Setting Fees for Consulting Services

Continued from The Role Of Fees In Practice Development

It is at this stage that an inexorable rule has to be considered no matter how much information, how much skill and how much science go into establishing what the fee will be.

High fees – opportunity for high profit = low chance of success. Low fees = risk of low profit or loss = high chance of success.

More than anything else the practitioner requires a methodology for arriving at fees which are acceptable to the organisation, to clients and will not influence third publics (possible referrers) adversely. It has already been remarked that the organisation that is at the mercy of its clients deserves sympathy and nothing else.

Some methodologies comprise a multi-stage process which leads towards the final fee but such mechanistic approaches fail to account for the interaction between the different stages. To be effective the multi-stage process must be reviewed as cyclic and reiterative rather than a one-way flow from start to finish. The stages are:’°

Objectives

Just as with the total practice development strategy an early step must always be to decide and to obtain agreement on fee objectives. These can be as variable as the objectives of the total strategy; a given level of profitability, return on investment, achievement of specific growth rates, high cash flow, optimisation of special skills and resources, attracting new clients/higher level of repeat consultations or instructions.

Designation of targets

This stage will have been completed in the preparation of the practise development strategy. Clearly, the fee structure must fit the target market and it may well be that having arrived at the fee structure either because of the nature of costs or of demand, it may be necessary to reconsider the market targets in the total practice development plan.

Demand estimate

The next step must be an estimate of the demand which will be generated at a particular fee level. Because it would be impractical and unprofitable to undertake marketing research for every occasion, but by no means impractical to arrive at general level of acceptability, this must be best judgement.” The teleological nature of pricing decisions is nowhere better illustrated than at this stage where fee level can generate or inhibit demand and where high or low demand has an immediate favourable or adverse impact on costs and thus fees. Nevertheless, those responsible for setting fees cannot sit on the fence. A view must be taken on assumed demand at given fee levels.

Fee–image relationship

There is a direct correlation between fees and image. As has already been pointed out a professional service just like a product can be suspect if the fees are perceived as so low as to affect the quality or delivery of the service. Conversely, high fees will frequently indicate a high level of qualification, experience or ability.

It is unwise to an extreme to attempt to arrive at a fee level without first considering what image the practise wishes to convey both overall and in the specific transaction under consideration.

Selection and use of communication techniques

This must be a judgemental decision towards which not even the most advanced thinking on marketing can contribute. No matter how sophisticated the marketing of any organisation may be and no matter how many protestations to the contrary are made, the communication ‘mix’ is still decided much more by empirical than methodological means. Just because there is unlikely to be any multi-million pound budget to juggle with the problems are no less severe. Indeed they are probably greater in having to work within a very limited budget and in a market where there is little record of client reaction to any given fee level and perhaps no market information whatsoever. Yet again the practise developer has to take a posture even with minimal information.

Decision on fee policy

The practise will have to make a decision on the basic policies relative to fees. How far will fees be flexible to meet particular circumstances or to secure and retain particularly desired clients? What will be the policy relative to keeping the fees above, level with or below competitive fees? Is there to be some provision for fee incentive for perhaps continuity, forward commitment or use of the full or fuller range of services available? It is even possible that reciprocity with clients whose products or services can be utilised by the professional practice would be considered and encouraged.

Selection of a fee strategy

It may be useful in developing a to distinguish fee policy from a fee strategy.

Policy might be said to apply to the predicated situation, most particularly those situations that are recurrent. However, demand is never wholly predictable and is subject to many fluctuations caused by the impact of the forces or change which are largely uncontrollable – social, economic, political and technological. Changes whatever their cause may well demand a change in fees. Strategy is the formulation of the guidelines in setting fee levels to meet any special situation not envisaged or allowed for within the policy principles. It is in fact the contingency fee plan and the trigger for implementing it would be any situation which the price policy could not encompass.

Choice of fee tactics

Surprisingly, some of the pricing techniques adopted in parts of the consumer goods industry are applicable for professional services but their very names will usually lead to instant rejection as examples of commercialism at its most brash and therefore totally inapplicable. This is quite wrong. Whatever nomenclature and however they are used in consumer goods and services’ markets their applicability is clear. The main methods which are relevant to professional service pricing tactics are summarised in Figure -1.

If the titles and techniques of fee tactics appear totally divorced from  practice it is only necessary to see how many of them are in current use. ‘Offset’ fees can be found in dentistry where a low examination fee may be combined with high cost ancillary services, for example X-rays or supplies such as prophylactics; ‘discount’ offers are commonplace in computer services, engineering and management consultancy; ‘service flexibility’ is not unknown, indeed is commonplace, in many forms of financial services most particularly insurance; ‘inducement‘ (or loss leading as it is known in commercial parlance) is an extreme taken by solicitors offering free first interviews to private clients who may be involved in accident claims.

Precisely how each tactic is used is totally dependent upon the service involved, the target client group, and what might be termed the “situation – ‘ambient conditions’.

Whatever the circumstances, the use of any of these tactics to be effective, requires a knowledge and understanding of clients and in the case of commercial clients a knowledge of the selection and decision-making process also.

Any discussion of fees in consulting  services is surrounded with a type of taboo typified at its extreme by the barrister who receives not a fee but an honorarium, and all financial arrangements are negotiated through his clerk. (Barristers still carry in their gowns the vestigial remains of the pocket into which the fee was placed to avoid their actually having to receive the money from the instructing solicitor.  Thus fee tactics are frequently seen, not as they are – a legitimate and efficient tool of practice development – but as a somewhat devious means of separating the client from his money.

However, whether it is called loss leading‘ or `development fees‘, or a ‘sprat to catch a mackerel‘, the tactic remains the same and is wholly applicable to consulting services marketing.

