Conceptualisation of the consultancy pricing paradox

Structural SurveyEmerald Article: Conceptualisation of the consultancy pricing paradoxDe-Graft Owusu-Manu, Edward Badu, David J. Edwards, Michael Adesi, Gary D. Holt

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To cite this document: De-Graft Owusu-Manu, Edward Badu, David J. Edwards, Michael Adesi, Gary D. Holt, (2012),"Conceptualisation of the consultancy pricing paradox", Structural Survey, Vol. 30 Iss: 4 pp. 357 - 378

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Conceptualisation of theconsultancy pricing paradox

De-Graft Owusu-Manu and Edward BaduDepartment of Building Technology,

Kwame Nkrumah University of Science and Technology, Kumasi, Ghana

David J. EdwardsCentre for Business, Innovation and Enterprise,

Birmingham City Business School, Birmingham, UK

Michael AdesiTraining Innovations and Technology Transfer Institute,

Kumasi, Ghana, and

Gary D. HoltCentre for Business, Innovation and Enterprise,

Birmingham City Business School, Birmingham, UK

Abstract

Purpose – Despite widespread demand for consultants and especially within the surveyingprofession, driving forces of service/pricing/quality are not fully understood and have receivedminimal research attention. The purpose of this paper is to review contemporary knowledge in thisfield, highlighting en route the dilemmas of the consultancy pricing paradox.Design/methodology/approach – Methodology is of axiological, philosophical tradition –induction and inference, generalized concepts and theories. A critique of extant literature underpinsa theoretical pricing problem framework, a future research agenda, and a model of the pricingparadox.Findings – The study elucidates paradoxical aspects regarding value perceptions, objectives,strategies, cost recovery, competition and systematic processes. It conceptually models the dilemmaof service pricing and suggests a research agenda based on process and value, nature of service,competence and branding.Research limitations/implications – The formalisation of the paradox and development of theconceptual model opens opportunities for a new research agenda in the future, which is highlighted aspart of the study.Practical implications – Advancement of theory will impact pricing paradigms.Originality/value – The paper presents a novel conceptualisation of the subject.

Keywords Surveying, Consultants, Fees, Pricing policy, Value, Quality, Research.

Paper type Research paper

IntroductionArthur D. Little established the first consulting firm in the USA many decades ago(Niewien and Richter, 2004) and since then, the consulting sector has developedsignificantly (Sultana, 2009). Consultants have become critical in the diagnosis,advising, formulation and implementation of policies that can affect the affairs ofcompanies, global organizations and even nations. Resultantly, functions dealing witheconomies, industries, education, health and technology transfer, have all benefitted(Michielse and Thuronyi, 2009).

Greiner and Metzger (1983) and Naarmala and Tuomi (2006) defined consultingas an advisory service provided by qualified persons who act objectively to help

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Structural SurveyVol. 30 No. 4, 2012

pp. 357-378r Emerald Group Publishing Limited

0263-080XDOI 10.1108/02630801211256706

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The consultancypricing paradox

identify/analyse problems and assist in the implementation of solutions. Consultingservices are diverse and may comprise: feasibility, environmental studies; projectplanning; quality, construction or cost management; forensic services; researchand development; or tender preparation (list not definitive) (The World Bank, 2002;ACENZ, 2004). Some advancements in the sector have come from research, a notableexample being the model of consultation proffered by Schein (1990). Otherdevelopments have emphasized that consultants engage with clients (Nees andGreiner, 1985) to strive for relationship optimization (Appelbaum and Steed, 2003).However, problems persist which centre around the sector’s lack of a generic pricingframework. Parties can disagree on appropriate pricing modalities; clients often feelthat consultants overprice their services, while consultants sometimes feel they areunder-pricing to the detriment of their business.

To address these issues, the objectives of this research are to: synthesize knowledgeregarding the dilemma of service pricing; present a theoretical framework explaining therudiments of consultancy pricing and proffer a future research agenda. The researchcentres on a literature review that considered concepts of price and value, critical factorsaffecting pricing and the characteristics of the consultancy sector. Methodologically,the study is of axiological philosophy, where induction, dwelling wholly on thegeneralization and synthesis of extant research provides the basis of the framework.

