Have you been told that your prices are too high?
Getting your pricing right is one of the keys to building a successful practice. So, if you’re feeling powerless and confused about what to do, try following these 6 rules.
1. Understand the emotional side of buying
While professionals may deal in the analytical and rational, it’s always worth remembering that buyers are seldom analytical and never rational. Why else would people fork out hundreds of thousands of dollars for a different badge on a handbag or a motorcar? It’s because they see these as denoting higher status than other goods.
The same principles apply to professional services as they do to retail. People, including the hard nosed management teams of serious corporates, will pay a premium for services that they perceive as premium. Similarly, if they see something as run-of-the mill, they’ll expect to get it for the best price they can.
To make sure you fall on the right side of the equation, you need to understand the emotional side of buying. If you want help doing that, there are a lot of good books that can point you in the right direction.
You also need to understand what will make a client pay top dollar. And, whether that’s through specialising in a niche, providing a personalised service, or innovating, one thing is certain: clients always pay more for professionals who understand them.
If you’re being told your prices are too high, perhaps you’re simply not getting this right.
2. Don’t dive straight into fixed fees
In the current climate a lot of professional services think that all they need to do is move to fixed fees and the pricing problem will take care of itself. Anyone who has read any of my blogs in the past knows that I have very strong views on this. While fixed fees may be part of the solution, they’re not the solution every time.
Fixed fees tend to work brilliantly when the scope of work is known and its commoditised - for instance, a conveyance or a simple contract for a lawyer, or a basic end of year tax return for an accountant. In my view, fixed fees don’t work at all where the scope of work is unknowable and the work you’re doing is bespoke and highly skilled.
And, for most types of work, they’ll fall somewhere in between - effective sometimes and not others.
So, instead of going straight for an “alternative fee” model, I always encourage people to go straight for an “appropriate fee model”. Analyse what’s going to work out best for both you and the client and stick to that, rather than being rigid. If you're not sure what to charge, here's what I think should influence your pricing.
3. Start with the client
In my experience, a lot of professional services firms get their pricing the wrong way around. What I mean by that is that they have no pricing strategy, so instead the starting point for what they’ll charge will be their remuneration policy.
If they pay a staff member $100,000 a year, they’ll use this figure to calculate how much they should charge to pay their employee, cover their overheads and take a bit of profit. That sounds logical, but doing it in isolation can lead to a raft of pricing problems, the effect of which can lead to a short change for both your practice and your client.
A better place to start is with the client. Figure out how you can bring them value, by delivering what they want and making their experience with you pain free. Once you’ve put some thought into that, you can then work backwards, figuring out how to utilise technology and your fee earners to deliver it in the best possible way.
By putting things in this order, you may uncover more profit than you could ever dream about rather than using salary as your starting point.
4. Work out where your value lies
Good law firm pricing always comes by knowing the value you bring. In other words, what is your client really paying you for?
To work this out, you’ll need to engage in a bit of good old fashioned soul searching and problem solving. So what is it that your client wants from you? And what could they just as easily get anywhere else and at a cheaper price?
When you look at things this way, chances are you could take something off the table to bring your prices down without compromising your profitability.
For instance, are you spending too much time of admin? Could you push some of this back onto the client? Could you deconstruct the service you offer, breaking it up into many parts so that you retain the high value stuff and outsource the other parts somewhere else?
If you do have this option, I’d suggest you try taking it because it’s likely to lead you into building a network of referrers who pass you work in return - that is the stuff you really want to be doing. And that will help protect your fees and your profits, while still keeping your clients happy.
A tool that can help law firms with pricing dilemmas or decisions is Price High or Low. Designed by Joel Barolsky for professional service firms, this is a very clever and timely application.
5. Look for the real motivation of clients
If a client thinks your pricing is too high or they start going to a cheaper provider, it’s easy to look within. But sometimes, it’s not you, it’s them. So look beyond the rejection to find out why they don’t want to pay.
Chances are they simply may not have the budget. Perhaps there’s been a restructure. Perhaps they have a new CFO who’s stepped in and is slashing costs. Otherwise, perhaps they’re really just not the client for you because they’re simply not prepared to pay for the value you provide.
I liken it to the petrol pump selling High Octane 98 fuel. To me, this makes no difference; I’ll just buy the cheapest fuel on offer. But a motoring enthusiast will probably really notice, and care about. The 1% difference it’s making to their performance. If people don’t value what you have, you need to find your own enthusiasts; the ones who really do get it.
6. Talk about pricing with your clients
Finally, I always think the best way to find out what a client thinks about your pricing is simply to ask them. I know, I know. Our mothers told us it was rude to talk about money. But sometimes, when you’re in business, you’ve just gotta.
Ask your clients what they think about your pricing. Are you cheaper or more expensive than your competitors? There is no winning formula. It really often is about sitting down and talking about what is fair from both ends.
After all, in my experience clients price shop a lot less than most people think.
So if someone does say you’re too expensive, maybe they’re really trying to tell you something else…