It is not often that I am shocked. But this was one of those conversations where my eyebrow was permanently raised.
It was one of those innocuous conversations that don’t seem to be going anywhere. Then we got onto the topic of pricing and how to decide on fee levels. We talked about fee levels and then the first confession came:
- I often undercharge the fees stated on the website.
But that wasn’t the only revelation to come out. When I asked what basis the firm’s fees were based on, I was told:
- We always aim to under cut our main local competitor.
This isn’t good! But there was worst to come… I then asked, what’s your hourly rate?
- I put my hourly rate down when I brought on board my first fee earner. I’ve not got around to putting it back up again.
It was at this point that I thought, it just can’t get any worse. How wrong was I… We started to explore what was the right level to put the fees up to for each of the firm’s key packages. It wouldn’t surprise you to know that these fee levels were still based on old software subscription prices AND a business model of a practice with the owner as the sole practitioner. So, we dissected the cost to deliver the most basic package the firm was offering.
Even without any potential under quoting, the firm was making a loss for every client who was on this package.
There is a silver lining to the story. It became a very easy decision to fix the pricing for this firm and in a stroke increase their profitability by over 50% within 6 months. Did the clients leave in droves because of the fee increase? Of course not, one or two ‘price sensitive’ clients did leave. But these were the clients the firm wanted to exit any way!
What can you learn from this conversation?
Incorrectly priced fees are probably the biggest profit leak for any small growing practice. Whilst your firm may not make all the mistakes that this firm was doing, I bet that they may have done some of these in the past.
Price based on your own current business model
While your fee structure may have worked very well when you were the only fee earner in the business, it needs to be reviewed regularly as more team members get added or the shape/strategy of your firm changes. You don’t need me to tell you that low overheads means you can price very keenly. Those ‘keen’ prices don’t always work as well when you add in the cost of your own offices, fee earners and larger software license fees.
I’ve seen quite a few firms base their fee levels on another practice’s openly advertised fee packages. Of course, benchmarking your fees on your local competitors and similar sized practices is a good exercise. However, don’t let what another practice is doing cloud any sound commercial decisions. For example, you may be basing your fees on a competitor’s ‘stripped down’, ‘no frills’, ‘all extras are paid for’ tesco value kind of service, whereas you are delivering a waitrose-level of service where everything is bundled in. Fees stated on a website often can’t give you this level of intelligence about exactly what a firm is or isn’t charging for within their service packages.
Don’t take on unprofitable clients
No one likes to turn work away, least of all myself. However, the last thing you want to do is undercut the prices quoted on your own website. If you train a client from the outset that there is a ‘deal’ to be done or a ‘discount’ to have, this is the mindset the client is likely to have throughout your relationship. It then becomes difficult to ever get this client onto a profitable fee basis.