Today I want to show you how Design Professionals can increase their design fees and profit margins with a simple change to their Pricing Strategy.
Let’s start with a question – why do we need to change our pricing strategy?
Super Low Design Fees:
To answer this question let’s take a look at a recent article from the Architects Journal called “The era of the super low fee bid is back!”, by Richard Waite (6/12/18).
The article claims that a growing number of firms are now offering to work ‘below cost’ with fees as low as 2.5 percent of the construction cost!
In the same article the former RIBA President, Jack Pringle, warns that low design fees will either cause firms to go out of business, or give such a poor service that they’ll lose their Clients and their reputation… but who’s responsible? Is it the Architect, the Client, or both?… and can a change in pricing strategy really fix the problem?
How to Increase Design Fees:
To answer those questions let’s turn to an unlikely source – back in the early 2000’s, one of the largest insurance companies in the United States (Allstate), decided to address the issue of low fees by conducting a customer ‘value’ survey.
Customer Value Survey:
The objective of the customer value service was really quite simple – to find out what customers valued so that Allstate could increase their value proposition, attract more customers, and run a more profitable business.
The results of their survey were quite intriguing!
Value Survey Results:
You see, while it came as no surprise that the initial price of insurance plays a pivotal role in their customers purchasing behavior, what was surprising, is that the initial price was not their only consideration!
Price is Not the Only Consideration:
Many Allstate customers also reported other concerns including; the potential for costs to increase (should they tarnish their driving record with an accident or claim), and the opportunity for cost savings (should they maintain a clear record with zero claims).
So, in 2005 Allstate set about amending their pricing strategy to address the different ‘interests’ expressed by their customers.
How to Demonstrate Value in Auto Insurance:
This led to the development of not one, but four different insurance plan options, and four different price points, for their customer’s consideration.
Option 1: Accident Forgiveness Plan
First, there was Allstate’s original insurance policy called the Accident Forgiveness Plan. This plan offers all customers the opportunity to maintain their current insurance premium if they’re able to achieve five years accident-free.
Option 2: Value Plan
Then there’s the Value Plan option. This is a new option that’s aimed at the budget-conscious customer because it includes a 5% lower premium, but no Accident Forgiveness coverage.
Option 3: Gold Plan
Next is the Gold Plan option. This policy offers immediate Accident Forgiveness (for those customers who don’t want to wait 5 years) in return for a 5% increase on the Standard Plans fees.
Option 4: Platinum Plan
And finally, there’s the Platinum Plan option. This option includes the Accident Forgiveness policy for multiple claims, plus a safe-driver bonus credit, for each accident-free six-month period. The Platinum Plan option can be purchased for a mere 15% above the cost of the Standard Plan option.
According to the statistics published in the September-October 2018 edition of the Harvard Business Review by 2008 Allstate had sold 3.9 million auto insurance policies, and was reportedly selling 100,000 new policies each month.
By 2017, nearly 1 in every 4 customers (23%) had chosen to purchase a higher-priced insurance policy by selecting either the Gold or Platinum insurance plan option.
That’s not all, at the other end of the spectrum Allstate also reported that 1 in every 10 customers was signing up to their Value Plan. These are customers who are highly price-sensitive and may have gone elsewhere for auto insurance coverage had the Value Plan not been made available.
Successful Pricing Strategy:
By any measure, the Allstate’s pricing strategy changes had been a huge success.
One of Allstate’s senior vice presidents, Floyd Yager, was quoted as saying;
“There were a lot of skeptical people in the company… but we demonstrated that car insurance doesn’t have to be about being the lowest-price game.”
What’s the No.1 mistake that Architects and Interior Designers make with their Design Fees?
Too few Architects and Interior Designers implement a multi-fee pricing strategy, like the one described in the case study above.
Design Fees and Multi-fee Pricing Strategy:
A multi-fee pricing strategy not only allows Architects and Interior Designers to serve a broader range of Clients (from price-sensitive to exclusivity driven) but it also enables Architects and Interior Designers to educate their Clients on the different types of design services available (and the benefits associated with a higher-priced service).
(Note: To help you with your fee proposal and negotiation strategy we’ve created a free Starter Kit packed full of useful resources):
Design Fees don’t have to be Low:
So, when writing your next fee proposal, remember, design services don’t have to be about being the lowest-price service provider either.
Give Clients a range of design service options, at different price points, and you’ll be amazed at how many Clients choose to purchase a higher quality design service from you.
To prove just how powerful this method is, here are just a few comments from people who’ve taken the Fee Proposal Workshop training course, and implement a multi-fee pricing strategy:
For ideas on how to offer design service options at different price points see the following post: How to Benefit from LEED Certification and Decoy Pricing.
Alternatively, if want to learn how you can implement this strategy without delay… check-out the Fee Proposal Workshop.
Let us know what you think:
Are you implementing a multi-priced design fee strategy on your architectural projects? Let us know in the comments section below by saying “Yes” if you are, or “No” if you’re not.
That has been a quick look at the many benefits associated with a multi-priced design fee strategy for Architects and Design Professionals.
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Ready to Implement a Multi-Priced Design Fee Strategy?
The following is a list of resources that are available right now to assist you with creating your own multi-fee pricing strategy:
1. Design Professional’s Guide to Design Fee Psychology (eGuide):
2. The Ultimate Fee Proposal Online Training Course (CE/CPD points available):
3. How to Benefit from LEED Certification and Decoy Pricing (Blog): https://blueturtlemc.com/blog/how-to-benefit-from-leed-certification-and-decoy-pricing/