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Is Pricing the Ultimate Lever?

In my little coaching book of notes, I have a secret map.

It’s kind of a like recipe book/ mindmap/ multiple timelines of all the projects I could undertake with practices when I begin working with them depending on the kind of issues we need to solve first and/or the most important outcomes to achieve first.

Each of these timelines flows, one project after another, to give me a really good idea of a potential trajectory your business can go on during our coaching time together.

Obviously, there’s a lot of other factors in there that dictate where we might start, including:

  • What stage your business is at
  • Your team’s ability to implement certain things,
  • How motivated and on the same page you all are, and
  • How far along the growth journey you want to go.

Of all the projects though, one has the greatest potential to change everything fast.

Pricing is in many ways the ultimate lever.

When a business has its pricing model wrong, typically it impacts in two ways, being profit and capacity or, put more simply…

…a lack of resources to deliver on the promises being made to clients.

When we start working together, this is often something that’s already known.

You may feel it in the hours you’re working, or because you’re trying to get ahead of the curve but it’s hard.

You may have already looked to technology to try and solve the issue (which it rarely does), or simply decided consciously or unconsciously to absorb the cost of all those extra hours in the hope that it’ll sort itself out in time.

It doesn’t though and, if we know anything about the past ten years, it’s that the amount of work required to deliver advice has continued the upward trend.

Paul Graham of Y Combinator renown was once asked to comment on the biggest mistake growing businesses consistently make, and his answer was simple.

“They don’t charge enough, which stops them from being able to [grow]”

 He was talking about startups, but in many ways, as a result of what’s happened these last years, most practices (even the most mature ones) have been forced back into a type of growth mode, having to rebuild new systems, processes and ways of doing things much like a brand-new firm would.

We’ve all ended up back in building mode, rather than accelerating growth or optimising the model.

This is why pricing has become one of the key projects I’ve undertaken with every single practice on the program these last few years.

The process for building a fee model is not that complicated.

The truth is it can be done relatively easily, but there it is a sequential process. 

I built a proprietary tool to do it years ago and within The Leveraged Advice Program, we have around six modules devoted to this covering:

  • Building a fee model
  • Becoming confident with fees,
  • Launching a new fee model with clients,
  • Transitioning a client base across, and
  • Ensuring that the conversations you have about ongoing service and fees with clients are done in the right way and at the right point in time.

But it is something that can stir up a few common concerns, so I wanted to share a few and how I respond when challenged.

“What if I lose clients?”

This is an interesting one, because in my experience of doing pricing. I’ve never had a business, lose more than five clients in total.

Even that was an outlier.

In truth, clients are not as fee conscious as we think they are, but let’s ignore the psychology of it for a moment and focus on mathematical reasoning.

I have a calculator for just these event where we can model scenarios like this one:

  • 100 clients paying $3,000 each on average at a 30% profit margin.
  • A proposed across-the-board fee increase of 30%, bringing the average fee up to $3,900

Q1 – How many clients would have to say no for the revenue of the business to fall?

The answer is 23 out of 100, or 1 in 4.

From a capacity point of view, most I speak to could deal with working with 23 fewer clients yet banking the same revenue.

Many would see it as a better way forward from a purely commercial perspective.

Q2 – How many clients would have to say no for the profit of the business to fall?

That’s an even bigger number – 50%. Every other client.

Obviously, the second number is based on some unrealistic numbers  – it assumes all costs are variable – but then again the chances that even 5% of your clients will say no is statistically highly unlikely.

These calcs are a quick way of demonstrating one reason why the risks of not getting your pricing right are way worse than the alternative.

“I don’t want to have to increase fees for some of my long-standing clients”

This is a fair one. 

In many ways I think some of the more  “traditional” models based around an almost socialist ethos (whereby those who needed advice were supported by those who didn’t right now) made more sense, if only we could have trusted everyone to do the right thing in delivering it (i.e add value as well as take fees).

I also get that some clients are not in a position where a sudden increase makes a lot of sense but there’s a concept from the program we call the Long Tail & Fat Head that demonstrates why at least considering the implications is key. 

The typical fee “shape” of a practice is a curve that starts flat that rises exponentially at the end with lots of low fee-paying clients at one end, a few hyper-profitable clients at the other.

As you’d imagine in most cases, there’s usually a degree of cross-subsidisation in between.

By the way, I talk about this at length inside our Adviser Pricing Guide which you can grab here if you’d like.

The danger is if the equilibrium that some firms have been able to maintain is disturbed – by legislation for example – and some of the profitability at the top end is throttled back, then many firms might struggle.

It is entirely possible to build a model where there is some deliberate cross-subsidisation – pro-bono, even – but it’s something that is best done with insight into the specifics of how it works in practice.

Essentially, the better bet is to make the decision on purpose rather than by accident.

What about fair value?

It’s is a bit of a bugbear with me because it doesn’t exist. 

I’ve been a keen student of pricing psychology since someone gifted me William Poundstone’s book Priceless almost a decade ago.

The irony of listening to all that’s been said by those in Judgement of our industry on the topic of this thing called “fair value” is, as most experts in the field have observed, value is personal, relative and far from absolute.

Two things need to happen in a pricing model when it comes to “fairness”.

Firstly, the fee that your clients are paying needs to be commensurate with the value received which, in short, is the outcome they’ll get at the end of it all.

The challenging part is we’re in the future business, but even despite this, I’ve always found it relatively easy to work back from the desired outcome and easily demonstrate how most planners will deliver value that’s usually 10x – 20x more than the fees charged.

The second is what we’ve discussed already (via Paul Graham). It needs to be sufficiently profitable to provide the resources for running a great business.

Profit to me is more oxygen than lifeblood, and the correlation between financial pressure and poor decision making when it comes to practices is very real.

Being profitable and giving great advice are not in conflict. They’re absolutely essential, just as breathing is essential to staying alive enough to help others when needed.

There are many facets to pricing, but I’ll leave you with this.

When pricing is wrong, it makes it harder to fix anything else. It starves businesses of the resources, support, time and opportunity to build a system for giving great advice. 

Conversely, when you get it right, everything else can fall into play.  You have the time, the people, the focus, and most importantly, the platform to do what you do best.

Simply, it is the ultimate lever.

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