Critical factors influencing pricingKiesling and Hansen (1993) suggested that products and services (hereafter “products”for brevity) must be priced in accordance with a cost structure; taking cognizance of(both fixed and variable) costs, market, and distribution costs. Market demand has amajor effect on pricing and poor demand assessment can lead to poor priceperformance (DeLozier and Woodside, 1976). Adner (2004) argued that demand-oriented pricing is superior to cost-oriented pricing, pointing out that in the lattera predetermined amount is added to cost while for the demand approach, customerwillingness (to pay) takes precedence. Globalization has increased business frontiers,which in turn has exacerbated competition. Falch (2004) reminded us that price will beinfluenced by competitors’ prices. Experience also plays a part insofar as historicalcost data will influence current pricing (Zizzo and Oswald, 2001). The OECD (2008)meanwhile identified that jurisdiction can affect pricing in terms of authority, industryaverages and legal or regulatory standards (WBI, 2003). Location can influence pricetoo, a “prime” location for a particular product can usually mean charging more for it(Tsiotsou, 2005). Learning how customers feel about products or services helpsestablish a price range and can relate to how they perceive a business and its goods(Luk, 2009). Ideally, prices should motivate customers, be competitive and profitablewhile accounting for the risks of production (Patsula, 2007). Key factors that affectpricing comprise: demand factors (client expectation and value perceptions); costfactors (envisaged and present); competitive factors (barriers to entry and competitors’strategy); trade factors (market traditions, industry standards and industry averages);legal factors (such as taxation and legislation); strategic factors (pricing objectives/market structure); and geographic factors (of the business and its customers). Thesefactors are conceptualized in Figure 1.

The rudiments of consultancy services pricingInfluences of consultancy pricing include the above, along with objectivity, flexibility,discounts and allowances (Perreault and McCarthy, 2002). ACENZ (2004) asserted that

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consultancy prices should reward the consultant’s qualifications, training, skill andexperience, in addition to allowance for risk and reasonable profit. The Ministry ofFinance (2009) opined that breakdown of consultancy fees should demonstrate basicsalary; social charges of non-monetary nature (e.g. sick leave, pension, social security);overheads not charged directly to the assignment; and fee or profit. The latter may beexpressed as a percentage, normally within the range 5-20 per cent depending onnature and duration of services, level of specialization, and risk. Clients often negotiatesome cost elements such as living expenses and travel, with contingencies forassignments of 18 months or more to allow for price escalation (Ministry of Finance, 2009).

Consulting Engineers South Africa (CESA, 2009) opined that pricing of servicesshould conform to guidelines taking account of project requirements; costs involved;and “knowing” the client. The Islamic Development Bank (IDB) suggested thatconsulting remuneration depends on the type of service rendered and degree offlexibility (or control) to be exercised. According to Davidson and Simonetto (2005),price variability is influenced by client negotiating power, timing of the deal, politicalclout and management intervention. The “basic” form of pricing consultancy cannot beoverlooked, thus ACENZ (2004) identified basic fee nomenclature, which is suitablefor small projects and/or where the scope of work cannot be clearly defined. Othersundry charges identified by ACENZ include measurement of works (involvingcharges for the preparation of bills of quantities) in the range of 0.5-1.5 per cent ofthe value of works, and charges for valuations of insurance and preparation ofcertificates. The World Bank (2002) stipulates that consultancy fees shouldinclude staff remuneration; travel; mobilization/demobilization; staff allowances;

Competition

Demand

> Expectation

> Value

> Experience

Price

Cost

Regulatory

> Anticipated/ present cost

> Profit/ risk

> Taxation

> Restriction

> Legislation

Location

TradeStrategic

> Traditions > Price objectives

> Market structure> Industry standards

> Manufacture

> Market

> Clients

> Entry barriers

> Competion objectives

Figure 1.Conceptualisation of

pricing factors

359


communication; report production; office rent, supplies, equipment and insurance;survey and training programmes; taxes; and contingencies.

Davidson and Simonetto (2005) opined that pricing has been revolutionized by software,for setting, optimizing and enforcing – and that the best tools have an integrated view ofcustomers along with full historical reporting facilities. Software tools need models tooperate, thus Sheedy et al. (2010) identified models that consultants currently use including:time –and expense (charge per unit of time plus expenses), fixed price (flat fee), risk/reward(includes a bonus for key achievements or penalty for missing milestones) and results-based (paid upon meeting agreed targets). Time and expense is best where the scope of theassignment is ill defined; fixed price where the scope is clearly defined; and for projects thatfrequently require the services of several consultants, a hybrid is appropriate (APEGGA,2005). Figure 2 graphically conceptualizes the pricing rudiments discussed above.

