THE PRICE OF EVERYTHING; THE VALUE OF NOTHING

 Value As A Fee Policy

              There was a time, not too long ago, when professional fees were not discussed in polite society.

              Professional firms are partnerships, and their firm finances are not generally open to the public, which means that profits and margins are only vaguely surmised. Clients may complain about fees, but there's strong reason to suspect that people don't question professional fees and really balk at paying them until there's a feeling that too much profit is being made. True, a sense of fairness enters into it, but if you don't know the basis for charging a specific fee, how can you judge its fairness?

              At least with a product, you have some sense of the cost of making and distributing it. But not so with professional services.

              Professionals, for years, never had fees questioned because when you need a lawyer or an accountant or any other professional, fees are not the main concern; the ability to help you get out of trouble is usually more important. And the funny thing is that, without collusion, fees generally tended to be in the same general realm -- not only high, but consistent from one firm to another of equal size. A kind of cartel, as one expert called it. A difference may be that collusion isn’t needed. The acoustics of the market readily spread the word about what everybody else is charging.  

            In this context, then, fee policy, in most firms, was generally set in response to only one question -- how much can we get away with? -- tempered by a sense of what others were charging. And few practitioners complained about gradual escalation. If the client didn't yell, keep going up.

              The growth of competition, though, seems to have changed that, and fees have now become a competitive tool. That's competitive tool, not marketing tool.

              What's the difference? As a competitive tool, fees simply mitigate to find a market level, as prices always do in a competitive situation. We saw this in the early days of the post-Bates competitive era, when firms accused one another of low balling -- cutting fees sharply to  get a client. Larger firms were often accused of this by smaller ones, because larger firms could better afford to take a fee cut in order to get a particular client, or to get into a particular industry or market. What was actually happening was that prices became a competitive tool, like gas station price wars. There was lots of room in the margins, and larger firms did indeed have the reserves to cut prices occasionally without adversely affecting the year's profit. They could justify it as an investment in building volume, or strengthening a presence in an industry, or some similar practice management reason.

              This is quite different from using pricing as a marketing tool, in which pricing and fee structure are set as a strategic device to assist overall marketing efforts.

              Some of this growing  demand for changes in pricing structure is defensive. Clients are questioning fees as never before, particularly where the client is sophisticated. An in-house lawyer who came from a law firm knows enough to demand better pricing, as does a financial officer who came from an accounting firm. In fact, a Wall Street Journal article spoke of fee shifting. A sophisticated client knows better than to sit still for  too many junior people, or other inflated expenses. The smart firm knows enough to avoid  billing those costs to a sophisticated client, and to make it up by padding the bill to the unquestioning client. Billing is an art form.

              Fee structures  also become a focal point as more companies divide their work among several specialized firms. This affords the client the opportunity to compare both pricing and service, sometimes to the detriment of a firm that may have had a long time relationship with the client.

              And certainly, the more fees are discussed within the profession, the more they are discussed in the press. Which raises more questions from clients and prospective clients.

              Two things seem to be happening.

·        Firms seem to be responding by either cutting prices or changing the fee structure

·        Fees, once determined solely by the professional firm, are now driven by the clients. The professional firms seem to be losing some of the initiative in setting fees

            Obviously, professional firms would prefer the old way -- charge what the traffic will bear. But when the market -- the client -- determines the fee structure, then fees become both a competitive tool and a marketing tool.

              This has led to both price cutting and alternatives to traditional hourly rate  billing. The options proliferate. Monthly retainers. Project pricing. Commissions. Contingency fees.   All these are attempts to use fees as a marketing tool, albeit somewhat primitive in conception. The idea is to make fees an attractive part of the mix of services for sale.

              On the face of it, pricing policy would seem to be simple. How much does it cost to produce our product or service? How much do we mark it up? How much do we have to set price competitively? How much will the market bear? Is there a better marketing advantage in discounting to a mass market, or in raising it to attract an upscale market?

              Unfortunately, it's not that simple. 

              How about the fact that each of the services you offer has a different audience, and therefore audiences that each place a different value on what you have to offer? How does that affect the price? What may be a bargain to one market may be exorbitant in another.

              No, pricing policy can't be summed up in three lines.

              Nor can random or arbitrary pricing structure serve effectively as a valuable marketing tool.

              What works, then? What can you control in pricing that best serves your marketing needs?

              The basic assumption, of course, is that you have some sense of what it costs you to deliver your service, plus a markup. That determines the price below which you lose money.

              But how about value? What  is the value to your client of any specific service you may be called upon to  perform? Not the value  of your firm, which is the warm fuzzy feeling approach, but the value to the client's business (personal or commercial) of the specific work you are being asked to do?

              "If I were to solve that problem for you how would it help you?" Not, "How much is it worth to you?" That would be a  challenge to your client or prospect, and the client would naturally react defensively. "How much would it help you," on the other hand, asks the client to think about the value of the solution, not the cost of it.

              Obviously, the value of any service differs from one client to another. And the value of the same service to the same client differs from one time to another, depending upon the client. The value of an audit to a company can be less if it's for a routine bank inquiry than for any SEC mandated stockholder report. You can say, on the one hand, that the same amount of work is required in either case. But if the value to the client is different for each audit, then shouldn't the price be different?

              This is not an arbitrary consideration, nor a device to jack up fees. Rather, it shifts the onus on fees from a dollar amount to a value oriented position. "I will happily pay what it's worth, if I can have a clear understanding of what it's worth."

              In this context, you are still setting the fee, but the client is setting the value. How can he argue with the fee if he sees the value? The key lies in the question "How much would it help you," which allows the client to examine his own sense of value, and to receive the information about price through a screen of value, not expense.

              Do the other devices help? The retainer or what have you, functioning within the context of value, certainly does help. Which is not to say that one fee practice is better or worse than others. Sometimes, the nature of the job is such that the value of the service is best perceived by the hourly rate rather than the monthly retainer. Sometimes the  monthly retainer, or the project fee, is  a better way to go. But one benefit of the value approach is that the bargaining point becomes the value, not the payment method. The  payment method then becomes  an added benefit, and not the focal point of the discussion.

              In other words, bargain about the value of the service, not the price of it.

              The difference is not subtle. You are performing a service that's needed by the client. If price is the focal point of the discussion about the service, then the emphasis is in the wrong place, and not on the service itself and the expectations for it.

              Discussions about the merits of the hourly fee versus the retainer   tend to miss the point of value added, and to turn the service into a commodity. The current vogue seems to see the hourly rate as being outdated and inadequate to the needs of the contemporary client. But in fact, sometimes the service is best measured on an hourly basis, or even by a contingency fee. The point is that the method of payment should be equal to the value to the client of the service  performed, and not stand on its own as a fixed and inflexible element.

              Lowering a fee in a competitive situation is a sales device, not a marketing device. It puts the emphasis on the wrong thing in a marketing context.

              Concentrating on the value to the client of the service, on the other hand, makes fee setting a true marketing tool, and enhances the value of the marketing effort.

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