Determining the right pricing model for IT professional services in the technology industry is neither simple nor easy. While it’s important to remain competitive and convey the value of your services, these goals must be balanced and aligned with the overall needs of company growth and customer success.

In this post, I’ll explain how you determine what your professional services pricing model and pricing parameters should be, with the help of the TSIA benchmark data.

Pricing Should be Downstream of Business Model

If your Sales organization is saying, “Professional services rates are too high!” you are not alone. Of course, while there are times when professional services rates can be too high, in general, many professional services organizations (PSOs) actually don’t charge enough for their services, or even give it away. Why does this matter? Professional services is “dilutive” and “just a sales enabler” anyway, right?

How much of a 'business' should your professional services organization be so that it is best positioned to help drive product growth, customer adoption, account expansion, renewal, and customer value and success in general?

There are many factors that can impact professional services pricing, including geography, role, level, and delivery type. But ultimately, the real question in play is as old as the tech industry itself: how much of a “business” should your professional services organization be so that it is best positioned to help drive product growth, customer adoption, account expansion, renewal, and customer value and success in general?

How Much of a Business Should Professional Services Be?

The approach you take to pricing professional services depends on how much you need it to resemble a business, at least partially. The ends of this continuum are depicted in the graphic below.

A business must price its wares in such a way that there’s enough money to pay for costs and investments while also leaving some level of margin. That is, a proper business is profitable by design with a pricing model that aligns to that principle. On the other hand, if the professional services activity isn’t expected to be profitable overall—in other words, not a business—pricing is another matter entirely.

In short, pricing should be determined based on your professional services charter, strategy, and financial model, and set within the context of industry-validated pricing benchmarks and parameters.

In practice, professional services pricing can and does just “happen” in the absence of systematic, deliberate analysis, modeling, data, etc. But that’s not the way a business should operate. Pricing should be the rational outcome of a process of vertical and horizontal alignment around the company’s professional services objectives, including a clear idea of the target financial model for professional services and solid data about what the market will bear.

Addressing the “Money” Questions About Professional Services Pricing

As a professional services leader, you know that price is a fundamental driver of financial performance. But sometimes you may only be able to gather incomplete pricing information from competitors, partners, Sales teams and the like. Many lack formal pricing processes or a regular pricing review cadence.

When you have no reliable set of pricing benchmarks to reference, it’s no wonder you might have trouble getting an accurate view of what the proper pricing bumpers are, let alone what programs or processes you need to have in place to manage price performance.  
To address these business challenges, TSIA runs two different studies that collect unmatched, actionable data on pricing practices and performance.

• Annual Professional Services (PS) Market Rates Study: Fielded every year since 2007, the TSIA PS Market Rates Study has collected hundreds of thousands of pricing data points from over 100 unique tech companies. The resulting data set provides detail on listed and as-sold rates by country, position, level, delivery type, as well as a wealth of pricing process and practice benchmarks.
• Core Professional Services (PS) Benchmark Study: The TSIA Core PS Benchmark Study doesn’t have this level of detail as the annual study, but it does collect useful information on global market rates and key pricing and sales related practices. The advantage of this source of pricing related benchmarks is that they readily be seen and analyzed within broader context of professional services profile and performance.

Let’s take a look at some key data points from the TSIA Core Professional Services Benchmark Study to explore answers to the following common Professional Services member questions:

1. Is our current pricing aligned with our professional services charter and within the parameters of performance established by industry benchmarks?
2. Are there table stakes or best practices that could help achieve better pricing performance?
3. Are my PSO’s list rates in line with industry benchmarks?
4. Is the shape of my rate card in line with the industry?
5. Are we discounting too excessively relative to industry benchmarks?
6. Is there an opportunity for us to improve pricing performance?
7. Are there table stakes or best practices that we are not engaging in that could help achieve better pricing performance?

One way to wrestle the first question to the ground is to compare the as-sold average blended rate performance of high-margin PSOs with lower-margin PSOs. In our benchmark, we track a group of professional services organizations that we call “Margin Pacesetters.” These comprise the top 15% of the benchmark sample as defined by PS net operating income.

So, how do professional services pricing rates benchmarks compare between the most highly profitable PSOs and the rest?

It should surprise exactly no one that professional services profitability is strongly correlated with market rates. But taking this basic, intuitive correlation as a starting point, you end up with some pretty useful guidance:

• The 25^th percentile result for the rest and the 75^th percentile result arguably establish the “in-nature” rate bumpers: $149 to $250. Your result can certainly land outside of this range, but you can be confident that this would be off the edge of the map.
• If your professional services charter emphasizes maximizing professional services profitability, your acceptable range is much higher than if it doesn’t: $149 to $203 versus $196 to $250.
• To drive such margin performance, your rates have to be 20% to 30% higher than the rest of the industry and the lower bumper for you is actually 32% higher ($196 vs. $149).

How do the Margin Pacesetters execute in such a way to consistently drive these dramatically higher rate outcomes? Based, again, on the TSIA Core PS Benchmark Study, here’s a selection of things we know about this:

Margin Pacesetters are:

• 3x LESS likely to set a maximum discount of higher than 20% off of list
• 2x LESS likely to have no maximum discount policy in place at all
• 50% MORE likely to set professional services minimums for product sales reps
• 50% MORE likely to have a sales methodology that includes the management of professional services opportunities
• 25% MORE likely to compensate consultants based on billable utilization attainment

This is just to name a few of the numerous, substantial differences between how the Margin Pacesetters behave and how everyone else does.

In short, driving higher market rates and looking and acting like a business (not a non-profit) exist in a virtuous, self-reinforcing cycle. This also means that if you’re more to the left of the “professional services as a business” continuum, your rate bumpers are demonstrably lower and that you can get away with, for example, discounting or sales practices that are more lax. Either way, you align your business, you are, well, aligned. And aligned somehow is always better than not being aligned at all.