Jacobs Solutions Pricing Spineometer: 4 of 5 Vertebrae

Jacob Solutions, an infrastructure development company, had a positive 2024. Revenue rose 6% to $11.5 billion and earnings before interest and taxes rose 2.5% to $693 million over last year.

A review of Jacobs’ 19 November 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Jacobs operates with two lines of business.

1. Infrastructure & Advanced Facilities works on Critical Infrastructure, Water & Environmental, and Life Sciences & Advanced Manufacturing. Airports, mass transit, water purification, and manufacturing plant buildouts would all come under this division. Infrastructure & Advanced Facilities counts many government agencies in the US, Europe, UK, Middle East, and Asia Pacific as their clients, as well as a few private manufacturing companies in silicon wafer chip production and elsewhere.
2. Jacobs is a majority shareholder of PA Consulting, a consulting and engineering firm serving consumer goods manufacturers, defense and security, energy and utilities, financial services, government, and health and life science companies.

Jacobs has a roughly 70/30 split between cost-plus and fixed-priced project-based contracts. Each project is largely bespoke.

And in these few sentences that describe Jacobs, we uncover a challenge similar to that observed when evaluating the price management requirements of Lockheed Martin. For both of these companies, their client base is largely government, and their pricing requirements are largely those of project planning, management, costing, and reporting. They operate a time and materials business with a cost-plus business model.

Price capture in project-based businesses serving governments is distinct from that in most other businesses operating in monopolistic competition.

1. Consider price setting. The importance of time and material costing dwarfs that of other price-setting approaches. While the concept of Economic Value to the Customer may apply to many of the projects Jacobs undertakes and would specifically apply to the role of performance bonuses and penalties for completing a project early or late. Yet even the application of this concept is trivial to the need for project management. Most of the other price-setting approaches, such as elasticity or conjoint analysis, are inappropriate.
2. Consider discount management or promotions for a project-based company with bespoke contracts. Since the inputs vary considerably between efforts, statistical analysis for estimating the price to be negotiated in a contract would be of limited, though non-zero, decision-making value.
3. Alternatively, consider the issue of price structure. Project-based contracts would of course contain lengthy lists of time and material costs, yet this is a small subset of the potential business models. Two-part tariffs, tying arrangements, versioning, price bundling, yield management, and dynamic pricing would have limited application for Jacobs. Perhaps subscription pricing for XaaS offerings or index-based pricing for lengthy contracts could be applicable to Jacobs, but XaaS offerings are believed to be only a small portion of their business and there are other means of managing costing risks for long-term contracts.

Pricing Strategy, my textbook, delineates the field of pricing into four key areas: Price Setting, Managing Discounts and Rebates, Price Structures (aka business models), and Pricing and Corporate Strategy. The models and methods contained in these concepts are of limited, though non-zero, value to a company like Jacobs or Lockheed Martin.

Industry benchmarks applicable to most businesses operating in monopolistic competition would suggest 23 to 115 pricing professionals be employed by Jacobs. But does this industry benchmark apply to Jacobs with its cost-plus business model delivering bespoke projects to government agencies? Would a professional pricing function help Jacobs performance?

Research into the investment by Jacobs in pricing yielded surprisingly positive results.

1. Pricing professionals were identified at Jacobs across the globe.
2. Their number was well within the industry benchmark.
3. Most pricing professionals had the title of “analyst”. No manager, director, or vice president of pricing was identified. Yet, many senior managers at Jacobs had once held the pricing analyst role at Jacobs. (Yes, pricing can lead to the corner office.)
4. Their responsibilities of pricing analysts included calculating margin expectations with standardized methodologies or preparing bids based on project management training. This aligned with the expectations stated above.

Given the importance and capability of pricing at Jacobs as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of January 2024.

Jacobs Pricing Spineometer: 4 out of 5 Vertebrae.

While we are pleased to see the number of professionals identifying pricing as their field, we uncovered that their role is largely limited to project management and related functions and their seniority would not classify them as decision-makers. Our thought experiment regarding what pricing could do for a company like Jacobs did identify some areas worth exploring. Hence, Jacobs scores a 4, and not a 5, because (1) they should explore the application of this field called pricing strategy a bit more or they are outsourcing this function to their consultants and (2) a career field which rises no further than the title of “analyst” is a stopping point at best and a dead-end at worst. Pricing at other companies is a decision-making role with robust career opportunities.

J (Jacobs Solutions Inc.) was relatively unchanged at from 140.4 the day prior to their earnings call and 140.7 one week later. FY 2024 revenue of $11.5 billion with a 6% operating margin and P/E ratio near 20.

For FY 2024, a 1% improvement in price would yield a 17% improvement in operating profits holding all else constant at Jacobs.