Overview of value-based pricing
It’s been a bit of a delay since my last post, but I took the opportunity to experience Xerocon NZ (and New Zealand) first hand. I talked to many accounting professionals who have navigated much of the 10 Steps to the Cloud I have been writing about. It was a amazing experience that reinforced all the research we already put into this.
I hope you’ll join me at Xerocon US this September 5th in San Francisco, so you can get this experience yourself from talking to other forward thinking accounting professionals. You might even want to stay longer to catch the opening days of the America’s Cup Finals. You can leave your details on our Xerocon US page to be contacted when more information is available.
In my previous post we covered the fourth step (“Establishing clear rules of engagement with clients”) in our series on Moving your practice to the Cloud. The fifth step is the process of phasing-in value-based pricing. This is a pretty important step and I have decided to dedicate two posts to go into the detail many have asked for. We’ll talk about it at a high-level in this post and then dive into the implementation steps in a few days.
Let’s first start off looking at the various types of pricing methods you can deploy in your firm. Here is a list of the common ones:
- Hourly-based billing = Set rate per hour for services
- Cost plus pricing = Cost to perform service + markup
- Fixed pricing = A consistent, set cost for a product or service
- Value billing = Billing on your perceived value of service after completion
- Value pricing = Pricing before service is performed and based on customer perceived value
Value billing and value pricing are not the same as they are done at different times and from different perspectives. Value pricing is done before performing the service and priced based on the customer’s perceived value. While you might provide the same service to two customers, the price paid might be different based on the value it drives.
Most probably use hourly-based billing as a primary method though I have seen in my recent polling many firms also using value pricing and some fixed pricing. I encourage those of you using hourly-based billing to move to value pricing to help not only your practice, but also your clients. Let me explain.
Problems with hourly-based billing
For longer than I can remember, hourly-based billing has been the de facto standard used by many accounting professionals. Whether we acknowledge it or not, there has been and continues to be pressure inherently from the profession (both past and present) to continue this – it is just how it has been done and change is difficult.
Ron Baker, who we had the pleasure to interview for this and who has published several books on the subject, has been professing the necessity to change for decades. This has existed in other professions as well (like legal, medical and construction industries). Some have moved to other methods (medical to fixed pricing) while others have been slower to adopt.
For the accounting profession, we encounter the following problems when continuing to use hourly-based billing:
- Working faster translates to less compensation
- Prospects shop around on rates vs. value
- Difficult conversations when raising rates
- Skill development doesn’t translate to rate improvement
- Constrained revenue and profits (since raising rates is difficult)
- No insight on the amount of money left on the table from engagement to engagement
In addition to this, clients aren’t asking for it. Some encounter it, but it isn’t expected or preferred. What is preferred from the client is to get the best service, to get their questions answered and to have you be their trusted advisor. How can you do that when the client is nervous to call you because the clock is ticking and every interaction has a per hour, per minute, per second charge?
The last thing you want the client to be doing is hesitating to tell you what’s wrong, what’s on their mind or what service they additionally need. When clients call, they need something, they need help. Helping at those moments lifts you up to the trusted advisor status and helps you position additional services that can help the small business client succeed.
Add in non-value add activities like driving a USB drive (with the small business’ financial data on it) to and from a client’s office, and you have a recipe for disaster – either charge the client or eat the time spent servicing the client in this way, or else it turns the relationship from collaborative to dysfunctional.
In addition, how do you deal with the fact you become more valuable over time. Inherently, you are learning, you are specializing, you are becoming more efficient. But, if you charge $60, $75, $100 per hour for everything you do, how do you get compensated for providing high quality results in half the time of a peer who might perform a similar service but takes more time or provides less quality?
How do you get compensated for understanding the ins and outs of your client and translating that to quicker, better, more impactful advice and deliverables that drive growth for your clients. Seem unfair? It is and it undermines the value you bring each and every day to your clients.
I digress (I am passionate about this subject), so we’ll come back to this in a minute.
