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Mortgage Brokers Transitioning to a Fee for Advice Pricing Model Part II

In the August edition of Growth Focus Monthly (GFM) we discussed the first of four components of a pricing model – the Remuneration Method. This is the component where it is determined that the pricing model will be structured around fees or commissions. (Part 1)

This second component of the pricing model is the Pricing Level, or how much the client is charged and the options for how we determine this. The pricing level is a very crucial factor as it will influence profitability of the business and/or the personal compensation for the professional, the future viability of the business and the value of the business and/or the professional’s ‘book’.

How does a business determine the price to charge the client? Where the professional/business has elected a commission remuneration methodology determining the pricing level is simple – the lender/product provider does this!

Where the professional/business has elected a fee remuneration methodology determining the pricing level is obviously a little more complex. There are a variety of different approaches that may be used to determine the fee level. But no matter what fee option is chosen (a percentage of loan amount, a predetermined fee or a variable fee) the actual percentage or dollar amount will be settled on through a combination of art and science.

There is one common element amongst many professionals/businesses with setting the price – that is it is generally the professional not the client who has most trouble identifying the value or their services. Many professionals/businesses undersell their expertise. Once confident with a new pricing model, provided that there is also a strong understanding of how the professional/business delivers value to clients (through designing a value story), many are amazed why they did not believe in themselves earlier!

There are four options in determining the pricing level:

1. Market Led Pricing

Market led pricing is determined not only by the market trend but also by the client’s perception of what they are willing to pay.  A Market led Pricing Level will be determined by either determining the fee on the level of commission being sacrificed or on the fee level typically charged by other brokers.

The Benefits of Market Led Pricing include

  • Market competitive.
  • Not at a competitive disadvantage as clients will be charged similar prices elsewhere.

The Limitations of Market Led Pricing include:

  • The professional/business is not in control of their financial future.
  • Maybe difficult to fund service differentiation
  • Pricing may not be a true reflection of value/services delivered by the professional/business.
  • No scientific analysis of whether pricing level is sustainable for the professional/business given strategic direction, staff costs etc.
  • May be difficult to justify pricing if business has not done any real analysis to determine the value it delivers.

2. Cost led Pricing

This is where the price equals the costs incurred to deliver the advice and service with a margin or premium added. Costs include a calculation of fixed costs eg inclusion of overheads such as rent, electricity, salaries etc and variable costs such as number of appointments per client. Cost led pricing is a bottom up approach and does not equate the price with the value perceived by the client. A cost led pricing structure should really only be considered as a base pricing level. If the cost of advice/service delivery is not measured the business profitability may be at risk. It may be worthwhile to also match cost led pricing with the strategic direction of the business. A top down approach, where the business determines its likely pricing based on projections or goals relating to revenue, profit, market share, business value etc. may assist determine what the premium amount should be.

Benefits of Cost Led Pricing include:

  • Relatively simple form of pricing.
  • If assumptions around client type, numbers and advice/service requirements are correct, it is more probable that the business will achieve targeted profit levels.

Limitations of Cost Led Pricing include:

  • Competitive and market forces are not taken into consideration.
  • Pricing may not be a true reflection of value/services offered by the business
  • If assumptions around client type, numbers and advice requirements are not correct, profitability levels may not be achieved.
  • Inefficiency, ineffectiveness and/or incompetence may be rewarded if price is set according to the cost of delivering advice.

3. Value Based Pricing

A fundamental prerequisite to successfully introducing value based pricing is the conviction and ability of the business to articulate the value it delivers to clients. Mortgage and finance professionals/businesses will not be in the position to use value based pricing without having developed their value story. This work is usually led by the development of the value proposition, which provides the framework for creating the value story. The value story is the focus of the conversation between the business and the client which assists the client to gain a clear understanding of the value they will experience from the relationship with the business.

The professional has the power to influence the client’s perception of value through a focus on ‘results’ and ‘outcomes’, rather than ‘tasks’ or ‘activities’. A starting point in focusing on the outcomes is to change the emphasis, from what the business does, to what’s in it for the client. It is suicidal to base fees on things that are important to us rather than what is important to the client. There is a need to establish very clearly what the client’s improvement will be, not on how the professional/business will actually do it. How the professional/business will do it is a ‘deliverable’ – and a deliverable is a means to an end. Deliverables themselves are not client results and they should never be confused as such. The key to avoiding the emphasis on deliverables is not to mention them, rather talk about the value, outcomes and results instead.

The mortgage and finance professional is the expert and the client has engaged them for a reason. Although it is reasonable to outline the methodology used, whether two research reports are delivered and 3 meetings are conducted, or one report is delivered and there are 5 meetings should not really matter – as long as the client can relate their improved condition to the advice and relationship with the business.

Benefits of Value Based Pricing include:

  • Do not need to ‘justify’ pricing as the value perceived by the client is aligned with the price – and may even be negotiated.
  • The business can determine the fee based on the advice needs and value delivered to the client together with the input from the business in to the delivery of such value.

Limitations of Value Based Pricing include:

  • A perception that it is difficult to calculate.
  • Need to have clear understanding of value experienced by client before being able to consider this method.
  • Need to have developed value story for the business before being able to confidently introduce this method
  • May be more difficult for client to perceive value when compared to “no cost” or “time cost” methods.

4. Hybrid Pricing

Many businesses will often use a combination of the above approaches to arrive at a pricing level that both ensures business profitability yet is also attractive to clients and competitive with other offerings in the market. It may be that different client segments attract a slightly different method of pricing. Eg Value based pricing may be introduced to a new elite client segment allowing the business to break into new markets. Whereas cost based pricing may be used for the ad hoc transactional clients.

In future editions of GFM we will examine the remaining two components of a pricing model - The Level of Transparancy and the Collection Method.




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