Ask VeraSage: Menu Pricing and Options

Here's a great question from Micael Golub, CPA, from NP Solutions, Inc. in Riverside, CA:

Hi all. I was having an e-mail chat with Ed Kless and brought up the concept of offering options within the different level scopes of a value priced proposal. I'm thinking about the benefit or detriment of offering add-on (no add-offs) to a value priced proposal. This would be contingent upon an add-on that does not rely on some other process. For example, here's a middle scope but there's something that the client would really like from the high end. Could that be offered as an option? The client is telling us they want it, we can value price it and adjust the scope accordingly. Or is it better to stick with, here's what we're offering based on our perception of your needs?

Thanks for your input.

Michael

Hi Michael,

This is a great question. In fact, it's an advanced question. It illustrates the limitations of the "menu strategy" of pricing—that is, offering options similar to American Express' Green, Gold, and Platinum credit cards.

I don't want to over analyze my answer, Michael, so let me say from an expedience standpoint go ahead and provide the customer what he wants and do a change order.

If you are interested in taking this discussion further (and I know Ed is), then let me explain why I've always had issues with the "menu strategy" for Professional Knowledge Firms (PKF).

I don't think a PKF needs to be as rigid as AMEX is with its credit card options, simply because we can meet with our customers one at a time and give them exactly what they want.

In a perfect world, value selling would be used to craft a completely customized FPA, with everything the customer wanted, no comprises. Don't make a Pepsi customer have a Coke.

I actually only started advocating the menu strategy as a way to ease people into implementing Value Pricing, but it took off, and got good results. I've always been skeptical of it. Here's what I wrote in Professional's Guide to Value Pricing, Sixth Edition:

This type of pricing is not without its disadvantages, however. One issue is that the customers might not perceive the options as tailored to their specific situations, and thus they may feel as if they are being sold an off-the-shelf bundle of goods. They may not want or need many of the items included. Another problem with this type of pricing is that firms offer a fixed price, set in advance—with no customer involvement—for each level of service. This is a serious mistake. Pricing should never take place in a vacuum, and because the customer is the final arbiter of value, one should always establish a price with the input of the customer. Finally, this type of pricing may give the marketing manager and the partners a false sense of security. They will think they they have covered anything that a business owner may want or need, but this is rarely the case. Packaging services into groups is an excellent strategy, but not if doing so is at the expense of creatively customizing services in order to meet any one customer's specific circumstances.

Notwithstanding the problems with the menu method, it carries many advantages. A thoughtfully crafted menu pricing strategy does allow your firm to respond to (or forestall) certain competitive threats. It can enhance your revenues while minimizing your revenue loss due to price fluctuations. This method can also help you manage the cost of delivering services to a particular niche as well as capitalize on marginal price changes for any one customer. One last important advantage is that customers seem to approve of the policy.

AMEX, airlines, and other companies provide menu options because they can't meet with every customer, it's simply too expensive. If they could, they could customize a credit card for every customer. Indeed, this is precisely what Verizon wants to do (with its 30 million customers!), according to its Chief Pricing Officer. Ultimately, pricers like to price one customer at a time, and not put people into buckets. Imagine if your water company could price each ounce depending on exactly what you were using it for? The price would be much higher if you were dehydrated as opposed to washing the dog.

PKF's transaction costs are essentially zero to customize a price, so they shouldn't need to segregate customers into buckets.

That said, if after assessing all of your customer's needs and wants, you still offer options, based on customized bundles, I might see some advantage to that. But it is still a customized option plan, rather than a pre-packaged program.

And if you know the customer well, why wouldn't you be able to price exactly what they want the first time?

None of this is meant to deny that the menu option strategy is highly effective for RFPs.

I know Ed's going to chime in on this as well, and we very well may have a debate. But let me say this: any pricing strategy has both advantages and disadvantages. You must select those where the former outweighs the latter, for each and every customer.

Remember: a pricer always wants to price one customer at a time. It is the dream world, and PKFs can come much closer to it since they meet with customers one at a time, at far less expense than can Verizon. Why wouldn't we want to take advantage of that situation?