Might social networks be bad for your fees?

by admin on October 2, 2009

in General

Agood customer base... @gapingvoid

A good customer base... @gapingvoid

Mark Lee has an intriguing post built around some Kellogg research into the impact of social networks and status on fee levels – or rather billable hour based fees. Mark wonders:

To paraphrase one key finding, the research suggests that you will charge lower fees to your friends than to clients with whom you share no social interactions. And put like that it’s almost obvious isn’t it?

When I was in practice I had a very small portfolio but at times I was able to bill more than any other partner, even though I had almost no staff. Why? I was almost always doing high value work on which I could charge premium fees. For example – end of year tax avoidance stuff where it was possible to charge £1,500 an hour at the effective hourly rate except that’s not what we did. In another case, the fee grew x100 in the eight years I handled the client’s affairs because his businesses grew and the work surrounding them more complex. We were good pals at the end to the point where we shared many social events. It didn’t make a jot of difference to the fee. That modus operandi was the genesis for me making a proposal to sell off fees and double up on income. Trouble was, other partners didn’t fancy the idea. I left and did better anyway.

The comments to Mark’s post make interesting reading. David Winch makes the key point:

As you can imagine, I question the whole concept of “the billable hour”. There are at least 30 reasons why charging this way is immoral and unethical.

So, assuming you are charging based on the value your client knows and understands they will derive from no longer suffering the problem you are fixing, how can your friendship or otherwise have any influence on this value, and thus the fee charged to deliver it?

You may choose to add in some “extra value” because it is your friend, but the core of your proposal will be a set of options, each of which fixes the problem, each of different value, and each with a different fee attached. Whichever option the client chooses, they know they are making a bargain investment for the value they will get in return, and you know you are making an extremely profitable deal!

I do not see why using more efficient technologies to deliver your service and run your ‘back office’ function should make any difference to the fee you charge, as long as the client is getting a huge value return on their bargain investment. Your internal workings are of no interest whatever to your client.

What’s interesting in the Kellogg discussion is the notion that friendship over time implies a boost to efficiency that in turn means lower fees. In making this startling observation, the writers are confirming what anyone with a calculator can tell you – efficiency lowers cost. But, in the researchers’ equation, that also means bills are lower. It’s the classic industrial age Marxist theory of labour value in action. I don’t buy that. It should also serve to sharply put in focus the problem of failing to assess value when considering the price of a service. By highlighting the lowering in fees, you are signaling to the client that despite the quality offered which may be better as a result of efficiencies, you were at one time darned inefficient. Does that seem a sensible argument upon which to set a fee? To repeat what David says:

Your internal workings are of no interest whatever to your client

There is no reason why they should be. Do I care what kind of spanner my car mechanic uses? Of course not. I only care that he has the expertise to fix my problem at a price I am prepared to pay. Do I care what sort of pen or whatever Hugh uses when drawing Cube Grenades? Nope. Only that the finished article makes me smile for which I’ll happily pay a premium – or in today’s post’s case, swipe a cartoon Hugh drew that links to something a bit later in this post – and which also makes me smile as well.

Kellogg’s argument about status serving as a way to increase prices makes intuitive sense but then I could charge the same rates or more as a Big Four crew. Not because I was as good as them – far from it – but because I set my stall out to provide premium services. I can still charge a premium for things I do away from the blog for the same reason. I’m in the scarcity business and that’s what brings results. But what about status? Does it matter?

Well that depends on who and what we’re talking about. Hugh MacLeod is alluding to that here but viewed through the marketing lens. Hugh has gone from zero to hundreds or even thousands of dollars in a few years because he has achieved a certain status among a large enough number of people that he can play the percentages at a premium level. (He’s done a lot of other things as well but you get my drift.) That’s another way to go. I know that some SAP customers use their products because customers of customers use them as well and want to be in the same ‘club.’ In some cases SAP can charge a premium because of the customer list it enjoys. Outside a few thousand people who regularly read my stuff here and there I doubt if there’s that many people who even know I exist let alone care what I do. That doesn’t stop me enjoying a premium at the appropriate time because we’re back to the scarcity factor. And I’m incredibly active in social networks.

However, I still see plenty of practitioners who are wedded to their billable hour addiction and then wonder why they’re working flat out with no time to spare, let alone get involved with social networks. I guess if you’re staring at a ticking clock all day then it gets hard to think of much else.

Any other thoughts?

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Mark Lee October 2, 2009 at 3:46 am

I have to admit that this is a better learning point to draw from the Kellogg research than the one on which I focused. Having said that I have addressed the time vs value based billing issue on a number of occasions on the Ambitious Accountants blog and think you'll find that we're in agreement as regards how fees should be determined.

Dennis Howlett October 2, 2009 at 4:06 am

I hope I wasn't implying otherwise – in reality it was David's response that got me thinking down those lines.

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