Price it Right!

Price it Right!

As a young consultant I remember partners telling me that they were in business in make a profit. After several years of hearing this and seeing what little profit they made, it became clear that making a profit was not the primary reason for being in business. 

Making a profit was the result of something else – like providing answers to clients’ questions, becoming more efficient and productive, and creating a new product that people wanted to buy. That was my first lesson.

Even if you did all of the above, you still were not guaranteed a profit. You needed to determine how to price your services to maximize your profits without alienating your clients.

Several Ways to Price Your Services

Pricing professional services is more difficult than pricing tangible products. While you can often pinpoint the cost of making a physical product, it's more subjective to calculate the worth of your counsel.  Here are the factors that you should consider when determining what price to charge for a service:

• Competitors' pricing. You need to be aware of what competitors are charging for similar services in the marketplace.
• Perceived value to the customer. This is where a lot of the subjectivity comes in when setting a price for a service to your clients. The important factor in determining how much they are willing to pay for a service may not be how much time you spend providing the service, but ultimately what the perceived value of that service and your expertise is to them. That is where pricing becomes more of an art form.
• Cost basis. Accountants will focus on labor costs (wages and benefits).  But, don’t forget the indirect cost of administrative assistants, overhead costs, rent, insurance, etc. and technology costs.

Different Pricing Models

Now that you understand what it costs you to provide a service, what your competitors are charging, and how customers perceive the value of your services, it's time to figure out whether to charge an hourly rate, a per-project rate, or try to negotiate a success rate for your services.  Here are some benefits and risks associated with the following pricing models:

• Charging an hourly rate. The problem with an hourly rate is that you may be charging too little for the value of your services. If you charge $300 per hour for a tax return, wouldn’t you charge more than that for a business valuation project?
• Charging a flat fee. While you are bearing the risk when you charge a flat fee, most of the time you will generate more profit than just by charging an hourly rate. There will be no write-downs and you can usually get paid one-third up front.
• Success fee.  Success fees are perhaps the most risky for you. However, they can also be the most profitable. Say you charge a flat fee for a business search and have a success fee attached for a successful transaction. The success fee can be almost 100% pure profit for the firm.

Monitoring Pricing and Profitability Monthly

Don’t let your people costs get out of line with their productivity and efficiency. You want to make sure that your people, especially partners, are generating an acceptable profit level.  You need to understand the profitability of your company every month. Firms need to pay more attention to their monthly gross profit margins.

Don’t Be Afraid to Raise Your Fees

Fees should be raised, at a minimum, of once per year. I’ve seen too many firms fail to do this, only to find themselves way behind the pricing curve. You can always write-off some of the fee increase. Remember that 90% of $200 is more than 100% of $175.

Blog prepared by: August J. Aquila, AQUILA Global Advisors, LLC    

http://aquilaadvisors.com/