Consultancy price

Add risk and profit

Staff allowance: Out-of-pocket expenses

Office: Rent; insurance; equipment and supplies

Reporting: Translation and printing

Communication: International calls; local calls; internetservices; teleconferncing

Travel: Local fares; number/ types of vehicles; maintenance;revenue costs

Surveys and training: Topography; cartography; subsurface investigations;satellite imaging; traininig programmes

Mobilization/Demobilization: Hotel cost; cost for shipping; transportation

Taxes and duties: VAT; levies; duties

Contingencies: Physical:10–15%; price: inflation trend

Staff remuneration: Professional staff; supporting staff; experience;qualifications; location; risk; difficulty of assignment

Figure 2.Rudiments of pricingconsultancy services

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Theoretical perspectives on pricing objectivesPricing perspectives are economic such as demand, cost and competition; wheredemand sets the ceiling, cost sets the floor and competition determines where on thiscontinuum the price falls. Zeithaml (1988) demonstrated pricing within intrinsic andextrinsic attributes of consumers in their perception of quality and value; while Shaw(1992) focused on the strategic, marketing management and managerial perspectives.Tellis (1986) opined that consumers differ with respect to information costs (e.g. time,effort, search costs), price sensitivities, and transaction costs (e.g. obtaining funds,uncertainty and switching costs). According to Roth (2001), a thorough understandingof product attributes and the market is key to pragmatic pricing and further, thatpricing objectives must synergize with business goals. Oxenfeldt (1983) assertedthat pricing objectives are directions for action (see also Tzokas et al., 2000a, b). Otherobjectives demonstrated in the literature include partial cost recovery, profit marginmaximization, profit maximization, revenue maximization, quality leadership, quantitymaximization, status quo and survival (cf. Channon, 1986; Cannon and Morgan, 1990;Bonnici, 1991; Payne, 1993; Palmer, 1994; Bateson, 1995; Woodruff, 1995; Drake andLlewellyn, 1995; Ansari et al., 1996; Lovelock, 1996; Meidan, 1996; Zeithaml and Bitner,1996; Hoffman and Bateson, 1997; Langeard, 2000).

Avlonitis and Indounas (2005) linked pricing/business objectives with achievement.For example: market share increase leads to cost coverage, return on investmentprovides return on asset and price differentiation achieves service quality leadership(list not definitive). They also revealed that quantitative pricing objectives arerelated to profit, sales, market share and cost recovery; and qualitative objectivesare related to matters such as relationship with customers, long-term survival of thefirm and achievement of social goals. Objectives can also endeavour to maximizeresults (profits and sales) vis-a-vis those that pursue satisfactory results (Avlonitisand Indounas (2005)). Several authors have criticized maximization as beingunachievable (cf. Boone and Kurtz, 1980; Bagozzi et al., 1998; Keil et al., 2001).

With reference to time, Avlonitis and Indounas (2005) identified that pricingobjectives may be either short- (p12 months) or long term. Moreover, Boone and Kurtz(1980), Bagozzi et al. (1998) and Keil et al. (2001) all suggested that emphasis onshort-term objectives may risk attainment of long term ones. Schlissel (1977) confirmedthat the most popular objective is profit maximization, with achievement ofsatisfactory profit next most popular. Morris and Fuller (1989) investigated 71accounting companies and found that achievement of satisfactory short-term profitwas the most popular pricing objective; while an investigation of pricing practicesamong 45 building societies (Meidan and Chin, 1995) concluded that 480 per centranked cost objectives most important.

The dilemma: under-pricing and overpricing syndromesMa (2005) pointed out that under-pricing means a product being positioned belowintrinsic (market) value. Loughran et al. (1994) in their study of 25 countries foundunder-pricing a global phenomenon. The theory of information asymmetry offersone explanation to under-pricing (Certo et al., 2001). This involves pricing based onconsumers’ lack of information about product value and is used to induce them (Rock,1986). Biener (2011) suggested under-pricing can occur when a monopolistic firmreduces a product price for which (competitive) substitutes exist and that propensityto under-price means a seller is ready to absorb losses and may become a hazard tocompetitors (Baron, 1982). Nonetheless, under-pricing may be used as a vehicle to

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acquire reputation (Neus and Walz, 2002). Paradoxically, some suggest it is also a signof quality (Grinblatt and Hwang, 1989; Allen and Faulhaber, 1989), but the assertionsthat it is a means of compensating for limited experience of new entrants to a market(Neus and Walz, 2002) and is employed for price discrimination by a monopolist(Biener, 2011), seem easier to interpret. Under-pricing may also be directed towardsnear-term goals such as achieving media attention. That is, “signalling effects” of suchstrategy can be directed at the financial press and general media, to attempt valuablepublicity for a company (Biener, 2011).

