Time's Up!

17Pricing the Portfolio

There is no such thing as a bad risk, only bad premiums.

—Actuarial Axiom

Coming off many successful years of windfall profits, an accounting firm decides to invest in a Hollywood studio. The partners are listening to a presentation from a senior studio executive about its plans for the upcoming year. “We will produce 10 movies. Five of them will bomb, and we'll lose money. Three will do okay, either break even or make a nominal profit. Two will be blockbusters, generating either supernormal or windfall profits.”

One of the accountants raises his hand and asks, “Why don't we just make the two blockbusters?”

I am not comparing professional firms to movie studios. For one reason, professional firms could not handle the risk it entails, being bred in an hourly billing mentality where every hour must turn a profit. In the subscription business model, you are forced to nurture and grow lifetime customer value.

The strategies for pricing the portfolio revolve around robust customer selection and minimum pricing. Here is where your Purpose, Strategy, and Positioning (Chapter 11) play the senior role. Pricing strategy is the servant to these broader themes. Recall how your firm is defined by the customers it does not have and the services it does not perform. You already have a built‐in constraint to what you are able and willing to do for customers. When you have a clear and concise offering it is much easier to stay in your lane and to know when a customer ...