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#12: Appropriately Pricing Services

What You Need to Know to Better Price Your Services

Have you ever been burned by a one-size-fits-all sales pitch? Yeah, we have too. Using this language isn’t always successful across multiple business sectors like retail and service-based models and can leave many customers feeling disappointed. If we know this style doesn’t usually work, why are your prices the same across each of your client tiers? 

Today, we are going to help you accurately price your services to reflect the true value you provide. Let’s get started.

One Size Doesn’t Fit All 

Many advisors have a single pricing structure that might make sense on paper but in execution can leave many cards on the table not only for the advisor but also for the client. When you think about it, you can see the immediate appeal of a universal pricing structure,

  • Simpler billing process
  • Ease of sales process
  • Clear explanation to clients

Essentially, a flat percentage advisory fee is analogous to a one-size-fits-all motto. It’s simple and sounds like a good thing, but not everything is what it seems and shortcuts can lead to missteps in your process.

Here’s the thing, setting your pricing requires a unique balance of affordability and appropriately matching your clients’ needs with the right service and professional to execute that service. We can break this down even further. 

Start with the client and think about what they need to be successful. We discussed this in our last post when creating distinct service models that best meet the needs of all your clients. Your firm needs to understand the type of clients you serve and what their needs are in terms of service, planning, and investments. This is the three-legged stool that all advisors focus on.

Once you have clearly identified these three legs (service, planning, investments) you can identify which professionals are needed to meet those needs. And different professionals have a different cost. 

Take the difference between nurses, general physicians, and surgeons, they all charge different rates. If a nurse can do the job, there is no reason for the surgeon to get involved. But if you need surgery, you should pay for the surgeon to perform the task they have studied and practiced even if the cost would be less with a different professional. Different skills require and command different compensation rates and a flat fee schedule essentially charges the same rate for different services and skill sets. 

Examine Client Tiers

Now is the time to take out your client experience worksheet (available for download below) and go back to client-tiers you established. Once you have those, answer the following questions:

  • What services are provided for each tier?
  • Which professional or group can best serve that tier?
  • How can you maximize each of your team’s unique skills to best support your client and your business?

This gives you the opportunity to take a closer look at not only the services you provide but which professional on your team can deliver the best value. 

The Two Things You Need When Setting Your Prices

In order to accurately set your prices, you need to remember the two main responsibilities you have:

  1. Your prices should be fair to all clients.
  2. Your prices need to be profitable for your business.

These seem really simple, you have a duty to your clients and to your business to set your prices in a way that makes sense for both groups. Let’s take a closer look at each of these duties and how they should influence your pricing model.

Duty To Your Clients

You have an ethical and legal responsibility to set your prices fairly for clients. Setting prices too high for the service you are offering would not be ethical and the SEC has specific rules for maximum fees for this exact reason. 

So charging too much isn’t usually the problem in most advisor firms. However, firms that use a flat fee schedule may be overcharging their clients with the most assets and undercharging their smaller clients. In a flat fee environment, larger households essentially subsidize smaller households.

Why does this matter? Well, if you have highly skilled veteran advisors serving the firm’s smallest households and taking time away from the largest households, that doesn’t make smart business sense. In that case, you have people paying a much larger dollar amount for service and advice, sharing a professional with people paying a much smaller dollar amount. 

Let’s look at this same idea from the opposite extreme. Say that some clients get service for free. How much incentive will you or your team have to give them for great service? Is everybody going to go above and beyond to help that client? Will you put in extra work for their financial plan or tax reduction strategies. To us, the real question should be, Is it even then fair to the client? Most firms don’t have a free fee schedule, but a flat fee for smaller households might have a similar effect. They’re actually giving clients a worse experience than what they want to. 

Duty To Your Company

The entire structure of your service model, including your pricing, always circles back to the design of your client service matrix. There is a lot of work that needs to be done to make that matrix, but once you have it you can use it to price your services appropriately for the team members that are delivering each part of the service inside that matrix. 

That may sound a little like inception but it really is much more digestible than that. Think about it like this, certainly having an expensive veteran serving a small household is an unprofitable proposition, right? It is all about the design of your services. If your fees are low, that isn’t necessarily unprofitable, it just means that your staffing needs to match the service. 

So if you want to charge a really low fee, you can but in order to be profitable, you need to match the fee with the service. That might mean taking longer to respond to emails/phone calls or only offering one investment model. 

The main thing this comes down to is appropriately pricing services with the value delivered and that information can be ascertained by making the most of your matrix. 

A Solution That Works

We are really excited to talk with you about a system that has transformed the way we approach our pricing, a tiered household billing schedule. Let’s break this down. 

  • Tiered, refers to the fact that different service experiences have different fee rates
  • Household, means that we aggregate all accounts in a household together and apply the rate to the total balance, not just one account at a time.

Some custodians and RAs use a tiered fee schedule, but for technological reasons, they can’t apply it to the entire relationship, which means that they tier each account. So there could be three separate $1 million accounts in a $3 million household, and each of those million-dollar accounts would each pay the highest fee. But because we’re able to separate by household, the clients only pay the highest rate one time. 

The tiered household billing schedule solves all the issues we addressed above. We charge a higher rate on the first tier of assets. Then we charge a lower rate for the next tier and the next tier. 

This provides enough revenue from smaller households while providing the service and professionals they need, and it rewards clients for growing their wealth under our firm’s management. Lowering the overall rate on the larger clients also fulfills our duty to price fairly and makes the firm more competitive for those households. 

This system ensures that each party is incentivized in the right way and allows us to provide the absolute best experience to every client no matter how much money they have because each experience is designed to attract and serve a specific client group. 

If you want to learn more about how the leveraged ensemble and tiered household fee schedule can help you serve your clients, please contact us. You can use info@cxinstitutional.com or you can call and schedule an appointment with our corporate development team.

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