Another thing a good relationship manager has to do is know how to talk about the costs of service, including price increases. Anyone who’s changed their pricing can tell you how difficult it is. That’s why some firms are reluctant to do it in the first place.
Economist Arthur Okun suggests in his 1981 book Prices & Quantities that consumers are downright hostile to price increases they see as unfair. A price change the client wasn’t ready for can destroy the goodwill you’ve created with her if you don’t explain it properly.
To test this hypothesis, a team of researchers conducted interviews and surveys with study participants and confronted them with scenarios (for example, “On the eve of a major snowstorm, a local hardware store doubles the price of shovels.”) A 1986 article by Daniel Kahneman, Jack Knetsch and Richard Thaler, “Fairness as a Constraint to Profit Seeking,” found that consumers will accept pricing changes, however, if they see a legitimate explanation for them.
This is where relationship management can be very helpful. Clients accepted those explanations that had to do with economic necessity and their vendor’s own rising costs. Ideally, clients are aware of the general economic mechanisms that determine the economics of the companies they work with and have a sense of how these companies make pricing decisions. Yet fairness, much like beauty, is often in the mind of the observer. The more the firm discusses with clients what those standards of fairness may be, the more it will have room to maneuver in pricing. This cannot be done with a memo from management—it ideally comes from the professional the client knows best.
Understanding The Relationship You Have
Managing a relationship also means constantly improving it and making it deeper. The great David Maister writes in his book The Trusted Advisor about different kinds of business relationships—including those based on service, those based on needs and those based on the interpersonal relationships between the professional and the client. He argues that a trust-based relationship is inoculated against competition, particularly price competition, and is much more likely to grow and be profitable.
A service-based relationship simply delivers something from a menu, such as what you receive at a fast-food restaurant—you order and you receive. Such a relationship is shallow; not a lot of information is exchanged, and the interaction is always vulnerable to competition and especially pricing competition.
A needs-based relationship is one where the client has a problem or challenge that the professional can solve. Think of a sick patient and a doctor. This relationship is deeper and can be evaluated on the success of the solution. Such connections are less vulnerable to competitors coming in and breaking them apart, because the effectiveness of the solution is more important than the cost.
When professionals enjoy an interpersonal relationship with their customers, their knowledge of those people moves beyond business solutions and into personal insight. The advisor can anticipate needs and suggest improvements the clients can make. The relationships are strong, rarely challenged and growing.
When that relationship is taken a step further and based on personal trust, there are no barriers between client and advisor. They each have sincere and deep interest in each other and are able to uncover and explore difficult issues that may be impossible to approach without this trust. In such a relationship, competition is practically irrelevant—unless the trust is somehow destroyed.