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Getting your pricing strategy right

FP Advance’s chief executive Brett Davidson discusses some of the core value points that determine just what clients are prepared to pay for their financial advice.   

Everything I’m about to cover here is predicated on the fact that you have done the work on your segmentation, understand who you work for, what their top five issues are and have put together a solid proposition for them. If that is in place then the pricing philosophy I’m about to describe will make perfect sense.

“It’s never about the price, it’s always about the value.” This could just be a throw away line but it’s not. In my opinion, this is the crux of everything when it comes to your pricing strategy – delivering value. Not necessarily what you consider to be value, but what the client (in fact each client individually) considers to be value.

Here is a précis of client thinking in three easy steps:

1. What is my problem (and how bad does it hurt)?
2. Will your product/service solve my problem?
3. What’s it worth to me if it does?

All you need to be able to do is find out the answers to each of these questions and then you can price your service perfectly. Simple enough eh?

Not exactly. You need to work through the questions in a different order from the client. Your order is not 1, 2, 3. But 1, 3, 2.

1. What is you problem (and how bad does it hurt)?

3. If I can solve that problem for you what is it worth?

2. Let me show you how my product/service can take away your pain and discomfort.

The first challenge is identifying what the client’s problem is. (When speaking with a client you would never call it a problem; it would be a challenge).

Asking great questions is the easiest way to 
find out what the problem is. Just like a doctor asks the patient what symptoms are presenting, you will need to do the same thing. Most advisers don’t ask nearly enough great questions to really diagnose the problem and how bad it is hurting for the client. That is obviously going to affect their pricing power (or closing rate) later in the sales process.

If you’ve got the diagnosis right and established the level of pain or discomfort the client is in you can try to
find out what it would be worth to the client to have the problem removed. This part is tricky because:
• The clients don’t always know how great things will be after you’re done (the intangibility of advice) so they can’t put a fair price on it
• It can vary significantly from client to client
• You can’t just ask “So what is it worth for me to fix this for you?”
• And if you do ask this question some clients may fib.

But asking some searching questions can help you get a flavour for what this might be worth to the client. Questions like:
• What value can I add?
• What are the criteria for a good solution? OR, what does good look like as an outcome here?
• Is there anything we can’t do?
• What are the implications of doing nothing?
• What have you thought of already?
• What concerns do you have about resolving this issue?
• How will you measure our performance?
The better handle you can get on what this will be worth to the client, the better you can position your fees and charges in the final step.

Assuming you have a really solid client proposition that addresses their main issues, you can simply explain how you have treated many people with similar challenges inthe past and prescribe them a course of your most appropriate service package.

Who is your master?

The typical approach to pricing is to take almost all the remuneration when the client buys something. There is no upfront advice fee for the initial advice, it’s all taken at implementation and if the client doesn’t buy there is no charge.

Who does this pricing approach work perfectly for? Product manufacturers. This is not a criticism of their approach; for them it makes perfect sense.

Three hundred years ago in Scotland someone realised that sometimes people died leaving no money for their family. So they devised a method for people to contribute a very small amount on a regular basis that paid their family some money if and when they died. This was the first mutual life insurance society.

Then they realised that no one actually bought this great product so they hired people to go and sell it. The salespeople obviously only got paid when they sold a product.

That model has worked pretty well for 280 of those 300 years but in the last 20 years, with the explosion in financial product design and complexity it hasn’t really made any sense at all for advisers or clients.

In this approach advisers are the distribution and that is still how they are referred to internally in most life insurance companies and investment management houses.

Does this pricing approach make any sense for your clients? Clearly not. They can’t seem to match up where they perceive the value with where they have to pay.

Does this pricing approach make any sense for you and your business? Absolutely not. Advisers work for their clients, not for the life companies and investment houses. Who is your master? The client, obviously. Yet most firms are using a pricing model designed for another part of the value chain. It’s well past time that it stopped.

The value for clients

The value that each client attributes to your service will vary from client to client, but here are some common issues that will be considered valuable by clients:

• Saving them time
• Cutting through the jargon
• Giving them a clearer understanding of their choices
• Calculating a figure or target they can work towards
• Validating a figure or target they have come up with
• Providing a second opinion on their own decision making
• Working alongside them as a trusted strategist – helping them set their future course
• Keeping them on track and in alignment with their real goals in life
• Removing emotional pain or fear about a major financial decision
• Helping them manage their emotional baggage around money.

Naturally, there are some clients that just want to do it themselves but to be honest they are in the minority. Most people have got better things to do than muck around with financial stuff and for many it is a pretty scary topic so you won’t be short of people to work with.

But the people that are prepared to work with you will still need help in understanding what you can deliver and how valuable it will be to them.

The value for you

All the value for you and your business is in the lifetime value of the client. If a 52-year-old client pays you £1,000 per year, their lifetime value to you is £43,000 (if we use age 95 as a reasonable life expectancy).

If a 60-year-old client pays you £10,000 per year, their lifetime value to you is £350,000.

The lifetime value of clients dwarfs the earnings you might generate in year one.

Furthermore, when you factor in the sale value of a client that has that sort of lifetime revenue potential (say two or three times the annual revenue) you are starting to talk serious money upon sale of your client bank or business.

So in a perfect world you want to be creating a business that is focused on finding and securing lifetime value clients. And once you’ve got those clients you don’t want to let them go.

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