We’ve had a great year teaming up with Mark Wickersham to help more accountants adopt value-based pricing for advisory services in their firms. In the past few years, these two concepts have grown from buzzwords to important strategies for accountants, helping them get paid fairly for their services in a changing industry.
However, switching from an hourly or fixed price model to value-based pricing can be a challenge. Applying these concepts to Strategic Advising is especially critical for accounting firms switching from compliance-based services to more profitable strategic ones. In this post, Mark Wickersham and Kathy Gregory discuss how accounting firms will benefit by making the shift to value-based pricing.
Mark Wickersham is a world leader in the subject of value-based pricing for accounting firms. He is an international speaker, writer, and mentor on this subject. Kathy Gregory has 25 years of experience in strategic planning, business development, and business process design. She runs the Strategic Advising program for LivePlan at Palo Alto Software.
Why do some firms have such a hard time shifting from an hourly billing model to a value-based pricing one?
Mark Wickersham (MW): I think there are a number of reasons. The first is habit. As a profession, we’ve been pricing based on how long the work takes for so long it’s deeply entrenched into our systems and thinking. And so, even though we know we need to change to value-based pricing, we still think in terms of time, i.e. how long will this work take?
Another reason stems from misunderstandings around what value-based pricing means. I hear many accounting professionals say they have made the shift to fixed pricing or flat fees, thinking this is value-based pricing. It’s not.
Just because we give the client a fixed price up front doesn’t mean that price has been arrived at based on a value conversation with the client. Usually, it has been arrived at based on a best guess at how long the work might take. That’s still pricing based upon the hour, the only difference is a price is given up front based upon an estimate of time.
That’s absolutely not value pricing, and usually results in money left on the table.
And a third reason is not knowing how to price on value and how to make that transition. Let’s be honest. Value-based pricing is not easy. It’s very difficult. That’s partly because value is subjective. You can’t touch it, feel it or measure it.
Always remember, only the client can determine value and, every client values things differently.
Fourth, we accountants sell complex services. For example, take bookkeeping. Every client is different with different needs, circumstances, quality of record keeping, size of business. With all those variables how do we give a fixed price up front, based upon value, and so that we are confident we’ll make a profit on the work?
And yet, despite all those difficulties, those firms who have made the successful transition and are mastering value-based pricing are getting much better prices, better clients, and making more money.
Value-based pricing brings a number of benefits to a firm. Can you highlight the top three that you’ve seen come up the most?
MW: The first big benefit is to the client. It’s a fairer way of pricing. Not only does the client get certainty right up front about what the price is, because it’s based on value, it means there is a real incentive for the accountant or bookkeeper to deliver as much value as possible.
Value-based pricing is a win-win pricing method. The more value you deliver the happier the client is, and when your price is based on that value, you are happier too because you get a better price.
It’s the opposite with time-based billing. You take longer and the price goes up. How does that benefit the client? It’s not fair.
Second, when we price based on value, we get higher prices. I’ve worked with many firms who have increased their average prices across their entire firm by 20 to 30 percent within a year, with minimal—and usually no—loss of clients. That has a big impact on bottom-line profit. I’ve seen many examples of firms who have increased some of their prices by double, and sometimes much more.
“Those firms who have made the successful transition and are mastering value-based pricing are getting much better prices, better clients, and making more money.”
And here’s the third benefit. Remember I said earlier, every client values things differently. That means some clients value what you do more than others. Those who value what you do will happily pay you much more when you add more value. Those are the clients you love working with.
However, I know you also have clients you don’t like working with so much. They are often the ones that don’t value you so much. They usually complain a lot. They pay you late. They’re a pain to deal with. When you move to value pricing, those clients may well leave.
And that’s a good thing. Because life is too short to deal with people we don’t like. And since your best clients are now paying you are higher value-based price, you can afford to lose those other clients.
Bottom line is this: You work with better clients, doing better work, for more money, and without wasting time on those clients who are a pain.
How long does it usually take a firm to transition to a fully working value-based pricing system? And what are the key steps along the way that firms can take to make the transition less intimidating?
MW: It is not possible to say how long it takes for a firm to transition to value-based pricing. It’s different for everyone. Some people grasp the concepts fast and can be getting amazing results within a few months. For others, it can take a few years. I’ve been teaching accounting professionals how to price since the year 2000. That’s a long time. And yet I’m still learning too.
The key step is to find a mentor. Someone who can help you on the journey. Someone who can teach the strategies and techniques and who can provide ready-to-use resources.
Kathy Gregory (KG): I think a big part of the transition is for a firm to understand what they sell and what their resources are for providing it. In order for a client to choose the things they value most, the services must be offered in chunks they can select from. A service packaged the right way, is really a product and the firm’s resources to build that product are the people and materials the firm will employ.
“A service packaged the right way is a product, and as such can be marketed and sold with higher value.”
Spending some time up front to define your Strategic Advising product and do some capacity planning around your internal resources lays the groundwork for a value-based pricing menu.
Value-based pricing is sometimes confused with fixed pricing. Can you articulate the primary difference(s)?
KG: A fixed price is usually built bottom-up by establishing an internal cost, or the hours the work will take, and then adding a margin, or a sell price the firm can charge based on their estimate of what the market will bear. This can work fine for one-time work that involves a customer scope and a request for proposal, but for repeated work, such that accounting firms offer, this is not an effective pricing strategy. More importantly, it’s not an effective profit strategy.
The best strategy for profitability is to group your services into packages and allow the client to choose the items they want, giving a range of more or less involved options for each. For instance, with Strategic Advising, a client could choose from a monthly one on one meeting, or a quarterly meeting, or an emailed video overview.
Why is value-based pricing the best option for client advisory (or Strategic Advising) services?
KG: As accounting firms transition from compliance based work to Strategic Advising, it’s important to also transition from hourly billing to value-based pricing. The work is so different—the pricing must also be different.
Advisory services are nuanced. It is not the type of work where x hours = x product. It is about applying knowledge and bringing value to the client month after month. Some months this work will take 15 hours, some months the work may only take three. And some months you might have to spend weekends helping the client build a new strategic plan.
If you show your clients that you can help them grow their businesses, they will pay for that value. But if you only price it by the hour they will be frustrated in the big months, and confused in the small months. And the whole time you’ll be making the same margin on each hour.
Fixed pricing doesn’t solve the problem either because Strategic Advising work is too nuanced. In a successful advising relationship, the work grows and changes over time. The early work you do will be replaced by work that is more and more strategic over time so it will be impossible to define a fixed scope.
If you build a menu of services (or products) that can grow with your client relationship, you will accomplish both things: meeting the client’s true needs and being profitable yourself.