Like all business owners, Accountants know we need to review our pricing at least annually. But pricing for Accountants is a complex issue. It involves understanding how we create and maintain our client’s perceptions of value on the one hand, and how we can ensure our Firm’s profitability on the other. TA107 addresses both considerations as well as suggesting a dependable approach for price reviews and how to manage their implementation.
Pressures on Price
Our industry now faces multiple pressures that drive us towards reviewing our price models. Here is a list of what I believe are the most important. I’m interested to hear your perspective on this as well, so feel free to add your experiences in the comments section.
Over the past decade suppliers to the accounting industry have driven the move towards value pricing through the steady commodification of elements of compliance work. Xero for example, have cornered the bookkeeping market and educated our clients about how easy, and fast bookkeeping can be.
As a direct result of industry supplier marketing, our clients expectations of what can be done, for how much and in what time have grown. This means pressure on accounting firms to lower prices for compliance, while increasing client outcomes and delivering in faster time frames.
In my opinion, the shift from charge out rates to fixed price is a methodology for firms to articulate the benefits of what we do for clients thus educating them the value of our services. The more we communicate upfront the more the client feels in control and value what we do. Hourly rates are too uncertain for clients and in my experience they question what we do to see if they can reduce the hours in order to reduce their spend.
We operate in a more Complex Environment than ever before
As a result of the above forces, the business environment in the accounting industry has steadily become a more and more complex environment where many factors weigh into how we price our work and how our clients respond.
I believe that this will get more complex before it becomes simplified. Which makes it essential to understand these pressures and respond accordingly.
Mistakes in Managing Price
The biggest mistake we made 15 years ago was to try to apply the same pricing strategy across all of our services. It took some experimentation and many instances when I felt as though we didn’t get a decent fee for the work done, but eventually we realised that we needed different strategies for different products.
These activities all lead to lower profitability, ineffective processors & system adherence, confused clients and, scope creep & write offs.
Here is a breakdown of individual mistakes and how they negatively affected our profitability.
1. Using Charge Out Rates to Set Price
This approach makes the mistake of assuming that all products are equally valued by our Clients in terms of the outcomes. It suggests that Value adding work and logical work are similarly valued and that the client will be happy to pay a premium price for both. Inevitably we will end up charging either too little or too much for services, which means driving clients to competitors for compliance work and eroding their notions of the value of more strategic products.
2. Applying one pricing strategy across all services
This approach fails to account for higher value products. It assumes all services are equally valued by the client and that the market is willing to accept price increases when new methods are showing a lower alternative spend.
3. Inadequate Team Training and Support
As the front line, our delivery teams should receive adequate training so that they both understand how the product delivers client outcomes, and how our clients are likely to perceive our pricing strategy. For high end products it is especially important that the delivery process is linked to directly to positive client outcomes and seen to be valuable.
Compliance products should be similarly managed so that our Clients understand how they are being charged and are given plenty of opportunity to buy higher end products. A lack of systemisation and automation will also have a negative impact on job profitability and hold up the delegation process that is essential to making compliance work more profitable.
Team incentives may also be used to introduce clients to premium services and/or successfully manage price increases for some services. When there is no incentive for your people to upsell during the year and your client doesn’t want to be upsold, clients often expect everything to be included after all you did say it was an upfront yearly price.
Further, under charge out rates you’re less likely to discuss the fee, meaning a higher risk that work is done which the client will not pay for (write offs are higher).
4. Failing to Communicate Value to your Clients
This is really important for one very simple reason: If we fail to communicate our value to clients, especially in terms of positive outcomes to their business, we simply cannot sell higher priced services profitably.
5. The Problem with Service Agreements
Fixed agreements that combine high end value add services with accounting-compliance (One service agreement for all services) positions that value is equally spread therefore true value is not communicated to the client.
One service agreement for all services also means 1000’s of individual agreements in total. This makes it easy for scope creep to happen. Additionally it makes it hard to track where you losing money on jobs.
Successful Pricing Strategies
I estimate that it took our firm about three years to successfully transition from charge-out rates to a profitable value pricing approach. On the way we learned many valuable lessons in planning, implementation and delivery. Not all of them were necessary though, and when I look back, many could have been avoided if we’d just been told they existed and if we had someone else’s experience to follow.
So I’m going to share with you my adapted approach to pricing. It’s adapted because it wasn’t exactly what we did back then, and I intend to save you from my mistakes.
The True Value Pricing Model
Pricing Day to Day Client Services
Day to Day Client Services (logical work) are best priced with a Packaging Model that allows for levels of service offering that are priced by cost of production plus profit margin matched against market acceptance, (what the client is expecting for that price). Allowing of course for volume and depth of complication of the client situation.
Pricing Value Add Services
Value Add Services are best priced by ‘Productising’ each service with distinct a) outcomes, b) deliverables, c) steps and d) price. Prices are determined by value delivered and volume of client uptake. The greater the volume can mean that the service is more readily available in the marketplace and your clients will appreciate that you are looking after them by offering it to them.
The Real Costs of your Pricing Decisions
Client Perceptions of Value
There are some products that are really up-selling tools that enable you to demonstrate the exceptional value of your expertise to your clients. For example, Tax restructuring is best positioned with a Tax & Risk Review product.
It’s also worth considering Products that are niche to an industry or where you deliver an expertise that others cannot will deliver higher value to clients and therefore attract a Value Price. eg. business insight based on a specialised expertise. One of my firms has a Partner that is sought after for his ability to determine if a strategy is right for the business. This is an expertise built from 25 years of dealing with medium sized businesses. He gets paid very well for it and the remuneration has nothing to do with hours.
Then there are one-off services that deliver value which exceeds client expectations. A good example are Negotiations. These involve outcomes that are unknown, and therefore charging a percentage of the outcome is exceptional pricing that also delivers outstanding value for the client.
Three Profitable Outcomes of Value Pricing
Consider how each of these three profitable outcomes may be of use to your Firm:
- Focus on operational effectiveness as a result of:
- systemisation and
- delegation of higher profit per job.
- Awareness of the value delivered to clients creates a culture of:
- Excellent communication skills where the team ask better questions of clients in order to find and demonstrate value.
- Motivation for finding opportunities with existing clients to offer more services. Here the team are more involved with the client and therefore feel closer to them. They then become more motivated to provide value add products that truly add value to the client.
- More value pricing opportunities combines with greater profits from your expertise and ability to provide an exceptional results, means more profit.
Get Independent help with Pricing in your Firm
One of the best things we did back in practice was to get in an independent industry expert to help us benchmark ourselves against other firms and to offer rational advice on how to position our firm.
Book in for a complimentary Pricing Review in the next 30 days and get 30 minutes to discuss your current number one hurdle to taking your firm to the next level.
Get advice on:
- Pricing strategies, including how to transition to a premium pricing model;
- Turning your Team into experts who can automatically generate more work from existing clients as they deliver compliance work;
- Simplifying your delegation process so the Partners have more time for higher value work; and
- Strategies for bringing all the Partners together as a tight knit management team.
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Access a Google Docs version of the diagnostic here.
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