I’ve been working with several professional services firms recently, a nice smattering of lawyers, accountants and consultants. There’s a tradition in these firms of using the third:third:third pricing model, so I thought I’d share my thinking with you about this model.
What’s a third, a third and a third?
Thinking about this has made me think of a very traditional Dickensian legal firm, so I’ll use the example of Ebenezer Scrooge and his employee Bob Cratchit, although of course, none of my clients are anything like Mr Scrooge.
Ebenezer’s firm employs Bob to do their lawyering stuff for them. They charge £90 per hour, which is based on £30 per hour to pay Bob, £30 per hour to pay for a share of the overheads, as they’ve had to give Bob a computer, some software, a phone, a desk and a chair. Scrooge’s firm is based in central Brighton, so they’re paying a hefty price for office space. That leaves £30 per hour for Scrooge’s profit.
The beauty of this model, of course, is that it’s very simple and easy to understand. If it costs £30 per hour to employ Bob, you need to charge three times that to make a profit.
Easy. Nice. Simple. Or is it?
Where does this model fall down?
I’m sure you’ve worked out already that even with Brighton or London office rents, the cost of the desk isn’t the same as someone’s salary.
So, you have to make sure that you’re dividing in the cost of all the firm’s overheads here, not just the cost per member of staff. You need to include all your marketing costs, the costs of all your non-billable staff such as the office manager, admin people, and all the bits and pieces which you end up paying out to run a business.
And remember that you won’t get seven hours a day, 52 weeks a year of billable work out of anyone – most professional services firms will be doing well if they can get 75% billable hours from any member of staff, and that’s after you’ve been kind enough to give them some holidays and maybe some time off when they’re ill.
Unless you’re making a very hefty investment in marketing, or have massive expenses in terms of specialist equipment, you’re probably spending more on staff costs than the rest of your overheads. The third, third, third model falls down here.
Will I make any money?
If you’re in Ebenezer’s position, you want to be able to make a profit from all the Bobs you employ.
But why would your profit be the same as you pay out in salary?
That’s what the third, third, third model implies.
Maybe you want to make more money? And maybe by being clever about how you do business, your scalability isn’t just about adding in more and more Bobs to work for you.
What should I do about this?
Before I started thinking about this in depth I was tempted to let people use the third, third and a third model as a rough ready reckoner. It’s something Ebenezer could work out on the back of a fag packet with his quill pen.
But now we see that this model can be a limiter on profitability, I think you should just throw it out of the window like the people used to do with their chamber pot. See which method fits with your business from these pricing strategies.
How you price your services and position your business in the market can have a huge effect on your ability to grow, which is why it’s so important. If you’re struggling to understand which pricing strategy is best for your business, then my Remarkable Business Programme can help.
Pricing is just one area that we work on to make your business a success. And you’re not doing this alone. By working with your peers, you can share your expertise and really transform your business while getting the help that you’d usually find in my coaching sessions.
Other posts you might like on pricing
Scrooge image by brizzle born and bred