06 Jun Do you have your pricing right?
We are often asked by advisers to take a look at their pricing model and let them know if they “have it right”. This begs the question, “is there such a thing as the right pricing model?”
The answer is “yes”, although what is the “right” model will vary for every firm. So here is a list of questions to ask yourself when considering whether or not you have got your pricing right:
1. Does the model we have chosen (flat/asset based/hourly rate/insurance commission/hybrid of any of these) suit the clients that we work with and the type of advice we provide? For example, there is no point in using asset based fees if we provide advice to a lot of wealth creators who employ gearing strategies. There was a great cover story recently in IFA magazine that looked at all the different pricing model options advisers are using and interviewed a number of advisers and consultants (me included) on the pros and cons of different models.
2. When creating our minimum fees did we take into account an appropriate profit margin, after principal adviser salaries are paid at market rates (no less than $120k per annum)?
3. Will our fee levels maintain our profits if we lose a considerable portion of our passive revenue coming from inactive clients?
4. Are our advisers confident in positioning our fees to our clients?
5. Do our clients consistently renew our service agreements (ie they see value in our services at the fees we have negotiated)?
Here are some things that we see are warning signs that a business has not priced well, when they start implementing their new business and pricing model:
• Revenue drops before it regains previous levels – this indicates that the advisers are not presenting their offer effectively and/or they have priced too low,
• Different advisers in the practice are charging wildly different fees with no legitimate rationale,
• Advisers feel the need to discount their fees to win clients (old or new).
Getting your pricing model right doesn’t mean that you need to start charging exorbitant fees for your advice, and yet we find many advisers do start charging more than they have in the past for some of their clients. In many cases this is because they have never had clarity on what they ‘should’ be charging, because they have had significant passive cashflow coming in from trail commissions from inactive clients. This cashflow will disappear in future, and so it becomes vitally important, in a sustainable business, to price at a level that generates profits and longevity for the business, while providing value for the clients it services.
If you’ve taken the right steps to evolve your advice model well, you will be unafraid of FoFA, less concerned with Fee Disclosure Statements than many of your peers, and you will be feeling positive about the future of your business. Essentially you’ll be satisfied that you are able to continue delivering high quality advice, to clients who will receive significant benefits from your relationship, and a great return on their investment.
If you’re not feeling so confident, perhaps it’s time you took a robust approach to your pricing, and sought assistance from the experts?