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One of the most successful methods adopted to implement Value Pricing is the Fixed Price Agreement (FPA). This document arises out of a conversation between your firm and a client; it provides clients with a customized list of services to meet their specific needs and wants; offers a fixed price for those services; and specifies the payment terms, the scope of services to be provided, and any other level of agreement reached. No two FPAs should look alike—they should be as unique and individual as your clients. The more customized it is, the higher its perceived value.
Using FPAs Has Many Advantages
There are at least ten benefits of using FPAs.
1. It pre-qualifies the client. Discovering the client’s perception of value—before your firm commits any resources—is a better strategy than finding out after the service has been performed that the client has a lower value perception than you do, no matter how you price your services. Discussing price up-front puts these issues on the table, and in the long run will save countless hours and back-end costs in pricing disputes, write-offs, collection issues, and other problems that could have been avoided had there been better communication at the beginning of the engagement.
2. It provides an opportunity to cross-sell. By brainstorming with the client regarding future goals and aspirations, you will inevitably learn of many opportunities to cross-sell your firm’s services. You cannot expect to automatically receive additional work from the client—you have to earn it by demonstrating your firm is a better alternative than the competition. Empirical evidence proves that with an FPA relationship you will be more successful in obtaining additional work by focusing on value.
3. Value pricing gains “ego investment” from the client. All of us want to be in control; it’s human nature. By giving clients a sense of ownership over your firm’s services, offering them choices, and customizing your delivery to meet their needs, you will get their “ego investment.” Most often, once people make a commitment, they will behave more consistently.
4. Quoting fixed prices projects confidence and experience. It indicates that your firm is experienced and confident, traits clients value. Imagine an airline not quoting airfares before the flight but instead charging by the minute. How would you feel? Would you begin wondering if the pilot is deliberately prolonging the flight? Would it lower your confidence in the airline? The argument that the legal profession can’t provide fixed prices, up-front, is specious. Every other business does, and we are subject to the same laws of economics, consumer and price psychology as everybody else. If you cannot quote a price before performing the work, perhaps you don’t know enough about the nature of the work and shouldn’t be doing it in the first place. Change orders are designed to cover any scope creep or unforeseen circumstances which may occur (and will be explored in the next article).
5. It increases a customer’s switching costs. The more services you perform for the client and the more you know about a client, the more expensive it will be for the client to defect. Creating a partnership with your client links your destinies and prospects for prosperity.
6. It forces your firm to be effective. By offering fixed prices, you must delegate the work to those in your firm who can perform it most efficaciously. It also forces you to review every procedure and work review level to ensure that each task adds value to the client.
7. It overcomes buyer’s emotions. Using FPAs diminishes price resistance (sticker shock), price anxiety (buyer’s remorse) and payment resistance (not paying the invoice). By discussing value, price, and terms up front, you will reduce the negative impact of these emotions on the client, not to mention your firm’s profitability.
8. The firm maintains the pricing leverage. A service that is needed is worth more than a service that has been delivered. If this is true—and it is—then why do firms insist on pricing their services after they’ve been delivered? Because they don’t know down to the last six-minute increment how much time the task will take. This is precisely the problem with the labor theory of value: since no client buys hours, they don’t care how much time is spent. They only care about the value provided relative to the price charged. And they want to make that decision before they buy, just as you do when you, as a customer, buy anything. By pricing your services before you begin, you will obtain a higher price since you are removing the risk of the transaction from the buyer. You will also have the opportunity to educate your clients as to the value you are providing (if they don’t agree with your price) or to withdraw from the engagement completely.
9. Prices can be increased more easily. When was the last time you raised your hourly rate? Do you believe there is a concomitant increase in value to any one client? I can assure you your clients don’t view the world that way. However, when you have customized services and pricing for each client, it is easier to increase the price.
10. It provides a competitive differentiation. Since each price is customized, the perceived value of your firm increases. In contrast, by using hourly billing, you are simply treating all clients the same, which is not a prescription for success in today’s marketplace. Clients prefer fixed prices, up-front, and will continue to gravitate to those firms willing to offer them.
Obviously this is not an exhaustive list of the advantages of value pricing, just some of the most important ones.
FPAs Increase Your Bottom Line
Firms around the world have successfully implemented the Fixed Price Agreement and have seen many salutary effects as a result. They are cross-selling more services, obtaining a larger percentage of the client’s wallet, able to extract a premium price since they are bundling services into one FPA, and offering a service and price guarantee that lowers the client’s risk even further. Also, they are speeding up accounts receivable collection since the payment terms are agreed to up-front. Many are also reporting negative WIP in some areas of their practice. Moreover, Change Orders are being used to capture the additional wants of the client, and combined with innovative pricing strategies (such as the “TIP” clause), firms are reporting some windfall profits. One partner I know received a “TIP” of over $1 million for work he would have valued at $180,000 using the outdated hourly billing method. This illustrates the pernicious effects of being mired in the mentality that we sell time.
The future is here; it is just unevenly distributed. The firm of the future will offer fixed prices, up-front, for every service it provides, just like every other business. Firm leaders will remove the artificial ceiling they have placed over their firm’s head by the antiquated hourly rate billing method. As a result, they will finally begin to get paid what their clients already believe they are worth.
