Use the below checklist when reviewing your service pricing model
Pricing has a greater impact on profitability than any other part of your business, yet it can often be difficult for service-providing firms to know what to charge. When economic conditions are more challenging, there is little margin for error and maintaining a positive client relationships is crucial.
A good pricing strategy demonstrates value to your clients and ensures your business remains profitable. If you’re considering reviewing your pricing model, or planning to launch new service areas, this six-step guide can help.
In general, any business that provides services has two pricing models they can choose from:
- cost-plus pricing – essentially a billable hours approach
- fixed fee pricing – charged as a project fee or as a regular subscription, such as a retainer.
Many legal firms now use fixed-fee pricing arrangements to attract new clients. They use this model to build relationships and then once established, switch over to a billable hours model.
Although many service firms have traditionally taken a cost-plus pricing approach, some are choosing to consider charging for value rather than time. Macquarie’s 2013 Legal Best Practice Benchmarking Report found that while most legal professionals are sticking with their tried-and-tested billable hours model, fixed-fee pricing dominates in some practice areas.
“Many legal firms now use fixed-fee pricing arrangements to attract new clients,” says David Gonano, National Head of Sales for Macquarie Business Banking.“They use this model to build relationships and then once the relationship has been established, they switch the client over to a billable hours model.”
If you’re thinking about reviewing your pricing model, you need to take a look at your business first, and assess the impact of a pricing change on your clients, staff and external advisers – as well as the day-to-day running of your business.
Six steps to pricing success
1. Set objectives
What do you want to achieve for your business and clients? It could include:
- demonstrating value for money
- making sure you get paid fairly for all the hours you spend with a client
- defining different tiers of service to segment your market.
2. Fact find
Now you need some data to work with:
- compile a list of hard facts, such as your client base, costs charged and the services you provide
- consider broader aspects of your business, such as its history, how you feel about different pricing approaches and who your target market is.
Review the pros and cons of your preferred pricing options:
- how do they fit with your business and objectives?
- how will they position you in the market?
4. Reality check
What looks good on paper doesn’t always translate in the real world. Research benchmarking reports, analyse competitor models or get first-hand insights from your peers at networking events and conferences.
5. Crunch time
Time to make a decision. Based on all the steps above, you need to get everyone on board with your proposed changes.
Communicate your plan to staff, partners and clients, and discuss how your business will price jobs in the future. It’s important both staff and clients are happy with the changes, so be prepared to listen and potentially make some compromises.
Not sure if it’s time to change?
Your Macquarie Relationship Manager can also help review new pricing model ideas or with any specific steps in the process.