Empirical evidence suggests theoretical development of overpricing throughthe decades. For instance, Wang et al. (1992) found overpricing in a sample of real estateinvestment trusts; Datta et al. (1997) found overpricing of investment gradebonds; while Cooper et al. (1998) and Hand (2000) documented irrational overpricingof “internet” shares. Research has shown that an initial public offering (IPO)may be overpriced in equilibrium to its expected market price and that IPOs could beboth overvalued and under-priced simultaneously (Purnanandam and Swamination,2004).

The under-pricing/overpricing syndrome has placed consultancy providers in adilemma. Gao (2010) contains empirical evidence that under-pricing may not reflecta fair value for services, while Ritter (1991) and Daniel (2002) support this by empiricaldemonstration. Gao (2010) confirmed the potential for financial losses from under-pricing while Nelson and Economy (1997), opined that mispricing can cause thefailure of consultants. According to Harshaw (2008) overpricing can result in self-offense when the actual price of a product’s real worth becomes later known;while under-pricing fails to achieve income commensurate with the consultant’sservices. AWA (2010) confirmed the dilemma of mispricing insofar as under-pricingleads to over consumption and vice-versa while overpricing services producesextraordinary profits and abuses a monopoly. In a perfect, free market, overpricing willlead to loss of trade and profit to realistic priced products. Skitmore and Smyth (2006)described pricing as an optimization problem, while Gordon et al. (1980) confirmed:

Setting a price too high can indirectly reduce profits via a reduction in the firm’s market share,while setting a price too low can directly reduce a firm’s profits through low profit margin.

Mispricing holds implications for delivery of quality services. According to Sappington(2003), empirical service quality research has focused on the speed and reliabilitywith which new service is installed, the number of problems reported by customers,the speed with which problems are resolved, and overall customer satisfaction.Sappington (2003) further asserted that competition is an important determinant ofservice quality that varies with time and geographical location (see also Clements,2001). Iwarere (2010) suggested that increased global competition calls for improvedservice quality and cost reductions – to achieve both customer satisfaction andenhanced organizational value. Iwarere and Fakokunde (2011) later made the case thatproduct quality has considerable linkage to profit such that improved quality resultsin both production and product reliability, increased productivity lowers cost andincreased product reliability leads to a higher price. Service quality inures to servicereliability thereby underpinning realistic pricing whereas under-pricing leads to underrecovery and the inability of service providers to research, innovate and improvequality. Consequently, product pricing is an aspect of profit planning – qualityinfluences price and so a balancing act is called for to achieve “price attractiveness” fornew customers while maintaining present ones (Iwarere and Fakokunde (2011)).

362

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Qualitatively, consumers will normally acknowledge “higher prices” rather than“overpricing” because they are unaware of a product’s price ceiling. The “recognized”medium of overpricing acknowledgement is via regulators like statutory governmentswho intervene with price control; this being more typical in a socialist economyand much less so in a free market economy where economic forces determine priceequilibrium. Overpricing remains under-researched so questions remain such as:“When is a service adjudged to be overpriced? “What is the acceptable price of aproduct? And, “Is there an empirical limit to service price?”

Strategies to achieve service pricing qualityMany factors must be considered to develop optimal pricing strategy (Parece et al.,2002). Strategy decisions will impact geographic, product, and/or customer segmentsand determine opportunities for pricing adjustments (Kutsuna et al., 2006). Strategiesaffect not only revenue and profitability streams, but also volumes and continuation(or severance of) client relationships (Forman and Hunt, 2005). Strategyimplementation and resulting impact on the customer relationships calls for periodicvaluation analyses ( Jain et al., 2008) – helping understand the impact of pricingdecisions (Bitran et al., 2008). It facilitates a proactive approach in managing valuecreation (Mario, 2007) while providing insights regarding the timing/pace of strategyand highlighting opportunities to reprioritize (Jain et al., 2008). Different strategiesmight be employed over time to fit with changes to market conditions or product lifecycle (Roth, 2007). Some pricing strategies are as follows.

