I’ll come clean. As an economics graduate working in recruitment, I really don’t spend much time mining the ‘intellectual resources’ gathered during my degree. But a great article by Mark Ritson in Marketing Week a few months back got me thinking about elasticity of demand and supply in recruitment.
According to Ritson, a noodle bar in Singapore received a Michelin star and hit a massive boom in demand – way beyond what it could supply. This gave it an unusual opportunity: to increase prices without affecting sales volume.
Did the owner do it?
According to Ritson, he is ‘hopeless at pricing’.
See, inelasticity – where price increase does not lead to a significant drop in demand – is a dream situation for most businesses, and one that may sometimes never happen.
If you’ve earned it, use it!
Inelasticity and recruitment
So consider this: in recruitment, inelasticity is a reflection of client loyalty and agency quality.
The conditions for kindling inelastic demand, mean agencies need to adhere to a meaningful value proposition.
Pricing is too often used as a negotiating tool, but it’s a mistake to define the ‘value’ of your proposition in purely monetary terms.
You owe it to your brand – the promise you make to your customers and clients – to keep the price representative of the high value they get from the product.
So the question to consider, particularly in recruitment, is:
How far does your brand let you increase profitability without damaging customer and client trust?
Stretching your elasticity
There are many factors that affect your ability to be inelastic, however these are the key ones.
Supply of candidates
Good quality, reliable candidates, relatively scarce in a particular specialism make for a more inelastic situation. Their negotiated salaries and recruitment costs can be increased without damaging demand.
Quality of service
Make it easy for clients to get great candidates, and you’ll achieve overwhelmingly positive client experiences. Client loyalty is a strong sign of service inelasticity; you can set your own prices without damaging demand.
Where the client brand is not properly understood, the right hire can be hard to find. The better the understanding of that brand, the less likely high prices will affect demand. In addition, all the effort you put into marketing your great recruiter brand must be reflected the price you charge.
What can we learn from this?
Rapid competition at a micro level, and uncertain political events at the macro, mean in 2017, recruitment is going to hit that price-value conversation with employers more often.
The problem is, negotiation to a lower rate really leaves three choices for recruitment agencies:
- Suck it up and carry on.
- Walk away and risk future work with that client.
- Adjust your service proposition to match the fee you are being asked to charge. For example, let your clients know that they will be serviced by the more junior members of staff. Just like in a hair salon!
None of these options will be good for your brand you have spent so much time and money building. If you’re a specialist, providing candidates others can’t, offering a level of service unmatched by rivals, a pricing proposition that undermines this will damage your credibility and your inelasticity.
Walking away from business never sits well, but your company’s values can sometimes be more important than potential business. As a recruitment agency, we’re not afraid to walk away from clients and PSLs when the terms don’t reflect the value we bring to a company’s hiring solutions.
What are your thoughts on pricing in recruitment?