Increasing profitability is a goal every business shares. Many businesses want – and need – to earn more than they currently do to grow sustainably.
Increasing fees is one lever firms can pull to increase profits. However, many leaders worry that doing so may reduce their competitiveness.
This article shares some evidence-based strategies to mitigate that risk: shifting the client conversation to one about value delivered and increasing the cost consciousness skills in your firm.
What is cost consciousness?
Cost consciousness means being cognisant and careful of the costs you incur and pass on to clients. Cost conscious behaviours include being diligently transparent with clients’ money, communicating in plain language so there are no surprises and co-creating aspects of work with the client.
Being cost conscious means explaining to your client and providing options for undertaking a project. Informing them of the different ways of delivering the outcome they are seeking and explaining their benefits, costs and risks are powerful ways to demonstrate cost consciousness. It also means ensuring no surprises when variations or overruns occur in a project signals the commerciality of your advice and how you care about your clients.
George Beaton, Executive Chair of Beaton, says the investment to become cost conscious is small, while the returns are impressive.
“Demonstrating cost consciousness to customers and clients costs very little,” he says.
“The investment required to be cost conscious is mostly in providing employees training and culture change programs. Every member of the firm must show clients they are cost conscious. As in all cultural transformations, the role of senior leaders is crucial.”
Every member of the firm must show clients they are cost conscious. As in all cultural transformations, the role of senior leaders is crucial.
Why cost consciousness is important for delivering value
It’s well understood that increasing units sold and unit price and reducing unit cost and fixed costs are ways to boost profitability.
What’s not well understood is the role that cost consciousness can play in its own right or by moderating changes in volume, price and cost.
The value formula below details how cost consciousness relates to the value a client receives.
To clients, value is a trade-off between performance and price. In other words, how clients think and feel about what they get from a service or product and what they pay for it.
Performance delivers tangible benefits, such as advice or a tax plan, and intangible benefits, such as feeling secure that you made a wise decision in choosing a professional service provider.
The price may be anticipated before purchase – “It will cost me $1,500 to buy the service” – or the actual price paid after purchase – “I paid $1,500 for the service”.
Where the gap between performance and price is low, high cost consciousness increases the value clients perceive. This becomes particularly evident when considering largely routine work, e.g. preparing a tax return, where competition is high and margins are low.
Clients choose firms based on the quality of service based on the above formula. They judge based on the overall value of their money – not the dollar amount.
How being cost conscious helps your clients feel you offer superior value
Cost consciousness is about procedural fairness. Research has shown that the fairer people think a process is, the happier they are with the outcome. And this includes your clients. Being careful, prudent, transparent and providing relevant information to your clients about how their money is being spent leaves them confident that they’re getting value.
Being cost conscious does not mean discounting or offering lower fees. As the next section discusses, being cost conscious allows you to raise your fees without losing the client. Being cost conscious allows you to charge higher fees when costs rise or there is a business need to invest more, as long as you have communicated the reasons for those higher fees.
The chart below shows how clients perceive they are receiving the highest value when cost-consciousness and performance and fees are all high (first pink column on the left). Even when performance is low, high cost-consciousness allows higher fees to be charged (third pink column from the left).
However, when cost consciousness and performance are low, value perceptions dip with higher fees (circled pink and grey columns on the right).
This chart is drawn from Beaton Benchmarks research into client feedback ratings of thousands of accounting and consulting firms’ users. The same findings are valid for law firms and built and natural environment consulting firms.
Value improves client relationships
Being transparent and open about business costs instils a sense of trust and satisfaction among clients. Customers appreciate firms that are mindful of costs. This commitment to delivering value without unnecessary or surprise expenses solidifies client relationships and creates a positive perception of your brand.
Clients who believe they are receiving great value from their firms are also likely to be more loyal. According to Beaton Benchmarks data, 85 per cent of clients receiving high value from their professional services providers say they are very likely to be still using the firm in two years’ time. In comparison, only 31 per cent of clients who receive low or moderate value say they are likely to still be using the firm in two years.
Being cost conscious does not mean discounting or offering lower fees. Being cost conscious allows you to raise your fees without losing the client.
How value boosts profitability
Not only are clients loyal when they feel they are receiving value, they are more willing to pay more for the same services they are currently receiving from you. That is, you can do the same work in the same way and make more money.
Where there is high value, more than one in two clients of accounting and built and natural environment consulting firms and more than two in five law firm clients are prepared to pay more.
This trend holds whether the client is a private individual, SME, large corporate or a government entity. A client is a client and the data suggest that for many firms there are many untaken opportunities for increasing profitability.
Tips for building how clients view your value
When considering how the Value Formula applies to your business, ask yourself:
- Do you have a robust understanding of your performance in your customers’ eyes?
- How are you managing and articulating your price?
- Do your people display cost consciousness in their day-to-day interactions with clients?
- How does your value compare with that of your closest competitors and the market?
Conclusion
Fostering cost consciousness practices has positive outcomes for both clients and firms. It can not only strengthen client relationships by improving trust and transparency, but also enhance your firm’s profitability. By communicating regularly, being prudent, and mindful of costs, firms can enhance their value to clients.
Clients who understand this value in terms of how their money is being spent are more likely to stay with your firm. They may even pay more for the same services, creating a significant opportunity for sustainable growth.
Actionable client feedback and tailored benchmarking
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