Competitive pricing is based on competitors’ prices and can be useful fordifferentiation (Shapiro, 1996). It can help either survival or maintain a status quo(Sahir, 2008). Good, better, best pricing relates price to production input (Roth, 2007)where the product is offered in different formats; the price of each rising abovethat of the previous (HSBC, 2010). Loss leader pricing “lures” customers with lowprice in the expectation that they will subsequently make additional purchases withlarger margins (Schoonveld and Timmerberg, 2005). It should be paired with eitherquantity maximization or partial cost recovery objectives (Schoonveld andTimmerberg, 2005). Multiple pricing seeks to maximize sales (DeGraba, 2003) andworks well with profit- and quantity-maximization objectives (Anderson and Simester,2008). Optional pricing has revenue maximization as its objective (Winter andSundqvist, 2009), while penetration pricing seeks to gain new markets and enticecustomers (Kowalski, 2006). Premium pricing is employed when a product is unique(CIM, 2004), its advantage being a larger margin to make up for the small number ofitems sold (Young, 2009). Product bundle pricing groups several products together andis useful for complementary overstock (Roth, 2007) – it can be matched with revenue orquantity maximization objectives (Reynolds, 2005). Product line pricing is optimalwhen products complement each other and can be packaged to reflect increased value(European Commission, 2000; Jensen, 2008). Skim pricing is similar to premiumpricing, but the price will have to be lowered as competitors enter the market (Hart andMilstein, 2003; Holcombe, 2009). Table I summarizes these pricing strategies, theirunderlying philosophies and trade-offs.

Overcoming shortcomings through systematic pricingThere are shortcomings inherent in the pricing strategies of service providers. Breidertet al. (2006) pointed out that in spite of advances in pricing research; companies oftenmake pricing decisions without a clear understanding of their customers or, their

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Table I.Summary of pricingstrategies

364

SS30,4

competition. Other studies have demonstrated that between only 8 and 15 per cent ofcompanies develop pricing strategies based on buyer response behaviour (Monroe andCox, 2001). According to Nagle and Holden (1995), pricing shortcomings can occurwhere marketing mix and/or complex dimensions of cost are not fully understood.Other shortcomings include not taking account of changes in market conditions,competitor behaviour or capacity levels (Skitmore and Smyth, 2006). A lack of reliablepricing models also presents a challenge (Hoffman et al., 2002), as reinforced byHogan and Nagle (2005) who confirmed shortcomings from “resorting” to ad hocmethods. Many agree on the need to estimate customers’ WTP as a panacea to pricingchallenges (see Nagle and Holden, 2002; Monroe, 2003). Price-setters should be awarethat low prices do not always stimulate sales (Skitmore and Smyth, 2006) and thatempirical methods of price determination – to determine what will stimulate sales –may be useful (Olshavsky et al., 1995; Smyth et al., 2006). Noteworthy here, Raftery(1991) confirmed that price models can be based on loose concepts anddo not necessarily require “mathematical precision”.

According to BHP (2011) price setting must accord with product value, costs ofproduction and the price that competitors charge. It is important to communicatethe value and features of products to prospective customers through effective valuecommunications – especially regarding how the product will satisfy unmet customerneed:

[y] as the doctor is trained to look beyond a patient’s symptoms to diagnose underlyingdiseases, it is imperative that price-setters look beyond the pricing symptoms to diagnose theflaws in pricing strategies (Hogan and Nagle, 2005).

Empirical studies suggest that systematic pricing must conform to marketingparadigms, especially, marketing mix (Borden, 1964) and relationship marketing(Berry, 1995). The former encompasses product, place, promotion and price (McCarthy,1964); while relationship marketing encourages business-to-business relationships(Gronroos, 2000; Gummesson, 2001; Ford et al., 2003). Prices cannot be set so high asto damage relationships but must generate profit (Ford et al., 2003) and to this end,Gronroos (2000) emphasized four approaches: service perspective (valuingrelationships), core perspective (core solutions with excellence), price perspective(related to marketing mix) and image perspective (perceived value in which pricesare set considerably above costs). Skitmore and Smyth (2006) meanwhile suggestedthat relationships are critical to “add value or to be of intrinsic value”. Conceptually,relationship marketing is suitable for consultancy services pricing because services arerendered at business-to-business levels and represent “one-off products”.

