Thank to reader Logan, for writing in with this question:

...

"We go back and forth with the concept of an onboarding fee and I’m not sure what the right answer is. Because we do payroll, bookkeeping, tax planning, and tax returns, the onboarding process can be quite intense (5-10) hours. This means that we won't start profiting off the client until about month three or four.

The good news is that once we do start making money, everything is so streamlined that the margins are fantastic. I’m just wondering if you agree with the thought of taking a loss on the client for the first few months to get them onboard or if we should adjust our pricing structure to alleviate this crunch."

...

My views on this situation have evolved over time; when clients and I talk this situation through and evaluate payment options, the most commonly preferred method is: 

Take the onboarding fee + 12 x the regular monthly fee, total it up, then divide by twelve, so the onboarding fee is effectively rolled into the first year's price. 

...

Be up front with the prospect that "this is the price for the first year, and we can revisit toward the end of the year because businesses grow and change, and we'll want to revisit your needs, etc."


This way your pricing is simpler for the buyer, their initial cash outlay isn't double for the first 2-3 months for them, and you still will recoup your cost in due time. 


It helps when the seller puts the "onboarding expense" in perspective with the anticipated Customer Lifetime Value. If a customer sticks around for 5+ years, the onboarding fee is closer to 3 of 60 months, so about 5%; not nothing, but not huge. 


Books about the subscription model (The Automatic Customer, The Membership Economy, etc) say that the first 90 days of the relationship sets the tone for the remainder of the relationship, and that starting off right leads to much longer relationships (so higher CLV).


If this is true, it suggests that in the first 90 days if you focus on:

• simplifying the process and the pricing for the client

• reducing friction for the client

• creating value and early wins for the client

• making sure the client has great experience
  

it will be better for them and therefore better for youin the long run.

Hope that helps, thanks for asking!