Charging Premium Fees: Strategies for Mastering Pricing, Boosting Profits, & Transforming Your Business

Overcoming Barriers to Charging Premium Fees: Strategies for Mastering Pricing, Boosting Profits, & Transforming Your Business 

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If you’ve ever wanted to grow or scale your business, meet Melissa*. 

Melissa runs a successful independent RIA where she, a Client Service Associate (CSA), and two financial planners serve 150 clients generating $1 million in revenue. 

As she took some time to craft her advisory business’s future intentionally, she immediately realized how much she loved making an impact on people’s lives by giving them confidence and clarity around their financial situation. 

Although she had already done that successfully for 150 clients, she wanted to help even more people.

By almost any standard in the industry, Melissa built and runs a successful business on the surface – but numbers don’t tell the whole story. 

The reality was that the business’s growth had stagnated entirely. The usual 10+% organic growth rates had stalled – now, Melissa was lucky to cross over 2-3%. 

Every Monday morning, she would get a massive pit in her stomach when she pulled up her calendar for the week, already filled with meetings and tasks requiring her time and attention. 

Melissa knew that to grow, scale, and build the business of her dreams, she needed to change something. 

When she was asked, “If you could wave a magic wand and receive anything necessary to fix this situation, what would it be?” there was no hesitation in her response: “More revenue.” 

So, the next question for Melissa became, “If you instantly boosted your revenue by $250,000, then what would you do?” 

Having that kind of money would allow her to:

She wanted what almost all advisory businesses want: More revenue. 

How Can Greater Revenue Translate to Business Growth? 

Since Advisors have a finite amount of time and energy, one of the best resources you can create more of to help build the business you want is money. 

A Quick Thought Experiment: What Would You Do? 

If an angel investor came to you with a check worth $250,000, what would be the first three ways you would invest that money? 

Some options include: 

More money can be the catalyst for the trajectory and future of your business – the key to fulfilling your vision. 

So, now the question becomes: How do I create more revenue and, ultimately, profits?

The 3 Levers of Profits 

Three levers directly affect profits: 

Here is our base-case example of an Advisory firm’s P&L:

Now, let’s look at a simple example illustrating the impact of cost, volume, and price. 

1. Lower costs by $50,000 

Naturally, if you lower your costs, profits increase. But decreasing costs means something has to give – where are you going to cut?  

Not to mention, there’s a limit on how much you can cut costs; you still have to get paid, you need technology, and you have to keep the lights turned on.  

2. Add 20 clients and $14 million in assets 

The second option is to increase volume – or, in other words, bring on more paying clients to potentially generate revenue. (For the sake of this example, we’ll overlook that adding 20 clients and $14 million in assets is not easy. We’ll also ignore the fact that as you add volume, it’s likely that expenses also must increase eventually). 

But, as anyone who has grown their client base knows, more clients require more time or money (to hire people to serve them without diluting the service and client experience). 

The first two levers will get the job done but have drawbacks for your business. 

This brings us to our final lever: Price. 

3. Raise fees by .25% 

This lever can have a significant impact. Here’s how the Harvard Business Review explains it: 

“…many otherwise tough-minded managers shy away from initiatives to improve price for fear that they will alienate or lose customers. The result of not managing price performance, however, is far more damaging. Getting the price right is one of the most fundamental and important management functions; it should be one of a manager’s first responsibilities, a nuts-and-bolts kind of job that determines the dollar and cents performance of the company.” 

If pricing (fees) can potentially help boost revenue and profits, then it’s important to understand the pricing dynamics. 

Setting a Fair Price: 2 Key Factors 

Determining the right amount to charge clients for an intangible yet incredibly valuable service is tricky; unfortunately, there is no secret formula for establishing and determining an “appropriate” price. 

To effectively and appropriately price your services, you have to look at two things: 

*We’re going to skip over the fact that your price, at the very least, should cover the costs of the business to make it sustainable. 