Towards conceptualization of price and valueRamirez (1999) pointed out that “value” earned its measurable connotation in thethirteenth century, to mean what something is worth. By the sixteenth century it wasassociated with a measurable unit and in the seventeenth century, became known asthe price of something. The idea of value being subjective arrived in the nineteenthcentury and its contemporary meaning is accepted as a personal judgement (Ramirez(1999)). Research has targeted the concept; leading to various definitions. Rhett et al.(2006) suggested it is calculated with reference to perceived quality of results balancedagainst costs. Holbrook (1994) opined that value can be characterized along acontinuum anchored by two extremes (subjectivism and objectivism). For the former,it is regarded as “beauty” – an entirely individual assessment (Perry, 1954; Moore,

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1957; Osborne, 1933). In consonance with this is the belief that value representsa personal preference compared to similar objects (Holbrook, 1994). In contrast,several empirical studies have asserted that objectivism of value is intrinsic or innateto an object and therefore exists as a priori to the process of valuation (Osborne, 1933;Lewis, 1946; Hartman, 1967; Frondizi, 1971; Adler, 1981). According to Ulaga (2001),value is a ratio of benefits versus burdens while Flint et al. (1997) suggested it isa trade-off between benefits and sacrifice. According to Porter (1985) it is simply theamount buyers are willing to pay and in monetary terms, value has been expressed asthe functionality of a product in a given customer application (Anderson et al., 1993;Anderson and Narus, 1998, 1999). Researchers argue that perceived value is thecustomer’s overall assessment of the utility of a product (Zeithaml, 1988). Similarly,Rhett et al. (2006) opined that value is a subjective judgement, while Forsstrom pointedout that it does not include the idea of a measurable unit so much as it is a perception ofwhat can be gained when weighted towards what is given away. Holbrook (1994) statedthat value can be classified into four quadrants as intrinsic/extrinsic sources on oneaxis and the active/reactive sources on the other.

Proponents believe the consumer may experience this return as economic utility(the perception of affordable quality) (Thaler, 1985; Yadav and Monroe, 1993) andutility in turn will be derived from the efficiency of an exchange encounter (Zeithaml,1988; Holbrook, 1994). Within the literature, reactive extrinsic sources of valueencompass service excellence (Holbrook, 1994). Oliver (1999) suggested this dimensionof value serves as an ideal against which quality judgements are formed. Value derivedfrom perceived service excellence reflects generalized consumer appreciation of aservice provider to deliver through expertise and performance Zeithaml (1988); whilereactive sources of intrinsic value largely border on aesthetics (Olson, 1981; Veryzer,1993).

In business studies, value constructs have been variously used. For instance, Porter(1985) used the value chain framework in which economic implications of differentactivities were studied at the firm level. Similarly, Schumpeter (1934) addressedvalue creation through technology change and innovation while Barney (1991) used theconcept of value in a resource-based view of the firm. Lorenzoni and Lipparini (1999)used it in governance mechanisms for value creation; (Gulati et al., 2000) used theconcept in studying the importance of resources for value creation; and Moller andTorronen (2003) pointed out that a value system can be used to create strategicnetworks. There are two broad divisions in conceptualizing value, first, the substantivevalue dealing with reduced costs, increased revenues, enhanced transaction efficiency,improved coordination, profit, volume and economies of scale. Second, there iscognitive value that deals with new products through innovation, competence andsocial rewards.

It is equally important to conceptualize price which according to Noble and Gruca(1999) is quantification of value defined by where the supply and demand curves meetand exchange occurs. Dodds et al. (1991) asserted that price is not only a monetarysacrifice but also a signal of product quality; it can confer an aura of prestige and thushigher price signals higher quality. According to Harrison et al. (2002) pricing is aninteractive matter and there are several approaches in this respect, while Hinterhuber(2008) identified several, namely, cost-based, cost-plus, target, breakeven, targetcontribution margin, competition-based, penetration, price skimming, average market,customer-based, perceived-value, performance and customers’ WTP. Empiricalstudies have demonstrated how each may be appropriate to a particular condition.

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For instance cost-oriented pricing is suitable for insurance transactions (Erdonmez andNutzenadel, 2006); while for industrial equipment, competition-based pricing is used(Buschken, 2001) and is equally suited to construction projects (Mochtar and Arditi,2001) and, industrial manufacturers (Forman and Lancioni, 2002). Researchersempirically interpret value as a trade-off between quality and price (Dodds andMonroe, 1985; Yadav and Monroe, 1993) and some have strongly asserted that priceextends far beyond money to include investment of time and effort (Zeithaml, 1988;Bolton and Drew, 1991; Babin et al., 1994). Table II summarizes the conceptualdefinitions of price and value identified in this review.

