Pricing for profit

Pricing for profit

Pricing for profit

Pricing for profit

Only one measure makes sense in a professional-service firm: profit per partner. So why do some firms still define success in terms of revenue?

Except in the context of a short-term grab for market share, it's a dangerous habit. It encourages staff at all levels to hang on even to unprofitable clients, to chase turnover at the expense of margins, and to salivate at every Invitation To Tender even time-wasters. That leads to the temptation to discount fees and cut corners, and thus risks undermining any competitive edge the firm has. It also condemns staff to a treadmill of more work for less reward.

By contrast, pricing for profit frees up time for smarter client-handling, thereby establishing a competitive edge which can underpin further price rises.

Making the change feels risky, of course, though it isn't in reality. One friend has taken months to screw her courage to the point where she feels able to up her daily rate from 700 to 750. Another, overnight, upped his from 2000 (excluding expenses) to 3000 (including them). Neither has noticed any drop-off in work.

Consultancy is, I suspect, what economists call a Giffen good. Its demand curve tilts the opposite way from normal. As with Rolls Royces, demand for it rises as price does (within broad limits). People want it because it's expensive and special. They wouldn't value it so highly if it were free.

A large personal-tax practice I know, fed up with being used as a loss leader to keep the directors of audit clients sweet, doubled its fee rates one year and lost about a quarter of its clients (although the remaining 75 per cent were now generating 150 per cent of the old revenue). A year later, the practice's chief doubled rates again, lost a handful more clients, but recaptured some who'd gone elsewhere in the meantime and discovered how awful most of his rivals were.

The quadrupling scared the hell out of his partners and staff. But it transformed his bottom line and gave him a power base that took him, a couple of years later, to the top of his Big Four firm.

If you decide to take pricing for profit seriously, there aren't many limits to what's possible. Take these two stories, for example, and revisit them whenever you worry that your fees are too high.

A training consultancy I worked with ran contests to see who could earn the highest daily rate. The record for a one-day one-tutor course in speed-reading for 75 people was 10,200.

A prestigious US firm pitched for a Business Process Re-engineering job in a UK power station. The firm figured, rightly, that it had two key things to sell: comfort (because it had lots of BPR experience); and value (because the client was looking to save upwards of 100 million across all its UK sites).

The firm's proposal explained that the job would require the services of two of its most senior consultants, full time, for two months. The fee they asked for was 2 million. Equivalent to a daily rate of some 24,000.... Each.

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