The first of two articles arguing the case for Value Based Pricing
People have been receiving fees in return for advice for millions of years, so why do we continue to under-charge and over-deliver and continuously struggle to come up with a pricing model that adequately compensates us for value provided? In this article, we will explore some of the basic concepts that support charging fees based on value delivered.
[tweet_box design=”default” float=”none”]“We continue to undercharge and over deliver and struggle to come up with a pricing model that adequately compensates us for value provided”
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Concept of Value and Fees
For most advisers, the question is really about value, not about fees. Let us take a look at a definition of fees.
[tweet_box design=”default” float=”none”]”A fee is remuneration provided in return for perceived value received”[/tweet_box]
Based on this definition, fees are dependant upon the perceived value received by the client. Therefore, when establishing a relationship with a client, the focus should be on articulating and maximising the value that will be delivered. It should be addressed as early as possible, prior to discussing strategies, solutions, methodology, options, timing or fees. The more perceived value that is conveyed to the client, the less pressure there is on the adviser to confidently charge fees. Advisers who fail to believe in the value they are delivering are one of the main causes of fees not providing adequate compensation. Psychologically, people believe they get what they pay for. Emotion makes them act; logic makes them think. Clients will react if they believe they can improve their position through the perceived value you can provide.
Another factor which is critical in applying value-based fees is that the adviser and the client have the intent to act ethically and do the right thing. The adviser will provide the most appropriate advice (and ensure the client perceives the value of the advice) and the client will act accordingly, based on receiving it (pay their fees).
In addition to the above, there must also be genuine commitment and emotional buy-in from the client to the process and their role in the relationship. Patience will be required to foster the right type of relationship that maximises client commitment throughout the entire process. Without genuine client commitment and client’s belief in the perceived value to be delivered, fees will be a major point of contention.
Some key points to remember when considering value and fees:
- Perceived value is the basis of the fee
- ranslate the importance of the advice into how it maximises a client’s long term gains in the client’s perception
- Develop a relationship where both parties posses the intent to act ethically and that embraces a client’s commitment and emotional buy-in
- Have a belief system that supports the high value being delivered to clients
[tweet_box design=”default” float=”none”]”Believe in your own value and build your perceived value in demonstrable ways every day. That is the fuel for the acceleration of fees”
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Focus on Outcomes
A simple way to maximise perceived value to clients is to focus on the outcomes a client will receive as a result of their relationship with you. Clients will pay a great deal for the outcomes, results and long term value of the advice. In order to demonstrate value, you need to shift the focus to how much value you provide through the outcomes and results the client will receive – not how much work there is to be done or how you are going to do it.
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“It’s the outcome, not the tasks, that matters”
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Everything you do must be translated into an outcome or a result to the client. A client does not care how many hours were devoted to researching, modelling or forecasting their position or how long it took to document and compile the Statement of Advice. They only care that the advice provided will deliver the outcomes and results that they perceived were of real value. For these outcomes, they are prepared to pay your fees. As an adviser, you have the power to influence the client’s perception of value through your focus on results and outcomes, rather than tasks or activities.
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“Most advisers place their value proposition at the wrong end of the equation – they focus on their ability to do, rather than on the client’s ability to improve”
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Fallacy of Deliverables
A starting point is to change the emphasis, from what you do, to what’s in it for the client. It is suicidal to base fees on things that are important to us rather than what is important to the client. You need to establish very clearly what the client’s improvement will be, not on how you will actually do it. How you will do it is a deliverable – and a deliverable is a means to an end. Deliverables themselves are not client results and they should never be confused as such. The key to avoiding the emphasis on deliverables is not to mention them, rather talk about the value, outcomes and results instead.
You are the expert and the client has engaged you for a reason. Although it is reasonable to outline the methodology you may be using, whether you deliver two reports and have three meetings or deliver one report and five meetings should not really matter – as long as the client can relate their improved condition to your involvement.
Transforming your past experience into the client’s future (results)
[tweet_box design=”default” float=”none”]”No one really cares about how good you are. They care about how good they are going to be when you’re done with them.”
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A major determinant of what an adviser is worth is based on the transformation that is achieved in turning your history, experience, education etc. into the client’s future (results). Although you can charge for your credentials it can be limiting, compared and contrasted to other similar professionals; yet when you base your fees on the client’s future position and their results, the sky is the limit. You are constantly learning on the journey to enriching your client’s future. Therefore, as you are further increasing your value to the relationship, why would a client want to leave you?
[vtftable cols=”{0}0-4:cccccc;{/}”]
Adviser’s Past;;;;;;Intervention Activity;;; ;;;Client’s Future;nn;
Experience{;n}Education{;n}Achievement;;;>>;;Consultative Meetings{;n}Forecasting/Modelling{;n}Mentoring/Coaching;;;>>;;Problems solved{;n}Peace of mind{;n}Educated/Informed;nn;
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The only column above that really matters is the third – the client’s future. This is what you attach value and ultimately your fees to; not the first two.
In order to charge what you are worth, remember:
- Focus on the client results and outcomes, not on the deliverables
- Demonstrate how your unique past can transform to the client’s unique future
Reference:
Weiss, Alan “Value Based Fees – How to Charge – and Get – What You’re Worth” (2002)
