Our Analysts' Insights

In their search for the best possible deal, prospects and clients put tremendous pressure on language service providers to reduce their prices. In our recent series of interviews on quoting, we inquired how LSPs decide when to cave in and offer a big discount – or simply walk away from the deal. It’s no easy decision. Not all buyer demands should result in discounts. But holding the line on pricing is a tough gamble because clients or prospects may actually try a new provider. They will come back only if they get a markedly better level of quality and client service from you – and only if this is important to them.

In our research on LSP maturity, we analyzed how pricing strategies change as language companies advance through the six stages of CSA Research’s LSP MetrixTM model. A firm’s organizational and business maturity level directly affects its ability to respond to price pressure and to compete while staying profitable.

Two core approaches to pricing dominate the language services industry. Production-driven companies tend to apply the “cost-plus” model while sales-driven organizations price according to what clients will pay and determine costs accordingly. Both rely on the concept of project markup – one group adds it to costs to determine the selling price, while the other deducts it from the price to calculate budget. Ultimately, some companies engage in both practices with a default cost-plus model that opportunistically shifts to target costing.

So if LSPs price upfront based on what their costs are going to be, what do they do when customers ask for discounts? Providers are creative in their quest to avoid the all-too-frequent race to rock-bottom pricing. They may choose to promote a fair trade approach where discounts are not an option. If they expect haggling, they may not give their best offer at the beginning so that there’s room for later negotiations. Many offer different service levels. If the price they calculate doesn’t include everything the client wants, they usually drop steps or create packages that let buyers choose a more suitable option.

But when all else fails, how do LSPs stay profitable? Most providers ask their vendors to negotiate reduced rates so they can protect their own margin. They tell these suppliers that some work at a lower rate is better than not winning the business. They also tap into the power of technology – such as advanced translation memory functionalities and machine translation– to reduce the effort involved on projects. The savviest companies deploy lights-out project management, which automates quoting and production processes.

When buyers push a little too hard, LSPs are also not shy about cutting corners. It’s not because clients refuse to eliminate one of the standard process steps that providers necessarily deliver all of them. LSPs believe that many clients refuse to confront the reality of what pricing pressure forces them to do to remain in business. For those buyers who have experienced compromised quality, it’s time to learn a bit more about what providers have to do to meet their requirements– instead of complaining later that deliverables aren’t up to their desired standards.