Set your prices at the right point
This week we talk about pricing and I am going to give you a number of ideas about how to arrive at the best price and avoid leaving money on the table.
Nine times out of ten a dissatisfied client will cite “price” as being the reason for their dissatisfaction but this rarely turns out to be the case. Lack of communication is the number one reason for dissatisfied clients and frequently lack of communication on costs. So the first tip is to keep the client informed about progress and about costs – clients don’t like surprises any more than we do.
So, how do you go about setting a price for a piece of work? Easy, you estimate the hours to do the work the client needs and then apply the charge rate (the one you set at the start of the year) and bingo you have a price. OK but no one ever pays full charge rate so you knock a bit off. Sound familiar?
There are a number of drawbacks to this approach:
Here in 10 easy steps is our guide to a completely different approach:
Step 1 Establish what the client wants
You already have a good idea of what he needs because you’re an expert in that field. Let's say the instruction is a corporate takeover. You know what is involved and what the client must do. What you don't know is what it looks like from the client's perspective. Take the time to find out. You may want to ask:
Is the business profitable?
What’s the downside if the transaction aborts?
How important is this transaction to the client?
How much experience of these types of transactions has the client had?
What are the key measures of success?
What are the timescales?
Listen and ask open ended questions – use the 80:20 rule - spend 80% of the time listening and 20% talking. You will then be able gauge what it is the client really wants and values.
Step 2 Work out how you can deliver the work as cheaply as possible
What are the absolute minimum number of tasks required? This doesn’t mean compromise on quality, but it does mean working out the basic steps, the absolute bare minimum, to deliver what the client wants. Let’s look at an airline – Virgin Atlantic flying from Heathrow to JFK offer a standard ticket for £547.06, a flexible standard ticket for £903.56 and a first class flexible ticket for £3,739.56 (with chauffeur!). The minimum requirement is to get the passenger from A to B and every price does that. Virgin offers options to the traveller, be it flexibility to change their dates or additional comforts and benefits but all at a price.
Step 3 Work out what else may be required and price those activities as well
You are now moving into the realms of offering the client options as to how the matter is conducted. By giving each option a price tag and letting the client choose the options he wants, you are reducing the likelihood of the price coming under pressure and maintaining profitability.
There may be other aspects that arise during the course of the matter. Let the client know what they might be and that you will price each of these as they become known. The client can then decide how he would like to proceed at each point. By doing this, you are not only giving the client an idea of what the end cost might be but also demonstrating your expertise and project management skills and future proofing your budget!
Step 4 If possible, plan the matter together with the client
If you have now split the price down into tasks and maybe even phases, it is more difficult for the client to question the price overall. Even better, if you get the opportunity try and plan the matter with the client's involvement as this will gain even greater buy-in.
Step 5 Take a step back and ask "does this look reasonable?"
If not the look again at the resources you are using. Is there a way to restructure the tasks?Could more junior staff do some of the work? Do you really need so much partner time? David Maister carried out two year study and found that some 50% of senior time could have been delegated. Look again, or ask someone else to.
Step 6 Check that you have priced in your client's value points
Remember the first meeting? What did your client really want? If they require 24/7 access to your team then of course there is a cost attached but make sure you let the client know that that is what they are getting and what the options are.
Step 7 Time to let the client know what the price is for what he wants
Prepare carefully for this discussion. You need to be sure that you have understood exactly what the client wants from you and how he wants it and then present that information back to him in a way that reflects your understanding. Use this opportunity to illustrate the value you are delivering. Then tell him your highest price and (importantly) pause - give him time to consider this. Do not talk yourself out of the highest price!
Step 8 Give your client options so he can make a decision
Give the client your lowest priced "bare minimum" option. Be very careful in explaining what it does not include and to highlight the impact of that for him i.e. it does not include 24/7 access but a weekly thirty minute update conference call. This will allow you to reassess the client's real value points - those he is willing to pay for - and help you decide where to pitch the final price. Be careful not to "throw in" value points for free!
Your final price is the going to be somewhere between the top price and the bare minimum and it is for you to judge from the clients reaction where the sweet spot for him is.
Step 9 If the client asks for a discount - pause!
Don't just say yes. Explain to the client that you will need to go back to your matter plan and identify which areas could be reduced. In doing so you are demonstrating that your price has been carefully calculated and is not just a "finger in the air" open to discounting. Maybe the client could undertake some of the work and reduce the cost? The key is to match the price to the value delivered.
(Even better would have been to prepare for this question in advance and know how to answer the discount question before it is asked! Maybe next time).
If you do have to give a price reduction then negotiate something back - we would be willing to give a £2,000 reduction if you agree to settle our bill within seven days – could be a response. Try and avoid percentage discounts as clients often expect the same level of discount on the next matter. Make your price reduction specific to the work in hand and not an on-going arrangement. If you do have to give a discount avoid multiples of 5% as this gives the impression that it has not been fully considered. If your gut feel is for a 10% discount then offer 8% instead. Remember any discount given impacts significantly on your profit.
Step 10 Communicate to the client as you go
Remember when you told the client there would be choices to be made? Don't forget to give him advance notice of when they are going to happen and to present the options clearly. Throughout the matter on a regular basis remind the client what was agreed and how your billing reflects that agreement. Use this opportunity to build the rapport and trust between you, that will lead to a happy working relationship and future business.
Of course there is much more to pricing but these are a few tips to get you started. The client segmentation that Sally mentioned when she talked about understanding what your clients value will impact on your approach to pricing as will the improvements that Rob mentioned last week.
Finally, law firms often lose money where additional work outside the original scope is undertaken, mainly because they do not go back to the beginning and develop options for each additional element and agree the course of action and price with the client. Remember a service delivered is never worth as much as a service required – price in advance of starting the work.
We have developed a number of techniques and pricing models that can be used to help you not only price your matter but also present that price to the client. We have helped clients with their pricing approach for tenders, both private and public sector, for consortium bids and for individual clients whether corporates or individuals. We’d love to help you too.
If you would like to read more about our approach to pricing, here is a copy of an article that Sally and I wrote for Managing Partner magazine which appeared last month.
If you would like to discuss how you put in place a more robust approach to pricing for your firm we would be only too happy to hear from you. Our approach results in happier clients (through better communication and more choice) and improved profitability (through increased prices and improved staff morale). It really is a win-win approach!
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