I recently read “How Clients Buy,” a book on marketing consulting services. It was a good read, but I disagreed with the premises that they build their strategy upon. They begin by differentiating selling products from consulting and assert that consulting is fundamentally different and doesn’t behave according to normal market forces because it’s a “credence good.” This isn’t true and the misunderstanding leads to blind spots in pricing and marketing tactics.
The book quotes Asher Wolinksy, a professor at Northwestern to define credence goods:
“The term credence good refers to goods and services whose sellers are also experts who determine the customers’ needs. This feature is shared by medical and legal services and a wide variety of business services. In such markets, even when the success of performing the service is observable, customers often cannot determine the extent of the service that was needed and how much was actually performed.”Asher wolinksy
To provide an example, if you’re like me and you know little about cars, mechanics are credence goods. I have no clue if I’m being charged appropriately, if work was done, or how to vet their work.
I agree that this is the situation that people who hire experts find themselves in. But the authors are wrong in that credence goods don’t behave like other goods in the market. For example, they assert that credence goods aren’t subject to supply and demand:
“..if there is a limited amount of demand, say Fortune 500 companies interested in conducting a strategic review (there are only 500 of them), you would expect prices to go down as the number of strategy consultants goes up. But that’s not the case. In consulting and professional services, the price rarely correlates with either supply or demand. It’s because we sell credence goods. Economists tell us that in credence good transactions, it is hard for clients to value quality. The expert, after all, knows more than we do, both about our problems and how to solve them. For this reason, reputation stands in as a proxy for quality… The fact that the laws of supply and demand do not hold in the world of consulting and professional services suggests that the way we sell those services is different from the way we sell shoes.”How Clients Buy
The error in this interpretation is that it doesn’t take value into account and how risk warps value.
For example, a couple of years ago I donated a kidney to my father. If there were a 100,000 hospitals that did kidney donations we still would have been limited to ~40 hospitals to choose from. Why? Because only ~40 US hospitals have a track record of doing donations. Doing an invasive surgery that can kill you sky rockets the risk and eliminates perceived options. Similarly, if you’re a Fortune 500 executive that can get fired by hiring the wrong firm, you don’t have a huge market of strategy consultants to select from and probably less than five true options- and those firms’ prices reflect that.
This is why we don’t pay mechanics like we pay consultants. Yes, they’re credence goods, but there are many of them and the value they provide is anchored to your car’s value. The risk of hiring a bad mechanic is real, but it’s impact on value is negligible- you’re not going to die or get fired.
Believing that credence goods are magically different causes missteps in strategy and tactics. For example, the authors believe that reputation is what’s affecting the pricing of Fortune 500 consulting firms. But my father and I would have easily chosen a state university hospital with a hundred successful donations over the Mayo clinic with zero. And I’m not going to pay a mechanic with a great reputation any more than what I’d pay a mechanic with none.
It’s not that reputation doesn’t matter. It’s just not the only tool to establish value, remove risk, or to differentiate. And that’s the problem with believing that selling consulting is unmoored from normal market forces. It limits what’s possible and can lead to waste pursuing tactics that are unnecessary for you or only viable in other contexts.
Featured image is of snake handling at the Church of God with Signs. Snake handlers believe their faith in God will cause the snakes to treat them differently than normal people. Notable deaths here. Used under public domain.