To determine the best pricing approach applicable to clients, RSA have considered the three primary pricing methodologies applied in business. These are value, cost and market driven pricing models:
Value-driven pricing reflects the willingness of clients to purchase what they perceive as value. When a service is unique or highly differentiated, and there is very little competition, or when a products/services is in high demand but short supply – generally there is a reasonable basis to charge based on value.
Cost-driven (or margin driven) pricing reflects the financial dynamics of a business. The idea being to cover costs of doing business, plus realize a profit margin that is acceptable. In essence, the financial planning practice decides on the profits wanted and structure your price accordingly.
Market-driven pricing reflects a competitive situation. If a planning practice is not very well differentiated from competitors, or when the market is flooded with similar products, clients can make their buying decision in favor of the lowest price. Generally this results in low profit margins, and in extreme situations, it drives weaker companies out of business. (Thousands of advisers have left the industry, driven by government regulatory reforms that are driving down price and increasing costs).
Which pricing model is fair and reasonable for you?
There are two considerations that determine the answer to this question. The first is the complexity of your circumstance and the second is your knowledge levels and confidence regarding your needs. This is best explained in a complexity and impact matrix.
Determining where in the matrix a client sits needs to be considered twice. Firstly in terms of initial advice and secondly in terms of ongoing requirements. When asking these questions we consider the following questions:
- What is the ‘real’ cost of providing our service to you, initial and on-going?
- Are we adding value strategically and increasing wealth?
- Is the value added related to investing, product selection and portfolio performance?
Using this information we are able to create a guide to cost of advice for clients. An example of how pricing may be calculated is below.