When policy, strategy and tactics have all been decided and agreed there still remains the final step which the whole multi-stage process is leading to, the selection of the fee or fee structure. The interactive nature of these stages and re-cycling, which will lead to the selection of the actual fee, is best illustrated on the same basis as the total practice development strategy, namely as a planetary system. This system has final price as the ‘sun’ and the various stages arriving at price moving around on an eccentric course depending both upon the circumstances of the practise and the changes in the environment in which they operate.

For the decision on the final fee the practitioner will be limited in his options by the various factors which impact on fees. Nevertheless, there will be a range of possibilities that will be consistent with the various stages of the fee-setting procedure.

The two key points are that fees charged must cover direct costs and carry a reasonable margin of profit; the arithmetic of pricing must not be ignored; that is a study of the costs and the revenues generated by alternative fees within the range which is circumscribed by the different stages passed through in moving towards the selection of the specific fee. By approaching the final fee on the basis of each different consideration the risks of deciding what this fee shall be, based purely on ‘cost’ or ‘values’, are avoided and a more rounded view which improves judgement is obtained.

Although the multi-stage approach is claimed as practical as opposed to the elegant theories which are frequently offered, the practicality is often limited by lack of information on which to base each incremental decision.

The multi-stage approach will have the virtue for each organisation, no matter how lacking it is in information, of at least indicating the data it requires to achieve, as time progresses, better and better fee bases and structures that are both practice and client orientated.

Fees may be a key decision factor when services are undifferentiated while in other circumstances they will be of little or no consequence within the restraints imposed by the client’s resources. In the first instance when identical services charge identical fees the fees are not part of the decision-making process. This could apply to payment of doctors, dentists and other professional personnel employed in state health services. The opposite circumstance is medical assistance in an emergency where it is the existence of the assistance and not its cost which is all that matters. Between these limits, fees will play a variable role in the range of factors considered deciding both on the use of a professional service and the provider of that service.

The multi-stage approach suggested will narrow down the options and range of fees from which the choice must be made. It is a considerable aid to judgement but does not replace it. There is no certain way to arrive at an optimum fee and the multi-stage approach is an attempt at systemisation and avoiding the excesses which on over-reliance on rigid methods can produce at one extreme or allowing emotions or history to shape the final decision at the other.

The problems and rewards of effective techniques for setting fees or devising fee structures as a vital part of the total practice development plan have been treated only superficially. It has been more an introduction to the subject than a detailed explanation of its mechanics. The purpose has been to ensure that the question of fees is not allowed to occupy a less important place and command less consideration within the practise development plan than its all pervasive impact on results justifies. All consulting organisations should examine their policies (or lack of policies) to ensure that methods of setting fees which have been used in the past are still relevant in today’s conditions and will remain so in the foreseeable future.

Fee setting at the correct level is of considerable consequence both for the individual and for the survival of the organisation. Fees are a tool, to obtain and retain clients as well as to ensure the profitable continuance of the organisation. The two objectives are inter-related and lend themselves to a variety of strategies for their successful achievement. Those concerned with practice development, faced with increasing professionalism in marketing consulting services, need an understanding of fee-setting techniques if they are to have any chance of success

Title Description Effect
‘Offset Low fee for ‘core service but recouping on ‘add-ons’ Psychologically favourable at the quotalion stage, but can easily lead to difficulties on implementation. Advantages in some cases of client being able to control extent of commitment
‘Inducement Fee charged produces sub-standard profit or loss but attracts new clients or helps retain existing clients, used on the basis it will be possible to recoup fees on later transactions Successful with unsophisticated clients but tends to give a fee ceiling which is difficult to penetrate later
‘Diversionary’ Low basic fees on selected services to develop image of value for money which transfers to total practice Generally effective so long as the client does not feel obligated or that he has been persuaded to use more realistically costed elements in the total service offer
‘Discrete (for commercial clients) Fee level brings the decision into an area of authority of a DMU favouring the organisation.A lower fee may take decision to lower management; a high fee to the board. This tactic necessarily requires an intimate knowledge of the prospect organisation While the decision can be moved into the DMU responsibility area favouring the organisation better able to appreciate the offer, all fee adjustments upwards or downwards have associated risks
‘Discount Quotation   subject    to discounts on   a predetermined basis, e.g.. time schedule, extent of commitment, magnitude of transaction Positive encouragement to client to structure transactions on mutually favourable basis
‘Guarantee’ Fee includes an undertaking to achieve certain results – the undertaking surpassing that of competitors Moves competition from consideration of fees to consideration of values and places high quality service in most favourable position to compete with lower quality services
‘Service flexibility’ Quality of service hence costs varied to enable fees to remain unchanged Removes fees as major negotiating point, substituting the service but note effect above for diversionary fees
‘Conditional’ Fee is conditional on the purchase of other services Tied in service has to be attractive in itself or else potential for the basic service is reduced. This method is illegal in some countries
‘Predatory Fee set well below competition as means of removing them, Realistic fees applied later Requires accurate assessment of competitive resources and policies.   Can  be self-destructive and also illegal
‘Skimming’ Fee set high when demand is inelastic or capacity short and gradually reduced as situation becomes competitive Gives      extra  profitability  and a hedge against later sub-standard profit. Enables the organisation to keep an edge over competitive organisations so long as the original high fee has been maintained long enough

 

Did you find this article useful?  Please let us knowThese are outline notes from a MAANZ course.  If you are interested in obtaining the full set of notes (and a PowerPoint presentation) please contact us – info@marketing.org.au

Also check out other articles on http://smartamarketing2.wordpress.com

MAANZ International website http://www.marketing.org.au

Smartamarketing Slideshare (http://www.slideshare.net/bmonger)

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