by Johnny Grohovaz
“You’re in business to render a service that is so good that people are willing to
pay a profit in recognition of what you are doing for them…1 ”
Providing customer value allows for pricing at a profit. The CVP (Client Value Proposition) process should lead to services on which customers will be happy to pay a profit. Please refer to previous article for an overview of the CVP.
If the CVP of the service is correctly positioned, then price should not be a major issue. Customers are more concerned with what they are getting, and the value it provides, rather than just the cost. Professional surveys reveal that price does not feature in the top six or seven reasons why customers engage or leave.
There are a few factors to bear in mind when pricing a service:
The cost to the practice for each service is the starting point when it comes to pricing. See article in this series on costing services. The cost would be a set numerical amount to undertake the service for a customer e.g. the practice’s “Retiree” service will cost R 2 887 a year (see table below).
One way to determine the mark-up is to look at historical earnings. The required profit can be increased from previous years. For example, if the last year’s earning’s ratio was 20%, looking at 25% or 30% for the coming year is a consideration. This is one of the benefits of the FFS exercise. The planning process can allow for increased profits.
With some practices, all services have the same mark-up. Alternatively, certain services can be priced at lower margins (e.g. for retirees) and others at higher markups (e.g. private wealth management clients).
For pure Fee For Service advisers, the final price, the amount in the last column in the table is what they would charge. Whether a client has R 5m or R 10m, the fee is the same, as is the level of exertion to service that client.
Advisers earning revenue based on a percentage of assets would use the profit mark-up amount as a yardstick. When discussing service options with a new customer, knowing the practice’s minimum service price allows for the positioning of a service in line with a customer’s budget. If there are, say, three levels of investment advice (the typical gold, silver and bronze client segmentation), the final price of each of these services allows an adviser, when engaging with a new client, to pitch an appropriate service to that client’s expected earnings potential.
Pricing is also one of the final steps in coming up with a forward-looking profit and loss statement. The expected budget for the coming year will be dealt with in the next article in this series.
In the coming articles in this series, more information around the FFS issue will be provided.
1 Stanley Marcus (1905 – 2002) US Businessman