Do you ever feel like you could solve a huge chunk of your problems by just doubling the fees you charge?
Improved cash flow, increased profits, better client quality, the ability to attract A-grade recruiters… all in one fell swoop, just by massively increasing your rates.
But you can’t do that, can you?
If you increased your fees from the 14-18% range, to the 25-30% range, you’d lose all of your clients overnight and have no chance of attracting new business.
Well, believe it or not, some recruiters ARE ramping up their fees in short order and the effect is transformative.
This is how they’re doing it…
First a story. Maybe true, maybe apocryphal, but here goes…
Once upon a time there were two petrol station owners who had forecourts on opposite sides of a busy road. There was more than enough business for both of them, but to be amiable, they always discussed increases or decreases in prices. By keeping their rates the same, they co-existed peacefully.
Then they had a falling out.
And a few days later, the first petrol station owner (let’s call him “Bob) noticed that his neighbour (let’s call him “Jeff) seemed to be getting more traffic. It didn’t take long for Bob to figure out that Jeff was charging five pence less per litre of fuel than he was.
Bob was irritated that Jeff had done this without their customary conversation and so, when he changed his own rates to match, he decided to go a step further and reduce his rates by another five pence.
The volume of business quickly swung back in Bob’s favour.
Bob found that he quite liked this situation. The profit he gained from each customer had decreased, but since his business had nearly doubled in volume, his overall profits were sky-high.
But this only lasted a few days. Jeff was soon beating Bob on price again.
The price war continued for a few weeks until they both hit the break-even point. Bob and Jeff’s prices were the same again but they didn’t dare go any lower because it would mean operating at a loss.
This stalemate lasted for some time. Bob and Jeff were living month to month and no longer had any long-term profits to stash away. They tried various initiatives to attract more customers – such as free windscreen washes and loyalty cards – but in the end it seemed all anyone cared about was the price of the fuel.
Eventually Bob hatched a plan. He had some savings squared away so, he could afford to sell fuel at a loss. For a while at least. The idea was to hold out until Jeff went under and then he would be free to put prices back up without any competition to worry about.
It worked. To begin with.
But it turned out Jeff had savings as well.
And so, the price war sparked up again.
Word about crazy-low fuel prices got out and before long customers were coming from miles around to fill their tanks.
Bob and Jeff were burning through their savings, but there was no turning back now.
For a brief period, Bob and Jeff started giving their fuel away for free. Then Bob cracked and starting offering customers £1.50 and a bar of Dairy Milk to fill their tanks.
The queue stretched for miles.
Jeff caved first. He took the remnants of his savings and retired to St. Ives.
Bob revelled in his victory for a while, but he’d over-extended himself. His savings were gone and his overdraft was stretched to the limit. Six months later he closed the business, sold his house, and moved into a bedsit in Swansea.
This is one of those stories that keeps rearing its head because it contains so many lessons. But the one we’re focusing on today is the problems with competing on price.
The recruitment industry has always this element to its competition because it’s hard to differentiate between one firm and another. Most recruitment firms focus on speed, experience, market expertise and, yes, price.
So, it’s inevitable that price becomes a key differentiator. For an employer, who struggles to tell whether recruitment firm A is any better than recruitment firm B, it’s easier just to go with the cheapest.
Or hire both firms on a contingency basis and see who comes out on top.
We’re not going to see a race to the bottom like the one in our petrol station story, but this competition in price keeps most firms locked within a certain range. A couple of percentage points doesn’t make a huge difference, but charging too much more can soon make a firm look like the expensive option.
Recruitment firms that operate in this fashion don’t have to match the cheapest firms, but they have to stay close enough that they don’t look outrageous.
Whether you’re the highest in your range, the lowest or somewhere in the middle, you still have to keep considering the same question…
Do you compete on price or stick to your guns?
But there’s another way.
And that’s to stop competing altogether.
Raise your prices so high that it no longer appears as if you’re even offering the same product.
If you’re charging 25% when everyone else in your industry is charging 15%, they start looking like the budget option, and you start looking like the professional that the big firms in your space should be reaching out too.
This isn’t hypothetical. This is happening.
Recruiters who up their fees to 25-30%, and even beyond, are attracting more sophisticated clients who better understand the need for an in-depth recruitment campaign that prefers quality to speed.
And they can do this because a recruitment business is more complex than a petrol station forecourt.
Jeff and Bob only had price to compete on because fuel bought here works just as well as fuel bought there. Petrol station prices, in a competitive sense, are mainly guided by proximity to other petrol stations. This is why motorway fuel costs more than fuel bought in the city.
But recruitment methods vary wildly and the results from one firm to the next can be substantially different.
Recruiters – those of the smart, switched-on, experienced variety – have so much to offer, that the level of the fees should barely enter into the conversation.
Think about it. A 15% fee firm looking for a director on 100K is going to cost the employer £15k. But what if the new hire leaves and the employer has to go again. Now it’s costing the employer £30k.
And this doesn’t take into account wasted salary and business disruption.
Through this lens, the recruiter who charges 25% but gets it right first time is, in the long-run, far less expensive.
Recruiters shouldn’t be competing on price. They should be competing on results.
So, let’s go back to our original question…
How do you increase your prices to 25% and beyond without wrecking your pipeline?
The key is to think of your recruitment offering as a different product to the middle-of-the-road, contingency-based recruitment firms.
Simply having a much higher fee will, in itself, get you part of the way there.
No one questions why a Michelin-starred chef charges five times more for a cheeseburger than McDonalds. It’s a different product.
Think of yourself in the same way.
Other recruitment firms are fast food. You’re a fine-dining establishment, using ethically-sourced ingredients, served on elegant china plates.
What would that mean in recruitment terms?
How can you refine your recruitment practices to make it superior to that offered by the average recruiter?
Often it simply means doing what you do now, but at a higher level.
This kind of change to your product will take some time to implement, but the trick is to offer it alongside your existing recruitment service.
Having a boutique product will give you a hook to reach out to larger businesses that might previously have seemed out of your league.
And you can offer it to your existing clients by describing it as an alternative recruitment service that you’re developing that provides a higher quality service and a better class of candidate shortlist.
Not every client will go for your new, more expensive product. But some will. And as you add new clients to your list, you can gradually phase out your former recruitment service and put all your focus into your higher-priced product that produces better results for your clients and candidates.
As I said earlier, this idea isn’t hypothetical. It’s how my recruitment firm moved into the 25%+ bracket, and it’s how many more have followed in our footsteps.
Just one word of caution with regards to offering guarantees. You must only do this is you’re confident in the success of your placements. How do you get there? That will be the subject of the next article in this series.