When Advisors Add Value, Pricing Power Follows

As the expression goes, when you settle for less than what you’re worth, you get less than what you settled for. Yet there's reluctance among many financial advisors to raise their prices for the services they offer, particularly after the 2008 crash damaged so many portfolios. Asset-based fees dominate the industry’s revenue stream, accounting for 85 percent of the total, according to the consulting firm FA Insight. Yet median fees as a percentage of assets under management were virtually unchanged between 2009 and 2010, the firm said.

Eliza De Pardo, principal and director of consulting at FA Insight, said just 31 percent of firms review their pricing strategy annually. It’s too bad, since there’s data showing that firms that review their pricing each year tend to have higher profitability per client. She understands the reluctance some advisors have about telling clients they want to charge more. “If the markets are declining, it’s a tough conversation to have with clients, obviously,” she told advisors during a pricing workshop at a recent Pershing Advisor Solutions conference in Manhattan. “The real question is, how do you deliver value, and can you communicate that to the client? If you can communicate it effectively, I don’t think anything’s off the table.”

One of the first places to start when reviewing what you charge is the condition of your local market, and the size of the fees your competitors are levying. De Pardo warns against placing too much weight on the latter, however, since all practices are unique. Advisors need to decide what pricing method is best for their practice—fees based on percentage of assets; flat or variable fees based on the advice needs of the client; hourly fees; or a fee that varies with the value delivered. Many advisors use a combination—an asset-based fee coupled, for example, with a flat fee for producing a financial plan. (Such fees may vary with the level of complexity required to produce the plan.)

Minimum fees help maintain profits; 57 percent of firms use them, FA Insight found. The median minimums range from $2,000 for firms with annual revenue of $75,000 to $500,000, to $5,000 for firms with revenues from over $500,000 to $3 million; firms with revenues greater than $3 million had median minimum fees of $9,000, the consultant said. Value-based pricing strategies are employed by 70 percent of the largest and most successful firms. Under those strategies, an advisor documents the financial savings that a client accrues through, say, lower insurance premiums or a reduction in personal tax liabilities through the advisor’s recommendations. The advisor would keep a percentage of the savings—maybe 20 percent—and add it to the regular fee that’s charged.

When preparing to raise prices, sit down beforehand and outline each argument that an unhappy client is likely to raise, De Pardo said, and prepare your counterarguments that demonstrate the value you’re providing. In addition to clarifying the case for your added value, she said, the exercise will help you feel less nervous when sitting down with particularly difficult clients. And be sure to share your value story with the rest of your staff, so they’re on board.

Advisors who want to charge more for their services have to differentiate themselves from their competitors, she said. Some regularly distribute e-mail newsletters on economic topics of interest to their clients, or organize luncheons for clients at which experts might speak about a particular topic. Investors recognize the value these things provide, De Pardo said. “Very rarely will a client say, ‘You know what? Keep the educational stuff.’ ”

Registered . Rep. The Source for Financial Advisors:  By Jerry Gleeson

OFT urges brands to review "misleading" Price Ads

Retail and brand marketers are being urged to review their pricing strategies by the Office of Fair Trading (OFT) or face tough “enforcement action” following its report into misleading price advertising.

The OFT says it recognises that advertising price is a “key part of active price competition which benefits both consumers and the economy” but warns that some pricing practices can mislead consumers and break the law. The watchdog says it will “actively monitor” price promotions and “take targeted national enforcement action against firms using practices that constitute serious breaches of the law”.

The OFT supports the Advertising Standards Authority (ASA) which regulates the content of ads and sales promotions in the UK. The report identified seven potentially misleading pricing practices as part of a new framework to regulate price advertising.

Drip pricing, where additional costs are added during the buying process, time limited offers and baiting sales, where only a small proportion of stock is available at the advertised price, were identified as the most harmful to consumers.

Despite recent criticism, buy one get one free (BOGOF) deals were seen as one of the least harmful practices.

Under the new framework, companies such as RyanAir which use drip pricing throughout the booking process and retailers such as Marks & Spencer which has been accused of bait selling with its recent £10 champagne offer, could face court action and fines.

The British Retail Consortium slammed the report saying that consumers benefit from the competition and are good judges of the best deals. Tom Ironside, BRC director of business and regulation, says: “Customers aren’t stupid. They make sophisticated judgements about prices and value within stores, between stores and over time and have all the information they need to do that.”

The OFT seeks to reassure “fair dealing businesses” that they should not be concerned that they risk enforcement action on trivial matters. John Fingleton, OFT chief executive, says: “Misleading pricing is not only bad for the consumer, it is also bad for competition, and creates an uneven playing field between fair dealing businesses that stick to the spirit of the law, and those that push the boundaries too far. “We urge all firms to review their pricing practices and to get their houses in order where necessary.”

