Monday, August 11, 2008

Setting And Talking About Fees – Part 2

What are the plusses and minuses relating to the choice of quoting hourly rates, e.g. “my hourly rate is $150”, versus task rates, e.g. “preparing your personal tax returns will be $1500”? From the prospect’s perspective, an hourly rate is considerably more open ended than a firm price for completion of a given task. Therefore, if the client isn’t really “sold,” and/or perhaps still hasn’t arrived at that point where they feel they know and can comfortably trust you, the hourly rate quotation clearly represents a greater potential for uncertainty than a task price. In an earlier post I noted that extensive research has demonstrated clients are more accepting of price when it is directly related to completion or accomplishment of a goal or deliverable they care about. These are strong arguments for quoting task pricing for “everyday” work such as personal tax returns, quarterly corporate compliance work, calculating balance sheets and P&Ls. The risk for you is small because you are sufficiently experienced with these activities to estimate very closely what your time investment will be.

One pricing technique that not only embraces good business development technique but also retains pricing flexibility is as follows: With a new client first ask them for a verbal description of the work. Let’s assume it is doing both personal and a (small, simple) business return. Ordinary stuff. You then quote a range, noting that the fee(s) will tend to the lower number if their raw data is complete and well organized. If that is acceptable, then have them send (or give) the data to you. Tell them you will call if there are any surprises. If you get into their data and see there is more work – perhaps due to an issue they hadn’t mentioned - you can justify a price increase because of scope creep. When you call to explain the increase and finalize the fee, their default is to agree to the price increase – of course, there’s a reasonableness test – and have you go ahead and do the work because a) by virtue of giving you the data and verbally agreeing to the tentative price they have already invested a degree of trust and belief in you and, b) it is a hassle to first have you send the data back, find another accountant, explain everything, give them the data, maybe get charged more, etc. etc.

Again, notice how you are coupling what you are charging to a given activity the client values and not just letting the price float around, e.g. “Our basic hourly rate at Solo, Venti and Grande is $175 per hour.” (client thinking: “Man, that’s a lot more than I make … do they charge that for everything … is there some kind of limit … what about for making copies?”) All you’ve done is create a barrier that must now be overcome.

On the other hand, it can often be very difficult to quote planning, consulting and project work on a task basis. If you know you will be attending a half-day meeting at your client’s company, it’s no problem. But, if instead the description is to meet for lunch to discuss acquisition strategy for the new product line and then keep talking into the afternoon as necessary, well, there’s no way you can quantify this in advance. The only way to approach this is some time = fee equation, whether you charge, say, $750 for a half day and $1400 for a full day, or by the hour.

You improve the odds of obtaining the work if you can reduce fee uncertainty. If the prospect – either a new client or an exiting client looking for unique or one-off services – can see an upper limit they feel much safer agreeing.

The technique described in the second paragraph above also adapts quite nicely to planning, consultation and project work. And, it provides the additional benefit of giving you a logical and client-friendly mechanism to adjust pricing upward if circumstances so necessitate. Here’s an example of the technique in an open-ended situation.

Bob calls you and you answer the phone:
“Hi, Bob. Have you decided when you want to get together to talk about the expansion funding?”
(he tells you he would like it to be on the 9th)
“Let me check my calendar.”
(you check your calendar)
“OK, that works. I’ve marked it down. Let’s make sure I understand the requirement so I know how much time to earmark for this project. Here’s my recollection: the two of us will meet for an hour or so to discuss the overall strategy and the relevant numbers, then I’ll prepare the funding options and we’ll meet again in a couple of weeks – this time with the bankers to get their input – and after that meeting I’ll narrow the options to the one that is most suitable and flesh out all the details with the goal of having everything finalized before the 1st of next month. Is that correct?”
(Bob agrees that this is what he wants and asks how much this will cost him.)
“I think the two meetings will total about 3 hours. The initial work up of the options will be around 4 hours, and I’m assuming preparation of the final option will take another 2. That’s 9 hours, so we’re probably in the $1,800 - $2,000 ballpark. It could be somewhat less, but if the bankers get overly involved and require more than one submission it could be as high as maybe $3,000. We can talk about it as we go through the process and I’ll alert you if it looks like we’re going to be any meaningful amount over $2,000.”
(Bob listens; agrees the time estimates are reasonable. He’s used to hourly rates in the vicinity of $200, so the hourly rate isn’t a shock. His experience is that bankers can be unpredictable, so that part also makes sense. You’ve told him you’ll keep him informed if it looks like he might have to pay more, so he feels he has some upside protection. He agrees to your proposal.)

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