A future research agendaThe following discusses research paradoxes as far as pricing of services is concernedand other issues pertinent to this study. Research gaps are highlighted and suggestedfuture areas for exploration are given.

Price and valueNumerous works have targeted value but its measurement is less researched.Hanemann (2005) argued that economic value is different from price and that itemswith no market price can still have an economic value. Hanemann agrees with Hayek(2008), that price level and production volume are correlated and demand and supplydetermine market or “fundamental price”. The measure of value is what an item isworth to an individual not the cost of acquiring it so if consulting services are valuableto clients, they will be ready to pay good prices for them. The challenge is making

Item Definition Literature sources

Price Is where demand and supply meet and exchange takes placeIs a quantification of value

Noble and Gruca (1999)

Is a signal of quality Dodds et al. (1991)Is only an aspect of the economic outcome of a relationship Harrison et al. (2002)

Value Is what something is worthIs the price for somethingIs something based on personal judgement

Ramirez (1999)

Is an equation calculated with reference to the perceivedquality of results

Rhett et al. (2006)

Is regarded as “beauty” Moore (1957), Osborne(1993)

Represents personal preference formed as a consequenceof interaction between a subject and an object with referenceto other comparable objects

Holbrook (1994)

Is intrinsic or innate to an object and therefore exists as apriori to the process of valuation

Lewis (1946), Hartman(1967), Frondizi (1971)

Is a ratio of benefits versus burdens endured by thecustomer

Ulaga (2001)

Is a trade-off between benefits and sacrifice Flint et al. (1997)Is the amount buyers are willing to pay Porter (1985)Is the total functionality or performance of a productoffering in a given application

Anderson et al. (1993),Anderson and Narus (1998)

Is the primary motivation for entering into business ormarketing relationships

Holbrook (1994), Babinet al. (1994), Peterson (1995)

Table II.Price and value

constructs

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consulting services valuable, attracting a realistic price and demonstrating that theconcept of economic value can be applied “to (such) non-market” intangible items.According to Hanemann (2005), economic valuation is the monetary valuationof products that people are concerned about and non-market valuation refersto the valuation of items that are not sold in the market. Drawing on this, futureresearch on the measurement of value in relation to consultant services could helpascertain the willingness of clients to accept what is on offer. It is therefore,hypothesized that:

H1. The worth of a consultant service is significantly dependent on: (H1a) itsmeasure of economic value and (H1b) the ability of consultants to demonstratepotential value of their services by realistic pricing.

Nature of serviceDe Chernatony and McDonald (1998) argued that notwithstanding research on productmarketing, the classification of services requires research because many of theemergent types, do not conveniently fit with previous designations. Kotler (1991)categorized four services varying from “pure product” to “pure service” while Payne(1993) identified the continuum of tangible-intangible and demonstrated that an offerof services is highly intangible. For instance, computer hardware and programmesare highly tangible commodities but the service elements of user training andtroubleshooting are intangible. Vandermerwe and Rada (1988) coined the term“servitisation” to represent a combination of training, consultancy, service contracts,troubleshooting, financing, delivery, guarantees, stockholding and computer links.

One notable theoretical development is the services classification scheme (Bowen,1990; Gronroos, 1990) which yielded strategic insights in response to questions: what isthe nature of the “service” act?, What style of relationship does the service organizationhave with its customers?, How much room is there for customization and judgement?and What is the nature of supply and demand for the service? It is imperative toaccurately classify consultant services in order to inform consultancy pricing so anempirical study, especially of emerging consultancy services, will be timely. It ishypothesized:

H2. The classification of services is significantly dependent on the nature of: (H2a)demand for emerging services and (H2b) supply of those services.

CompetenceCompetence in service delivery is at the core of effective pricing. Djaloeis et al. (2010)pointed out that consultant competence is paramount to quality service delivery. Theyfurther argued the need for professional competence to remain at the “cutting edge”.A theoretical competence model was proposed considering fields of activity, areas ofcompetence and levels of reflection. The competence of the consultant will inure to thebenefit of both parties of the (consultancy) contract in the sense that there will beinnovation, knowledge transfer and fairness in its discharge. Competence aids realisticservice pricing and research to develop a framework for measuring competence wouldbe of benefit, in the context of:

H3. The competence of consultants is significantly dependent on their ability to(H3a) transfer knowledge, (H3b) price innovatively, (H3c) successfullyimplement solutions and (H3d) innovatively manage the assignment.