Why move to value-based pricing
So why transition to value-pricing? Here are some quick reasons:
- Removes the constraint of time on profits
- Incentivizes all to improve efficiency and productivity
- Improves one’s ability to attract better talent
- No surprises for the client
- Eliminates the friction to collaborate
Remember, value-based pricing is the upfront agreed-upon price as perceived by the customer. This price takes into account the complexity of the client, the knowledge and skill you bring to the table and the nuances of the engagement. There are no surprises, you and the client agree to the details and the price upfront. If the details change, then the project is re-evaluated prior to the work being completed.
For instance, if you provide tax compliance services this year for $X, then the price for the same service might be $X + inflation next year. You might be more efficient next year, but you also provide higher quality and more predictable results. You are rewarded with higher revenue for the engagement (on a per hour calculation) and the client receives better client service and better results than they could get elsewhere. Remember, your time is finite but your value is not. Don’t undersell yourself and the benefits you provide!
Secondly, moving to value-based pricing helps you attract talent so you can grow your firm. It is a tough market out there to get great talent. It is unfortunate, but the average age of those in the field is growing each year as more and more push out retirement and a small trickle of new people come into the industry, barely offsetting those that do retire. You need something to differentiates you from them and motivates them to work at your firm.
Almost no one likes to work on a time clock. I can remember working at a big consulting company in my past and having a 110% utilization quarter over quarter. That was great for the company, but for me, it was deflating. It reminded me of the weekends I lost and the difficulty to stay passionate about the client engagement. Where was the reward for working harder, smarter and more efficient? If the company isn’t compensated that way, then should I work slower and longer to meet my utilization targets? I don’t work that way. I want to give it my all and many people, especially younger talent, want to as well. Don’t burden them with the conflict, free them to do their best and feel their best, and you’ll be rewarded with a talented and productive workforce.
Overall, moving to value-based pricing allows you to recapture being the trusted advisor so you can expand your services, increase your revenue, and increase your client retention. Who doesn’t want that? For you, you get to capture the value you are worth – for the client, they get a trusted advisor that works hard for them. There are some tips and tricks on how to do this, so we’ll cover those when we talk about bundling.
Having said all that, change is truly hard. Moving to value-based pricing isn’t something you can turn on like a light switch. Anyone who tells you it is hasn’t done it. It takes a strategy, planning, and time. Specifically, it takes a change in mindset, change of processes, universal acceptance across the firm, persistence and patience. Again, the road isn’t easy (easier now due to more and more firms doing it, changes in customer expectations, and technology like Xero to bundle together with your services), but it is definitely worth it. So how do you implement it for your firm?
10 steps to value-based pricing
In keeping with the power of 3, 7 and 10, I wrapped the steps to implement value-based pricing into 10 steps broken into three phases. Unfortunately, I won’t go into detail on any of the steps in this blog post, but will in the next one (just to keep you reading and me writing). Here is a quick overview of what we will cover:
Phase 1: Setup
- Step 1: Be strategic and have an initial plan
- Step 2: Create bundled packages of your services
- Step 3: Form a pricing committee & set your initial prices
- Step 4: Communicate the change (and processes) to all
Phase 2: Implementation
- Step 5: Assess the client situation
- Step 6: Articulate the value of working with you
- Step 7: Start slow
- Step 8: Set your packages, your prices and present
Phase 3: Follow Through
- Step 9: Be the Trusted Advisor
- Step 10: Reaffirm you delivered the value
Want to learn more on value-based pricing?
So that is an overview of value-based pricing. I’ll go in-depth on how to phase-it in over time into your practice in the second part of this fifth step in Moving your practice to the Cloud blog series. If you want to learn more, get more depth in the 10 steps to phasing-in value-based pricing, listen live or ask questions, feel free to join our value-based pricing webinar series happening over this coming month. There are three webinars to watch and some fantastic speakers joining us. Come, learn and get 1 CPE credit for each webinar:
- “The Ins and Outs of Value-Based Pricing” this coming Thursday, March 21st at 1-2 PM PST featuring Michelle L. Long, CPA (Owner, Long for Success) and Paul Meissner, CA (Director, 5 Ways Group)
- “Value Pricing: Where to Begin” March 26th at 1-2 PM PST featuring Ron Baker, CPA (CEO and founder, the VeraSage Institute)
- “Value Pricing: Implementation and Next Steps” April 18th at 10-11 AM PST featuring Michelle Golden, CPF (President, Golden Practices)
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