Pricing strategies: Pivot to value pricing
Accounting profit improvement expert Mark Wickersham talks value pricing in practice.
Over recent years, an increasing number of accountants have been saying goodbye to hourly pricing strategies and pivoting to value pricing.
With the current economic climate and the growing number of financially struggling businesses, there has never been a better time to address your fees within your practice.
While the topic of value pricing has been discussed within the profession for 20 or so years, it has only begun to pick up momentum within the last five or six years.
“People are either struggling with the whole concept, or they moved to fixed pricing thinking that is value pricing,” explained profit improvement expert Mark Wickersham.
A chartered accountant and AVN veteran, Wickersham struck out on his own to help accountancy practices implement value pricing strategies after his research found that less than 10% of accountants made the transition successfully.
Although the concept might be difficult to grasp at first, Wickersham explained that there are ultimately two ways to price.
There’s cost plus pricing, where the accountant totals up the costs and adds on a profit margin, and charges the total price to the client. This is the type of pricing involved in hourly rates.
Value pricing, however, starts with the customer – what’s the value to the client? How much does the client value doing a tax return or bookkeeping or whatever it might be?
In short, value pricing can be defined as setting a price based on the value the customer gets.
The challenge here is that value can be incredibly subjective.
“You can’t touch and feel value – everybody values things differently,” Wickersham told AccountingWEB. “We’re a profession that’s used to adding numbers up and having precision.”
Only the customer can determine the value in this situation, so the accountant has to use various techniques and processes to understand what that value is.
Grow your profits
“The bottom line is, if you want to make more money in your accounting firm, you need to be switching more towards value pricing,” said Wickersham.
There is plenty of evidence for this pricing strategy increasing practice profits; in some cases, value pricing has even been shown to double profits, according to Wickersham.
However, there are misconceptions and challenges that come with the process, the most significant being the issue of confidence.
Particularly within the events of the past year, there has been a lack of confidence within the accounting profession surrounding the subject of fees; many have been struggling to start the conversation with their clients about payments.
There appears to be a “moral dilemma” due to the financial struggles thousands are enduring as a result of the pandemic.
“We hate rejection – we hate it when a client says that’s too expensive,” explained Wickersham. “And so when we price we tend to give a number that we hope the client will say yes to.”
With the issue of the subjectivity of value, the tendency to start too low with pricing is common. But the reality is that accountants wind up working all hours and not making ends meet as a result.
The response many accountants have had in cutting their costs with clients might seem kind, but ultimately does more harm than good.
“If they see a client struggling, their thinking is ‘I need to reduce my prices’,” Wickersham said, “and that’s a crazy thing to do.”
By reducing your fees, you make less profit. Less profit means your practice will struggle. If you’re struggling, you won’t have the resources to deliver the value that these clients really need.
By doing the opposite and focusing on the value of your practice first, your clients will not only thrive off your support but they will be able to pay you according to that value.
“We tend to think, erroneously, that our clients are price sensitive,” explained Wickersham. “And because we think that, we focus on price, and that’s completely wrong.”
Instead of being price sensitive, clients are actually what’s called value sensitive. The reason a client might condemn your fees as being ‘too expensive’ is because they likely do not understand the value, to begin with.
For example, if you were to propose £5000 a year for bookkeeping services, the client might say that’s far too high simply because they don’t understand the value of bookkeeping.
“When people understand the value, and understand what they’re getting, then they’re willing to pay higher prices,” said Wickersham.
The way to get people to understand this is to simply focus on developing your communication skills. Discuss with your client exactly what the process is, what they’ll be receiving, what you’ll be giving – the value of your services.
A significant benefit of moving away from hourly pricing is that alternative strategies don’t involve relying or waiting on the customer to pay for services.
Workers within the service industry are normally paid either on delivery or in advance. Although accountancy is indeed included in the service industry, it doesn’t follow this expectation.
“Why in our profession do we act as a bank? Why do we give credit? Why do we send the bill and then keep our fingers crossed and hope we get paid?” asked Wickersham.
As a professional services provider, no firm should be having debtors on their balance sheet. Switching to value pricing makes the process of being paid in advance much simpler, and at a higher price.