOE is not needed.

In which case the accounting procedure for “free” hours, as I understand it, is to discount the revenue across the length of the
whole project. If the project is cancelled early, thereby meaning the client never gets their discount (which is the whole point of giving
it only at the end), then some discount-cancelling adjustment must be made.

Tommy