Get upfront with your clients - Value based pricing
21/06/2012 by Sofia Silva
Pricing is often an uncomfortable and uncertain area to address for many businesses, and accounting firms are no exception.
A few pressing questions that come up are
How do I create value for my client and communicate that value?
How do I make sure my price is fair for my client without impairing the profitability of my company?
What sort of pricing will keep me competitive in the marketplace?
Traditionally, accounting firms charge based on the time spent on a job. And although there has been a noticeable shift in the industry to value-based pricing, billable hours and timesheets are still the driving force for most Australasian accounting firms.
While neither model can be objectively judged as correct or incorrect, both bring a completely different set of results for the client and the firm.
Let's look at the conventional time-based billing model first.
One of its advantages is that clients and accountants are used to it, which makes things simple for the firm.
If a client's job takes 'x' amount of time (which is easily tracked by billable time recorded in timesheets), the job costs 'x' multiplied by 'y' (where 'y' is the per hour rate). Depending on how well it was executed and communicated to the client, there is either a write-on or a write-off. Sure, there are other factors that come in to play, but let's take this as a generalisation that can be true for the most part.
But there are some serious issues associated with this approach.
One - when most clients are presented with their bill, they often struggle to see that price as fair (unless hourly rates are low, which then brings in another set of issues for the firm). Business owners often complain that they call their accountant only if they really have to, and they dread the time of the year they need to use their services as they never know what the bill is going to look like - until it is generated.
Of course there's a more delicate issue that might confront some - at its very essence, time-based pricing promotes inefficiency. The longer a job takes the more money you make - a trap that can raise questions about integrity and ethics.
On the other hand, consider value based-pricing.
It is a business strategy that can bring in many benefits that outweigh the convenience and legacy inherited around billing based on time. One of these benefits is the fact that it is based on the value a particular piece of work represents and the convenience it brings to the client.
Another important benefit to highlight is that it promotes and rewards efficiency. The focus of the firm shifts to the efficiencies of handling client work and raising the level of service for a price that is fixed, presented and agreed upon upfront.
This not only gives the client a sense of standardisation in the firm's pricing, but also eliminates any unexpected surprises and a lingering sense of distrust. This approach gives you the opportunity to identify any other needs the client may have that you can assist them with.
As a roll-on effect of implementing this strategy, some firms report that they end up bringing down the cost of compliance by becoming more efficient at it. It also helps free up resources to focus on the kind of work that matters and really helps clients run better businesses (at the same time, makes the work more profitable for the firm).
I would argue, that is what most businesses really want from their accountant - a trusted business advisor they can rely on for key advice.
But is this model easy to implement?
Evidently, like everything that involves change management, it doesn't come without its own hurdles. The first obstacle that needs overcoming is that the fact that a majority of accounting systems are designed around the traditional model, making it tricky to cater to the needs of modern accounting practices.
Since value-based pricing is based upon performing the client's jobs more efficiently, timesheet driven systems are inadequate to achieve the desired results.
Instead, you need a system that lets you know where each job is at, allows you to manage resources and benchmark your jobs so you see your firm running as efficiently as possible and you have a complete handle on the workflow.
It is all about the jobs, process, automation and resourcing. And this is where a system like iFirm can assist you.
And once you've set up this pricing model, iFirm Practice Manager makes it easy to bill for your work, letting you either invoice upfront for your jobs or invoice for the work as soon as the job is completed. This pricing model dramatically increases your cash flow as you don't have to wait until the job is complete to invoice and you can easily create interim invoices as you go.
What technology can't do is to make people more comfortable discussing price with clients and handling objections. However, the good news is that there are many more firms out there taking this approach, and therefore, there are a lot of resources, such as articles, videos, webinars and other types of information available to firms that want to make the switch.
In the end, it's about change. And this change will give you a competitive advantage.