3 Key Tips to Transition to Fixed Fees

December 4, 2018
3 Key Tips to Transition to Fixed Fees

If you run a professional services firm, you’d have seen many articles telling you that you must move to fixed fees or value-based pricing. However, they often major on why and neglect how.  At FirmChecker, we collect and analyse ratings and reviews of a range of professional services business models, leaving us well-placed to say what works and why. In this post, we’ll briefly look at the “how” of quoting fixed or value-based fees to your clients.

Queensland Law Society: How to offer fixed fees

The QLS offers this useful guide for quoting fixed fees. It’s common sense but is a good checklist of the key things you need to consider when offering fixed fees.

They outline key stages in providing fixed fees as follows:

  1. Stage the instruction – i.e. itemise the fee.
  2. Interview clients about their matter with costs at the front of mind, identifying tasks, time and risk factors as you go.
  3. Define scope – explicitly identify what will and won’t be included in your matter.
  4. Have an accurate and updated database of your own costs each matter.
  5. Consider your margin –account for scope risks and premia
  6. Negotiate – understand what value you bring to the table and have a walkaway price
  7. Drive efficiency – eliminate, automate, delegate, outsource

It’s useful to make each of these stages habitual – in particular; driving efficiency and keeping an accurate database of internal costs. Note, you should constantly update your estimates for given matter types, particularly after you’ve transitioned from hourly rates – with a change in incentive structures, improving tech and a learning curve – you may find that your internal costs go down over time, and you ought to consider this when pricing.

The 2-5-3 Method of Pricing Professional Services

fixed fees can be tricky in professional services firms

Joel Barolsky, the creator of the Price High or Low app, advocates a simple, memorable heuristic for pricing he calls the 2-5-3 Method. It can be summarised as two objectives, 5 factors and 3 decisions.

2 Objectives

This is quite simple – your two objectives should be for your client to perceive great value and accept your proposal, and for you to make a handsome profit. Both are equally important – making a profit without a happy client is a short-term view and will stunt your organic growth.

5 Factors

When you’re clear on your objectives, you ought to be considering cost, value, competition, capacity (i.e. opportunity cost) and connection (i.e. to what extent can you price this in such a way you’ll get repeat business).

3 Decisions

You should then consider pricing structures (fixed, retainer, success etc), pricing level and how to best communicate your pitch with your prospect.

This approach should help ensure any client relationships you enter are mutually beneficial.

Summary: 3 Tips for Providing Fixed Fees

There’s a lot to take in here and all of these steps and strategies are important. Our key take-outs (i.e. those that go beyond common sense) from these two expert articles are:

  1. Respond to incentives. Once you’ve started transitioning to a fixed and value-based model, unlike the hourly rate, you’ve set up the incentive to deliver work as efficiently as possible. Use this as a motivator to drive efficiencies! Eliminate, Automate, Delegate, Outsource.
  2. Manage your risk. Fixed fees are risky, but you’re in a much better position to take that risk than your clients. Maintain a simple database (MVP: just do it in excel with some basic segmentation for fees, overruns, time costs, matter type, job type, what you quoted, what you recovered etc). From this database, you’ll be able to make more effective decisions around price and margin.
  3. Make sure you’re on the same page. There’s no point in providing a great piece of work for a client if you don’t make any money. Equally, there’s no point making a lot of money if it becomes a grudge purchase for the client and your reputation is damaged – people are way more likely to discuss a negative experience with their contacts and it will harm you down the track.

Conclusion

Increasingly, particularly as fees become more transparent with developments in IT, clients will accept nothing less than fixed fees. In a buyer’s market, effective scoping and quoting is a skill every professional should master.

About the Author

Ben Farrow is the Managing Director of FirmChecker and consults with Beaton Research + Consulting, the leading management consultants to professional services firms in Asia-Pacific. He holds commerce and law degrees from the University of Melbourne and digital marketing certifications from Northwestern University. 

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