Embracing New Pricing Models in the Age of Disruption

Matthias Barth

Digital disruption is changing how the professional services industry does business. This includes the restructuring of standard time and materials pricing models.

Established companies have a hard time understanding why this model is a thing of the past. What it all comes down to is that customers have become savvy forward thinkers. They embrace the new digital era and expect service providers to be just as savvy and innovative. New startups entering the game are giving customers what they want. They are disrupting the industry and forcing incumbents to catch up or fall behind.

One way to stay innovative is to restructure outdated time and materials pricing models. While these simple models have worked well in the past, outcome-based models are the new standard. While outcome-based billing is more complicated for service businesses, many are making it work.

Consider how the transportation, legal, and consulting industries are making new models work for them. Digital disruption of the services industry is inevitable. Adapting to new ways of doing business now will signal to customers that you are moving forward and adapting to their needs.

The transportation revolution

No industry is seeing the effects of digital disruption more than transportation. Digital upstarts like Uber and Lyft have upset the taxi business in dramatic ways. This transportation disruption is also affecting car rental and car ownership industries. New models focused on a shared economy are forcing these industries to rethink their strategies.

Zipcar, a car-sharing startup, is changing the way people drive. Rather than targeting the point-to-point, short-term travel industry, Zipcar focuses on lifestyle change. Instead of renting or owning a car, many people are opting for car-sharing options.

Zipcar markets itself as a car ownership alternative. Cars “live” in designated spots throughout the city, in neighborhoods, at airports, and other points. Zipcar members can walk up to any available car, swipe a card, and drive away. They use the car as needed and then return it to its original location. Zipcar’s membership-based pricing model gives customers flexibility and eliminates mileage, gas, or insurance fees. It is an innovative, simple way to get around town without the hassle of going to a rental office. Where car companies once relied on the idea that everyone wants to own a car, Zipcar is changing that model.

The Yelpification of law

Legal firms are also moving away from traditional hourly pricing models. Law firms have become more transparent with their pricing and value due to the disruption of traditional models. New, high-quality competition is driving prices down. The unbundling of legal services is increasing flexibility. Online performance reviews of legal firms are improving quality and customer service.

Firoz Dattu, the founder of AdvanceLaw, calls this “the Yelpification of law.” Price, flexibility, and customer satisfaction are now top concerns for most law firms. These factors forced firms to embrace disruption and create new models to stay relevant.

Lawyers on Demand is proving this by offering outcome-based pricing and flexibility. Rather than paying high costs for full-service firms, clients pay for only what they need. Services adjust up or down to fit customer needs and are project- or outcome-based. High-quality freelance lawyers can work on-site or off-site on specified projects. Rather than charging a traditional hourly rate, total fees are set in advance. Depending on the expertise of the lawyer needed, daily, weekly, or monthly rates are set.

Lawyers on Demand also offers three working models: instant on-call services, managed teams for specialized projects, and on-site services. These models give clients the flexibility to hire lawyers as-needed or long-term. Instead of hourly rates and overhead costs, outcome-based pricing gives clients more control. Prices are competitive, quality is high, and customers maintain control.

Consulting outside the black box

While most consulting firms have held on to the belief that their business models are immune from disruption, this is changing. Consulting performance is difficult for clients to judge in advance. It is hard for them to assign a value to unknown solutions or results. It is also difficult to judge consulting performance after a project is complete.

Consulting operates in a mysterious “black box” where clients cannot see the processes that solve their problems. They have no choice but to accept time and material pricing formats to assess value. The opaque nature of consulting has been successful and allowed firms to maintain control. Since outcomes are harder to pin down, this model is harder to disrupt. Andrew von Nordenflycht, of Simon Fraser University, found that in opaque service industries, “new competitors typically enter the market by emulating incumbents’ business models rather than disrupting them.”

Customers are catching on, however. They realize that they are paying for services they do not need. Clients now want more control, greater speed, and increased responsiveness from consulting firms. Alternative firms, like Business Talent Group, are capitalizing on this and becoming more transparent. They use smaller teams of high-level freelance consultants at reduced prices. These teams price their services in smaller, outcome-based chunks rather than larger, time-based models.

Larger firms, like McKinsey Solutions, are also disrupting traditional models. They are offering proven modular solutions with self-service packages. Pricing is subscription- or license-based. This gives clients access to flexible, efficient, proven solutions without the high cost. Rather than reinventing the wheel, they add to their level of expertise with each client.

Embracing new models

Professional service providers must adapt to the changing digital landscape. These are just a few examples of how traditional service industries are embracing disruption. Some businesses will continue to resist disruption and risk losing customers. As disruption continues, clients will move to companies brave enough to embrace new models at the dawn of the digital age.

To learn more about digital transformation for professional services, click here.


Matthias Barth

About Matthias Barth

Matthias Barth is solution director for Professional Services Industries at SAP. He is responsible for the segment of outsourcing companies (IT, business process outsourcing, managed services, and multiservice providers) and is the global solution owner. In this role, he defines the overall segment strategy, oversees the global business, directs product and solution road maps, and drives go to market activities.