Halo halo halo / Fees & pricing

On Halo

Nope, this is not about the Beyonce song, this is about a book that i recently read. It is called "The Halo Effect", click on the link for a summary of the main points. Essentially, the Halo effect is the effect that people tend to project the perception of one trait on all the other traits. For instance, if I think that a person is really really good at singing, I'll tend to rate his ability for presentation or something as unrelated as cooking, as higher than average (even if real objective performance measurement will disprove it).

I think we rely on this heuristic a little too much on daily life. have you met those parents who obviously favor one child over another? Whatever the favored child does is cute/funny/brilliant; whatever the other child does is dull/gross/stupid even if they are doing exactly the same thing...like singing in the train....hahaha...(who does that? definitely not me...)

This works in hand with Cialdini's Liking Principle to create huge biases effects on the way we view performance and allocating attributes to someone.

The following video is a summary of Cialdini's 6 points of influence.

On Incentives, Fees, Pricing, Competitive Pressure

A cost plus model is really a very weird model to pricing, yet this is used frequently in many industries. For instance, if my cost is 100 and I'd like to make a 50% markup, my selling price will be 150. Many in the professional line of business does a cost plus concept, e.g. if a lawyer bill by the hour, he is essentially saying my one hour costs X amount and you shall pay me X+y%.

However, this creates perverse incentives for people to inflate their costs. If i bill by the hour, do you think i'll resolve issues as quickly as possible or as slowly as possible?

A cost plus is also bad for the service provider for he will not be attentive to upward cost pressure and downward pricing pressure if a competitor can offer the same thing for a lesser fee. In a cost plus world, there could be a disconnect between what the buyer thinks the value is and what the seller wants to charge. In a fast growing world where there are loads unmet needs, cost-plus pricing provider may easily pass on costs to buyers.

For the accounting profession, as labor and harmonisation of accounting standards be more common, the numbers of qualified supplier of accounting related service has increased. The market demand is a slow growing one. And intensity of competition within the existing players has always been high. The means lower margins for low value added projects or engagements that the client does not value.

Possible solutions to maintain high profits include employing greater leverage (ie higher junior to senior staff mix), hiring people with lower salary and invest in them to bring them up to par to international standards, provide higher value added jobs (e.g. audit + tax computation as lower margin , process re-engineering, risk management, HR & IT solutions support as value added services).

I think it will be hilarious for any professional service firm that seeks to sell "best in class" solutions to clients to think that they can ignore the prevailing wind of market forces and not practice what it preaches.