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Service brandingA brand creates a relationship personified by organizational name – it is important inconsultancy in influencing price levels. De Chernatony and McDonald (1998)stated that a successful brand is an identifiable product that the buyer perceivesrelevant and value adding. Successful brands conform to criteria including aname, logo or design which identifies the organization with a product. Just likeany asset, a successful brand will depreciate without further investment. A brandcreates perception in the mindset of consumers, so perceptions must be consistent,positive and shared. To improve brand strength means to constantly shape theseperceptions so that consumers remain positive, but this can be complex. For instance,in the financial sector, few brands have created complete consumer perception (Denby,1995).

De Chernatony and McDonald (1998) asserted that the “deregulation” of manypublic corporations around the world, especially in the UK and other Europeancountries, has led to the creation of brands that “edge out” competitors. Service-basedbrands (vis-a-vis product based) involve multiplicity of interface with the consumer(Shostak, 1977). Levy (1996) contends that application of product-based brandingprinciples to service-based provision without adaptation is unlikely to be effective. It iscontended here, that an empirical basis for the adaptation of product-based branding toservice-based branding will be a novel approach. Hence:

H4. The success of service branding is significantly dependent on: (H4a) name,(H4b) logo and (H4c) relevant value adding.

H5. The strength of service branding is significantly dependent on the customerperception of services offered.

Summary of outcomesIn exploration of key issues that affect the pricing of consultancy services, the conceptsof price and value have been thoroughly examined and important issues underlinedand conceptual explanations have been summarized (cf. Table I). Various forms ofvalue have been identified: intrinsic, extrinsic, substantive, cognitive and monetary.Perceived value is critical to successful pricing.

Approaches to pricing and their interrelationship with supply and demandwere explored and fundamental pricing objectives are cost recovery and profitmaximization. Pricing objectives have been categorized as those that seekmaximization or, satisfaction. Under-pricing and overpricing philosophies wereexamined and found key in that they can edge out the consultant in a free market.Innovative ways of overcoming the shortcomings of these syndromes consist of theestimation of WTP, use of empirical methods of price determination and employmentof realistic methods to determine price stimulants.

The rudiments of consultancy services pricing were thoroughly examined in whichall the components of consultancy price were identified and synthesized. Resultantlya conceptual framework which considers all the critical issues bordering consultancypricing is shown in Figure 3.

Conclusions and recommendationsThe study confirms need for removal of the consultancy service pricing paradox. Thetheoretical framework proposed can serve as a paradigm for service pricing in future,

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especially, given emerging consultant services. The following are some of the keyfindings relating to the pricing paradox:

. value is key to price determination and they are symbiotically related hencecannot be separated, though one can represent a trade-off with the other andprice is the quantification of value;

. service branding is critical to successful pricing, under-pricing is more prevalentthan overpricing;

. consumers differ as a result of information costs such as effort and search costs,time, price sensitivities and transaction costs such as obtaining funds and thecost of uncertainty;

. the ability to estimate the client’s WTP is a panacea to numerous failings ofpricing strategies; and

. consultant pricing must accord with service value, cost of production andcompetitors, yet ultimately, is an interaction between the consultant and client.

The main hypotheses formulated in signposting a future research agenda centre onthe: worth of consultancy services, classification of consultancy services, competenceof consultants and strength of services branding.

Demand/supply

EquilibriumPricing

syndromes

• Under-pricing• Over-pricing

Pricingapproaches

• Competitive• Good, better, best• Loss leader• Optional, etc.

Pricingobjectives

• Maximization• Satisfaction

Pricingfactors

• Cost• Demand• Location• Regulation

Consultancy

Pricing

• Profitability• Win-win• Price sustainability

• Name• Logo/symbol• Personification

Services branding

• Innovation• Knowledge transfer• Fairness

Competence

• Methods• Models

Price determinants

• Efficiency• Value for money• Optimization• Productivity, etc.

Quality service delivery

• Type and character• Relationships• Retainability• Contract details• Time frame• Servitisation

Nature ofservices

Value• Substantive value• Cognitive value

Figure 3.A conceptual model ofconsultancy servicespricing

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Corresponding authorDavid J. Edwards can be contacted at: [email protected]

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Conceptualisation of the consultancy pricing paradox

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