Pressure To Lower Fees

Al, who has a practice in North Carolina, contacted me to ask about how he might deal with a local competitor who has begun promoting their practice by offering clients a, “… low, realistic price structure during difficult economic times.”

Sure enough, when Al checked it out he learned this individual has reduced his fee structure (when compared to average fees in the community) approximately 25%. You can guess how this came to Al’s attention: a client essentially told him that for cost savings of that magnitude he would switch to the other accountant unless Al matched the reduction.

Al is anticipating this may not be the first time this happens, so he wants to have a strategy in mind should the situation present itself. What should he do?

Like so many things, there are a lot of variables. How important is the client who is agitating for a discount? How much is the prospective reduction? How is your practice doing … can it afford to offer meaningful discounts for its services? Aside from profitability, how is the cash situation? How about AR? Are we talking short-term reduction or will the impact extend well into the future? And, are we considering discounts for all or just some clients?

In the short term, Al may, for example, simply ignore this one accountant’s potential negative impact to Al’s client base. If he loses a couple of smaller clients, so what? But, what if he is faced with a situation where other accountants in his trading area also begin lowering fees and the threat of losing existing clients as well as signing up new clients becomes meaningful. If Al’s cash flow and/or margins begin to falter, he may need to do take some steps in response. He could reduce costs (e.g. layoff staff), or lower his fees to some extent. Or both. Of course, if he has the balance sheet to pull it off, he may simply do nothing for the present and reassess the situation periodically as the year plays out.

Some long term considerations might include competitive positioning, i.e. is your practice a full service firm with a strong client list sitting on one of the top rungs of the local pecking order? Do you lose some of that status if you reduce fees or services? And, once you lower fees, no matter who your clients are, how difficult will it be to restore fees in the future to the present level?

Generally speaking, I believe an effective strategy might include these two major elements:

a) It isn’t an option to lose your “A” level clients. They contribute too much to your practice (revenue, profitability, quality referrals, potential for growth, etc.) and they are too hard to replace. If you are experiencing downward fee pressure, or sensing it is approaching, I recommend you immediately adopt a defensive strategy with these most desirable clients. Give them more attention and deepen the personal connection. Take them to lunch, a baseball game, or golfing. Thank them, inquire about their business and how things are going in today’s potentially difficult times, pass on some ideas, be helpful, stay in touch, and the like. You can forward a CCH article that is relevant to their business, warn them about a potential IRS ruling that may affect their operations, etc. The greater the level of personal involvement you have with these clients, the less likely it is they will leave because of fees.

Don’t unilaterally offer to reduce fees. Instead, increase the level of service and attention you provide these most desirable clients. A related defensive tactic might be to tell them that as an accommodation to your most important clients during this period of economic difficulty you are freezing their rates. If, at the end of the day, you are forced to make a significant reduction it is very helpful to have a strong personal relationship because you can then say, “Bill, I’m willing to provide this help for you because we’re in the boat together, but can we agree that when things turn around we can get back to where I can actually realize some margin for my efforts on your behalf?” If you and Bill have a reasonably good connection he should have no problem agreeing to this request and that permits you to raise the issue (and the fees) at a later time. I’ve even heard of a firm that has given a written offer of fee reduction for, say, six months; at which point the fees return to the present level. Both the partner and client sign the document to memorialize their agreement.

b) if you do make the decision to lower fees; do so selectively. Your clients don’t typically talk with one another, so if you reduce your fees for client A, it would be unusual for client B to know of it. I’d first consider reducing fees for your less desirable clients (“less desirable” being defined as those clients who are typically smaller, less profitable, provide fewer referrals, don’t offer much potential for future fee growth, require more hand holding, are slow pay, or any combination of these factors); ones that are perhaps more susceptible to being swayed by your competitor’s lower fee structure. And, they may be highly resistant to later efforts to return fees to earlier levels. The loss of these clients if their demands become excessive doesn’t, in the final analysis, negatively impact the long-term success of your practice.

I encourage your feedback on this issue. It may be on the table for many more months to come and if you have experience you think others might benefit from, please let me know.