Stop pricing the hour. Price the outcome and its true cost.
The day rate on the contract is the most quoted and least useful number in a services firm. What sets margin is the rate you realise after discounts, ramp and unbilled scope, and the cost of actually serving the work. Price on real cost-to-serve and a small move in price falls almost straight to profit; price on a rate card and you give it away one discount at a time.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
Realisation, not the rate card, sets margin. A firm can quote a strong day rate and collect far less once discounts, non-billable ramp and unbilled scope are counted. Price on true cost-to-serve and protect realisation, and because services carry little variable cost, a one percent gain in realised price moves operating profit by roughly eight.
You quote one number and collect another.
Between the rate card and the bank sit a dozen small leaks: the discount to win the deal, the non-billable ramp while the team learns the client, the hours written off because the estimate was light, the scope that crept and was never re-quoted. Each is defensible on its own. Together they are the difference between a quoted margin and a realised one, and most firms never measure the gap.
| Per billable day | Project A | Project B |
|---|---|---|
| Rate card | €1,200 | €1,200 |
| Win discount | −5% | −14% |
| Non-billable ramp & write-offs | −2% | −12% |
| Unbilled scope | −1% | −8% |
| Realised rate | €1,128 | €792 |
Same rate card, a third of the margin. The fix is not a higher card; it is protecting realisation and pricing the work that erodes it.
Value pricing rests on knowing your cost.
Know the true cost
Cost-to-serve by project and client, including bench, pre-sales and rework. Without it, value pricing is a guess with a confident voice.
Price the outcome
Quote the result and the value it creates, with a cost floor you can defend. The client buys an outcome; you keep the upside of delivering it efficiently.
Protect realisation
Make discounts, scope changes and write-offs visible at the deal desk, so the leaks are decisions, not surprises in the year-end review.
Set minimums
A floor below which an engagement is not worth taking, and a price for the extras that used to be absorbed. Small orders and rush work stop costing you margin.
In a services firm, price is the highest-leverage number you control. One point of realised price is worth roughly eight of operating profit.
Frequently asked questions
- What is rate realisation in IT services?
- Rate realisation is the share of your rate card you actually collect once discounts, non-billable ramp, write-offs and unbilled scope are counted. A firm can quote a healthy day rate and realise far less, and it is realisation, not the rate card, that sets margin.
- How much does a small price change move profit?
- In a services business, price falls almost straight to the bottom line. A one percent improvement in realised price typically moves operating profit by around eight percent, because there is little variable cost to absorb it. Pricing is the highest-leverage number a services firm controls.
- Can you move from time-and-materials to value pricing?
- Yes, but only on evidence. Value pricing rests on knowing the true cost of delivering and serving the work. Once you can see cost-to-serve by project and client, you can price the outcome with a floor you can defend, rather than guessing and hoping the hours land.
Find out what you quote and what you keep.
The Profit Check needs no data upload. It shows where realisation is leaking and what protecting it is worth.
- Duration
- 12 to 15 minutes
- You receive
- Score, 7 dimensions, sector benchmark
- Price
- Free, no email needed
Proof
A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.
Read the case study →Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Lectured alongside Professor Robert S. Kaplan at the CFO conference in Amsterdam (2009).
Call +351 910 313 731