The Competitive Landscape 

Knowing the fees of similar independent RIAs with similar services offers a benchmark to start with. You certainly don’t want to price too low, especially because it can lead to a perception of less value. At the same time, you don’t want to price yourself out of contention – finding the sweet spot is a delicate balance. 

There’s no perfect way to do this, but I recommend this report from Kitces.com on “How Financial Planners Actually Do Financial Planning,” which has an entire section dedicated to Advisor fees. 

Cost vs. Value-Based Pricing 

Being able to compare to the industry standard offers a solid starting point, but cost vs. value-based pricing is the most critical factor. 

Cost-based pricing is a strategy where the product or service is determined by calculating the cost to produce/deliver and adding a markup. 

Let’s look at a simple example: Assume you’re a toymaker. Making, delivering, and selling a toy is $8. The cost is the starting point, and then you mark it up to $10 to determine your profit. 

Value-based pricing is a strategy based on the perceived value of the product or service to the customer rather than the cost to produce. 

It asks, “What are the specific outcomes and benefits the person will receive from my service?” 

Determining Your Value as an Independent RIA 

The more valuable the outcome, the more you can potentially charge for it. To fully understand how valuable something is, let’s look at Alex Hormozi’s Value Equation: 

Image Source: 100M Offers by Alex Hormozi 

Financial planning can potentially check off all four areas of the above equation because Independent RIAs help clients: 

When you check off all four areas, you’re likely offering a valuable service worthy of a premium fee. 

Lastly, it’s important to remember that higher prices and increased revenue aren’t just for the sake of maximizing profits – it’s a proxy for communicating perceived value, attracting the right clients (and repelling the wrong ones, and fueling the growth of your business.)

The Mental Hurdle of Raising Fees 

Price can be a significant factor in boosting revenue, increasing profits, and building your business. To increase your pricing, you have to do one or both of the following: 

At this point, many Advisors get stuck and never do anything. You see the numbers, and it makes perfect sense, but then you think about actually going back to your clients to raise fees: 

Herein lies the most significant barrier to increasing prices: the mental battle. Before you can even think about a process to confidently and effectively raise fees, you must first win the mental battle, which requires believing beyond the shadow of a doubt that you provide your clients with a life-enhancing service. 

Think back to the value equation: Helping someone identify their dream outcome and injecting the belief they can accomplish it in less time and less effort is extremely valuable. 

Strategies for Conquering the Mental Hurdle 

Charging a premium fee or raising fees on existing clients can be a scary proposition. So, here are a few strategies to help you get over the psychological hurdle and win the mental battle: 

Look at the businesses and services you spend money on.  

How many have raised their prices at some point (Netflix, Southwest, everything at the grocery store)? Now, think of an example where you discontinued a service because of a price increase. If you can, ask yourself: “What value did it provide me?” If you canceled it, the answer is probably none. And then ask, “Are they still in business?” The answer is often yes! 

Take a look at an example of what can happen when you raise your fees.  

Let’s assume you currently have $1 million in revenue from 150 clients from a 1% AUM fee. That’s an average revenue per client of $6,666. Then, you raise your fees from 1% to 1.25%. And when you break the news, a shocking 20% (or 30 clients) decide to walk out the door. That’s not ideal, but look what happens: Even though you shed 30 clients, here’s the new reality: 

Your revenue stays the same, but now you’ve created more time – and the clients who left are most likely the ones who never fully saw your value; this fee raise was simply the final straw to do what was already on their minds. 

Looking at Long-Term Costs 

The long-term cost of lower fees is vastly misunderstood.  

For example, let’s assume you have a client with $1,000,000 in assets, and you charge a 1% AUM fee. That’s $10,000 in revenue from that client. 

Simple math tells us that raising the fee to 1.25% could result in a potential $12,500 in revenue. If you were to stay at 1% for the following 20 clients you bring on, then the difference becomes $200,000 versus $250,000. 

And you can’t forget that one of the best parts about this business is the long-term value of a financial planning client – your clients may wish to stay with your business for 20+ years! In that case, we’re no longer talking about a $50,000 difference, but $50,000 over 20 years – that could be a potential $1,000,000 of revenue left on the table! 