The Institute of Promotional Marketing welcomed the OFT’s report and says: “Price promotions that are deliberately designed to confuse and mislead consumers are simply not acceptable.” The IPM says it will look to incorporate the findings into its best practice guidance.

The seven pricing practices investigated are:

• Drip pricing - where optional price increments such as taxes, card charges and delivery charges are added during the buying process
• Time-limited offers - for example “offer must end today”
• Bait pricing - when consumers are drawn in with offers of discounts although few items are available at the discount price
• Complex pricing - for example offers where the price depends on numerous elements which may be conditional on each other
• Reference pricing - such as “was £100, now £60”
• Multiple unit price promotions - such as “three for two”
• ’Free’ products offered as part of a package - such as “first two months free

Source: Rosie Baker, Marketing Week

Top 5 Pricing Trends for the Holiday Season

With the holiday season upon us, many retailers are wondering what pricing strategies they should implement to price for profit and growth.

This year, more than ever, the U.S. is a “have” and “have not” economy. On the negative side, consumer sentiment remains low and the unemployment rate continues to sit at 9.6%. However, there is positive news: Personal expenditures were up by 2.6% in the third quarter, the Dow Jones Index is over 11000, corporate profits are on the upswing and unemployment has stabilized (albeit at an unacceptably high level).

Bottom Line: A new opportunity exists this holiday season to serve cautiously confident consumers who, due to pent up demand and an interest in treating themselves, are willing to open their wallets.

Trend 1: Tailor your pricing strategy to your customer:

•In economically-depressed areas, continue the status quo pricing strategy of recent holiday seasons: focus on staple products, offer financing and layaway plans.

•In cautiously-confident markets, there is an opportunity to sell higher margin luxury products and services.

Trend 2: Show customers why they should purchase your product:

•In previous holiday seasons, price was the key driver of sales. This holiday season, cautiously-confident customers are willing to pay a premium for unique features (for instance, ads for Apple’s MacBook Air highlight its thinness).

Trend 3: Feature upscale “reach” products to cautiously-confident consumers:

•While the basic version of an upscale product may be discounted to attract consumers, reap higher profits by offering upgrades as well as complementary products.

Trend 4: Welcome cautiously-confident consumers back with new pricing plans:

•Offer generous financing and layaway plans.

•Minimize risk with “satisfaction guaranteed” pledges.

•Offer lower cost options such as “basic” versions, rentals, and leases.

Trend 5: Offer experiences to cautiously-confident consumers

•After years of pinching pennies, consumers are willing to splurge on fun experiences.

Source: Rafi Mohammed, FOXBusiness

Uncovering Billions in 'Hidden Profits' for Airlines

Pricing is one of the most powerful -- yet underutilized -- strategies available to businesses. A McKinsey & Company study of the Global 1200 found that if companies increased prices by just 1%, and demand remained constant, on average operating profits would increase by 11%. Using a 1% increase in price, some companies would see even more growth in percentage of profit: Sears, 155%; McKesson, 100%, Tyson, 81%, Land O'Lakes, 58%, Whirlpool, 35%. Just as important, price is a key attribute that consumers consider before making a purchase.

At most companies today, pricing is a mix of marking up costs, matching competitors, and doing things "the way that they have always been done." A simple change in the way that managers think about pricing can reap a financial windfall. The key to better pricing is to "think like a customer" and set prices to capture the value that consumers place on a product or service. The beauty of focusing on better pricing is that prices can be changed on Sunday night and new profits can start rolling in as early as Monday morning.

Consider airline travel. On a packed cross country airline trip, how much would you pay for the benefit of not having someone sitting next to you in the middle seat? No airline has been able to capitalize on the tremendous value that passengers reap when someone is not squeezed in next to them. For me, an empty middle seat equates to enjoyable flight: no jabs and plenty of room to spread out my work materials. It's almost as good as first class.

Today, it's generally luck that determines which middle seats remain vacant at take off. When a flight is not sold out (which is often), some passengers are "luckier" than others. Why not start charging passengers for this added value?

One way to essentially guarantee that no one will sit in the middle seat is to simply purchase the middle seat, as some travelers do on international trips. However, there is another, lower priced, "no middle seat" option that may make sense to both airlines and consumers.

Here's my thinking: suppose two people book a trip and take the window and aisle seats. For, say, $100, the airline will "hold" the middle seat and designate it as one of the last seats to be sold. If demand ends up high, the airline will sell the middle seat to reap full revenue and refund the initially paid $100 option fee. If the plane is not sold out, the middle seat remains open. The benefits of offering a "no middle seat" option are two-fold: consumers have the opportunity to boost their chances of enjoying a relaxing flight and airlines reap revenue from unused capacity.

Source: The Streets by Rafi Mohammed