One of the toughest conversations you can have with a client is the one where you discuss raising your fees. It’s such a challenge, that many firm owners don’t even have it. Preferring to forego any extra revenue rather than go deal with any awkward conversation or risk losing them as a client altogether and all the revenue they bring.
This is a question that one of my WIZE Mentoring members asked me via email recently.
I have been ignoring a key issue in my firm for some time, and I’ve realized that now I really need to bite the bullet and stare it in the face. When I first started my firm, I wasn't sure how to price my services. I played a guessing game when drafting proposals (something along the lines of "pick a number from the hat, close my eyes and push send") and I also wasn't keeping timesheets.
Fast-forward to today, and I’m providing these clients with exceptional service (monthly meetings and everything) for a very low cost. I am also keeping timesheets, so I can see that we are undercharging these clients a lot.
How do I have a conversation with my clients and tell them that we need to raise their fees by around $400 per month? Am I better off taking the loss for these clients and accept they are good referrers? Or, do I increase by smaller amounts each year until there is finally no loss?
It’s a great question.
There is a financial matrix that shows that if you are on a gross profit margin of 30%, you can increase your prices by 10% and afford to lose 10% of your clients without losing any money. Namely, you will still make the same net profit.
You can work the numbers out for yourself quite easily:
Work out your average fee per client
Increase all these fees by 10%
Cut out 10% of your clients and see what the net profit will come to
300 clients at $1,000 each will total $300,000 in fees, with a 30% gross profit margin of $90,000
Increase these fees by 10%
10% lost clients would mean 30 clients
Now, you would have 270 clients left who are each paying an extra $100 ($27,000 in total). Losing 10% of clients means 30 client’s at $1,000 each, or $30,000 in total. It’s pretty close if you take into account fixed expenses.
But you won’t lose 10% clients, you will only lose a handful of clients. The purpose of this exercise is to highlight that even if you lose a decent chunk of your clients, you won’t lose in the overall picture from raising your fees.
When I first started my practice, I kept my fees low to get more market share. After several years I was overcapacity, so I needed to increase my fees back to market prices. I used this financial matrix to make that decision.
Yes, I lost a handful of clients. But they were some of my more troublesome clients, so in many ways it was a blessing. In my experience, it has always been 5% of clients that cause 95% of the problems. I increased my profits and got rid of the bad clients. A very good outcome!
When was the last time you looked at your legacy fee paying clients?
Founder & Non-Executive Chairman, Chan & Naylor
Ed started Chan & Naylor from a small home office in Sydney and has grown it into a National Financial Services Organisation with offices in most capital cities around Australia, servicing more than 6,000 clients.
In 2018 he co-founded WIZE Mentoring, a network for accountants who want to know how to successfully grow their firm and have it run without them.