The last thing is short and simple: Remember that for every price-conscious person, there exists a value-driven person – and you want to make sure you have the capacity to take on all the value-driven clients you can find! 

How to Successfully Communicate a Fee Increase to Your Advisory Clients 

We’ve talked about the power of price on revenue, how to think about value-based pricing, and how to win the mental battle. The only thing left is to provide the roadmap for successfully communicating a fee increase to your existing clients. 

Of course, it won’t matter how you do it until you’ve won the mental battle. If there’s a sense of doubt or insecurity, that will come through in how you communicate the message to your clients. Once you’re confident at this point, here are three strategies you can use to confidently and effectively communicate your fee increase: 

1. Tie the fee increase to a value increase 

The best approach to communicating a fee increase is to focus on the additional value the client receives in return for the higher fee (rather than explaining that “it’s the cost of doing business” – they couldn’t care less). 

Nobody wants to hear that they’re paying more money for the same level of service. By leading with the fact that there will be enhancements to the experience, it communicates that there’s something in it for the client, too. 

You’ll want to think about some of the ways you can enhance your service model. Here are a few examples: 

2. Advanced Preparation 

When communicating a fee increase, announcing it for a future date can help to alleviate the sting. You can also use psychology to your advantage here because our brains discount the costs of pain in the future (the same phenomenon that makes it hard for people to save). 

Communicating a fee increase and then implementing it right away is painful. But if you communicate that it’s happening at a point in the future, it softens the blow and allows the client time to evaluate what they want to do. 

Most importantly, you want to be specific on the exact date the fee will increase. 

3. Timing the Change 

Just like in life, certain times are more optimal for delivering certain messages: Having a spouse provide constructive criticism (while helpful and necessary) lands differently after you’ve had a good day than after a bad one. 

Similarly, the message and implementation of a fee increase would ideally come when the market is on a roll (or, if nothing else, when it’s doing what it’s supposed to). Telling someone that you’re going to increase their fees during a market decline could result in an entirely different response. 

To the degree that you can control it, bear in mind the circumstance and environment when you communicate and implement the increase. 

Other Considerations 

Before looking at specific ways to communicate the message, here are two other considerations:  

Communicating Your Fee Increase: An Example Message 

Now, assuming that you’ve won the mental battle and know the frequency and medium with which you want to communicate this message, here is an example of how to communicate the message. 

*This is for an email but can easily be adapted for an in-person conversation. 

5 Elements of Effective Communication When Raising Your Fees 

Five crucial elements must be included in this message: 

1. Start by reinforcing positives and progress 

You may think clients will forever remember the work you’ve done for them, but it often doesn’t work like that. Remind them of the things you’ve done and ways you’ve worked with them in the past. 

2. Focus on value over fees 

It’s not “We are increasing our fees because of these things.” 

It’s “We are doing these awesome things, and as a result, we’re raising fees.” 

3. Provide specifics 

Don’t be vague with the details. When you state the changes matter-of-factly and when they will take place, it exudes confidence. 

4. Offer an opportunity for discussion 

At the end of the day, there’s no client that will be excited and eager to pay more. It’s likely that you’ll have clients who want to voice their concerns, and you’ll want to provide them with the opportunity to do so. 

5. End with empathy 

Finish the conversation with empathy by acknowledging that you are keenly aware of how sensitive this is. Be sure to emphasize that your firm is committed to making sure that your fees will always be fair. 

Sticking to the Plan 

Lastly, and most importantly, you’re going to have some clients who reach out to discuss the fee change with you. You may be tempted at that point to make an exception for one client. 

Before you do that, go back and reference the example from above on just how costly this can be. In the example above, the difference spread over 20 years cost the Advisor $1 million in revenue! 

As the Harvard Business Review said, pricing is the single most important decision for a business to get right and can be damaging to the growth of the business otherwise. 

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[Disclosures]
*Content here is not an offer of advisory services. It is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously