The first part of this article (Advice Pricing – Part 1: Pricing Committees and Models) discussed the authority for Pricing Committees, and their core work of developing and maintaining a firm’s pricing models.
This second part examines the Pricing Committee’s responsibility for controlling minimum prices and minimum quotes for work on unfamiliar opportunities.
Minimum Pricing
For professional service firms, price is the ultimate time management tool. Controlling minimum pricing is a core responsibility of a firm’s Pricing Committee.
Professional services firms are often too busy to be effective because they are pricing too low. The origins of low pricing are easily traced to a firm’s establishment days (when all business was good business); however, minimum pricing policies are fundamental for successful business growth.
The Pricing Committee needs authority to enforce and continually develop a firm’s minimum pricing for work and for quotes. (The only exception to minimum pricing is pro bono assignments.)
The Pricing Committee’s first real pricing test is a firm-wide acceptance and implementation of minimum pricing.
In a firm’s establishment stages, new work is usually priced to ‘get the business’ and generate revenue and cashflow, which are as essential to an establishing professional services firm as mother’s milk is to a newborn.
Without an authority such as a Pricing Committee enforcing and monitoring a firm’s minimum pricing, professionals (particularly senior professionals who were instrumental in the firm’s genesis) will become bogged down with work of great quantity, but sporadic quality. Teaching and supporting professionals to say “no” to low revenue-producing work (with even lower profit producing potential) is the first tough role of a Pricing Committee.
Firms that don’t enforce minimum pricing believe the path to growth and success is fundamentally based upon the firm’s ability to replicate the career of its founders. Rather than enforce minimum pricing – which means leaving ‘opportunities on the table’ – they hire lower-cost junior professionals to undertake the low-priced work while they themselves focus on ‘higher’ opportunities.
Consequently, juniors get busy on low priced work while seniors get busy on higher priced work. Unwittingly, the firm has set up a cycle of activity (some call it a treadmill), from which it will find it difficult to ever extract itself – simply because it failed to implement adequate minimum pricing.
Enforcing minimum pricing helps break this activity and dependency cycle, for both senior and junior professionals.
Minimum quoting
Ideally, professional firms grow faster than do their clients’ needs. Such a firm will regularly come across opportunities for which it has few pricing precedents.
For these cases, the Pricing Committee establishes minimums for quotes – or, more specifically, the “quote to quote”.
When clients or prospects provide opportunities to the firm for which there’s little precedent, a minimum fee is quoted to prepare a quote. For this minimum fee, the firm will conduct the due diligence and necessary research on the opportunity, to determine the fee the firm will charge to undertake the opportunity.
Minimum quoting is as important as minimum pricing to reduce time wasted working with uncommitted prospects and unprofitable assignments generated by ‘off the top of the head’ quoting.
Thanks to an overreliance on product-based pricing, our industry has poorly defined and underdeveloped advice pricing muscles.
You can try hanging on and hoping that the marketplace will return to former glories, where pricing linked to products generated great returns. Good luck if you believe this – you’ll need it. The marketplace will return, but the world will have moved on and we’ll be operating within a different environment. I believe the product retailers have had their best of times.
Welcome to the era for the advice providers.
Use these times to experiment with newly established Pricing Committees, who will forge new pricing models to generate well-deserved profits for your great advice. Take control of your pricing as soon as possible. When you do, you’ll also be taking control of your destiny.
These are the best of times to be building a great advice firm.