Fees in Professional Service Firms — Two Views

Business people are pretty efficient when it comes to negotiating prices for goods and services when they purchase them from others. However, when setting their own level of fees for professional services many firm owners do not know how to begin the process.

Fees for professional services are based on a variety of factors including a firm’s overheads, the principals’ experience and knowledge, and of course the price the market will bear. The highest fees are usually charged by large metropolitan firms. Smaller suburban firms that have lower overheads can afford to charge less and usually do.

The pricing of professional services can get into areas every bit as sensitive as pricing for consumer goods. Setting prices is an art that every business owner needs to practice. It’s not often that a price is pleasing to both vendor and purchaser, but that has to be the target of any pricing exercise.

First and foremost you need to ensure that your pricing is sufficient to cover your costs and generate an adequate return on your investment as well as providing satisfactory remuneration for the effort you put in. If your fees leave you in the red each month you won’t be around very long.

As an independent businessperson you have a host of expenses employees never have to face. These include all the various taxes and license fees, costs for professional and personal insurance policies, allowance for time away from the office (vacations, holidays and sick days) and provision for your own retirement.

Those tax-deductible business outgoings like rent, telecommunications, travel, car expenses – the list goes on and on, still impact the bottom line so it’s easy to see why some analysts say that fifty percent of all professional services income just ‘goes away’ before you can really start working with it.

Now think about your pricing from the ‘customer perspective’. Those clients that are with you now are there for one or perhaps several reasons. Is it your fees? Undoubtedly that has something to do with their loyalty, but if your fees are about the same level as others in your area there’s probably another answer.

Your clients pay you to do a job that they can’t or don’t want to do themselves. They want it done when they need it done, they want it done well and they want it done at a reasonable cost. That’s about a lot more than just your fees.

Quality of service is critical to client satisfaction. If your focus is on giving clients the highest possible quality of service you don’t have nearly as much to worry about from competitors as you otherwise would.

If you can offer your clients services that are unique to your firm – for example, business development services over and above the usual compliance work, this too can be a source of client satisfaction.

Some firms offer their clients a choice of how work will be charged out that reflects the nature of the work and the depth of involvement the firm has with the client:

• An Hourly Rate – billing by the hour at a fixed rate plus expenses
• An Hourly Rate with a maximum – billing by the hour at a fixed rate with an agreement on a maximum number of hours
• A flat fee for a defined project
• An Annual Retainer that covers defined tasks – compliance work, consulting, director’s fees

Regardless of the pricing mechanism you use you should always be aware of what the competition is charging. Competitors offer either identical or similar services and your clients will be aware of this.

You need to remain competitive with other firms that offer the market what you’re offering, although this doesn’t mean you have to charge exactly what they’re charging. If you offer more than the competition you can charge accordingly.

The important thing to remember is that professional services pricing can be flexible and negotiable. Make money where you can and know that sometimes you can afford to give away an hour or so with a view to recouping those fees in work at a later date.

Copyright 2004, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.