A month or two ago, I was interviewed for a forthcoming article on how accountants should price their services. Here’s a sneak preview of my response, which should appear in the October edition of “Public Accountant” magazine.
Q: Accountants know about finances, but price setting is perhaps another matter entirely. What advice would you give them when it comes to deciding how to approach setting a price for their service and products (i.e., what questions should they ask themselves)?
A: Many professional services firms (accountants, lawyers, etc.) are under so much pressure these days to stop charging by the hour (which are their inputs, their costs), and to start charging for the outputs or value they provide. To do this, Accountants and their clients need to understand that they are not an expense, but part of a value creation process. There are four categories of questions accountants will need to ask themselves and their clients if they are to move towards a value-based approach to pricing:
- What sort of client am I dealing with? Are they a price buyer? Are they a value buyer? Are they a relationship buyer or are they a Poker Player? Each respond differently to a vendor of services: there's no point trying to sell a price buyer value-added services, for example. They are only interested in the cheapest possible price!
- Secondly, work out what the value of the services you will provide are to the client: what the end result or deliverables look like. Accountants (or anyone for that matter) do not know what this is, because value is in the eyes of the beholder (i.e. the customer). In general, there are three sources of value: an increase in the clients revenue, a reduction in their expenses or a minimisation of their risk, all of which can be quantified, and your pricing shares in that quantified value;
- What processes do I need to complete to provide this value, to achieve this end result or deliverable (e.g., do I need to obtain a private ruling for the client?);
- And finally, what inputs do I need for those processes and deliverables (resources, people, data, etc.)
Q: What steps should an accountant put in place when raising prices to minimise any client loss?
A: There are a couple of things worth thinking about here:
1. Tell the customer upfront of any price changes (not after you've done the work for them);
2. If you're in a very competitive marketplace, announce the price change in advance to give the competition time to respond;
3. Explain why you are increasing prices (and don't blame it on costs – clients don't care what it costs you to run your Audi or to rent your office. They care about the value they receive, not your costs).
4. Always offer choices (e.g. a small, medium and large alternative) each at different price points. The client then thinks "which one do I buy?" rather than "do I give my work to this firm?"
5. Don't implement across-the-board price increases. Price increases in many industries these days are more "laser guided missiles" than "carpet bombs". Some customers / segments may take a greater price increase, others customers / segments a smaller increase.
Q: Can you briefly explain the difference between time-based and fee-for-service pricing models, and the advantages/disadvantages of both?
A: Time-based pricing, as I touched on earlier, is where a client is charged on the basis of hours worked multiplied by an hourly rate. The advantages of this approach are that it is simple, every one understand it, it works regardless of the type and volume of the work being performed for the client, and your can put the question of "what value am I providing?" in the too hard basket.
But there are huge disadvantages including it is inefficient (not all hours of the day are equal in value), it undermines customer relationships, customers get invoice shock, administration queries increase, the client perceives the professional service firm to be acting in self-interests rather than their interests, and there is also evidence of high levels of depression and substance abuse in industries where the billable hour dominates.
Fee-for-Service is where you charge (preferably a value-based) fee to deliver a particular service, perhaps best illustrated by an example: a financial plan for a client under a fee-for-service model would be (say $2,000. Under time-based pricing, it might be $200 an hour. This illustrates one of the key advantages of fee-for-service: the client knows what they are going to be paying. They don't under time-based pricing.
There are many other advantages and disadvantages, many of which are the converse to those mentioned above for time-based pricing.