Business Development And Credence Goods
Why you should stay away from other industries' best practices.
Following yesterday's post: Consulting services are known by economists as "credence goods", whose quality is difficult or impossible for clients to assess. Even when the success of doing the work is measurable, clients often don't know how much of the service was needed and how much was actually performed.
This information asymmetry is one of the reasons selling consulting is a lot like selling legal or medical advice. They lack the knowledge to make a realistic evaluation, and the cost of acquiring this expertise outweighs the benefits. To buy credence goods, clients always have to trust the provider implicitly.
Now, how does this affect your business development strategy?
During the last months, I've been reviewing the existing literature and relevant publications that look at this. While I expect to summarize key insights in a longer format in the future, here are some findings:
- Price signaling can be an effective way for firms to communicate quality to clients. People might avoid the cheaper options as a way to avoid fraud. Indeed, many firms would not risk charging a premium if the quality of their delivery was disputable. But since clients don't have enough information to judge quality, price can also be used in a misleading way.
- Trust and reputation are important factors in consumer decision-making for credence goods and influence both the willingness to pay and the choice of provider. This can be achieved, for example, through certification, branding, or third-party verification. But there are several ways to earn client trust using manipulative practices.
- Consumers of credence goods may be more likely to engage in post-purchase information-seeking behavior compared to consumers of search or experience goods. This can include seeking out reviews, asking for recommendations from others, or conducting additional research to verify the quality of the service. Of course, the effectiveness of these in reducing uncertainty is limited - especially in consulting where most engagements are confidential and witnessed by few people.
- Consulting clients may exhibit greater loyalty to specific firms or brands, as switching costs are higher due to the difficulty of finding good alternatives. Firms may leverage this loyalty to upsell clients and improve their marketing effectiveness.
There are also clear differences in the way consulting clients search for firms, perceive and measure risk, how their emotion influences purchase intentions, the role of personal relationships, and so on.
Simply put, you can't compare the consulting world with other spaces. It's a different world. Generic marketing advice and best practices from other industries can lead to a waste of a lot of your time and money when growing your practice.
A big indicator of success for your strategy and growth planning initiatives is having objective, relevant insights to inform them. As the saying goes, garbage in garbage out.
Shallow expertise leads to poor advice. Poor advice leads to wasted time and money.