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Value pricing in practice

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25th Oct 2005
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'You don't want to be considered the best at what you do. You want to be considered the ONLY person who does what you do.' ' Jerry Garcia

Following his previous article In search of value where he looked at the notion of 'value' (as in 'value added' services), Nigel Harris looks at the specifics of value pricing.

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Having looked at some of the theory, let's look at some ideas to get you started on value- (as opposed to time-) based pricing for professional services.

The starting point has to be your clients. What do they value? In a 2004 Nisus Consulting survey of the legal profession, one client commented,

'Basically they're great at the things I'm less interested in, but poor at the things I value.'

In other words, firms were great (not just 'good'!) at delivering all the services that clients didn't value, but delivered poorly - if at all - those services that clients valued most.

In my last article I showed that firms trying to compete on quality and price alone will struggle, while those committed to providing exceptional service will thrive. Why? Let's look at what clients want.

Survey after survey of the accountancy profession show that what most clients want is:

  • Personal contact at partner or senior manager level
  • Continuity of staff contact ' not a frequent turnover of staff
  • A timely service - deadlines met and telephone calls returned
  • Explanations of tax, accounts, etc in non-technical terms
  • No surprises ' either in fees or tax bills
  • A clear billing policy explained at the outset (which may be fixed fees, but could be agreed hourly rates)

What they don't seem to be looking for is:

  • A state-of-the art website
  • Newsletters and mailshots
  • Accurate accounts and tax returns ' these are a given
  • A 'trusted adviser' ' ditto. (If this is your USP, what are you trying to say about the rest of us?)
  • The cheapest price ' OK, some clients are price-driven, but they are a surprisingly small minority

The bottom line is service. Clients will forgive all manner of imperfections in your work if you give them the highest standard of personal care and attention. I'm not suggesting that you accept sub-standard work by your staff, but the point is that how you put mistakes right is far more important than not making mistakes in the first place. The starting place in determining what clients 'value' is simply to ASK them. Client research, review meetings, even questionnaires and marketing consultants have a use ' but nothing beats dropping in on your clients with no fixed agenda, at no charge, and having a chat. Find out what they want ' and what they don't want ' and design a service and a fee structure to meet their requirements. Don't be afraid to sit down with them to design and agree a fee and payment structure to meet their preferences BEFORE you do the work. You'll probably be paid quicker and it makes billing so much easier.

You then have to decide if you can provide that service, at that price. If the market is pushing down the price for pure compliance work you'll need to decide if you can continue to provide this in the traditional way. Compare the economics of switching to online services (' the Government obviously has!). Sage Line 50 can now be run online, for example. Alternatively, could outsourcing overseas enable you to offer traditional compliance services at falling rates while remaining profitable?

The airline pricing model

If you're hell-bent on providing compliance services, try thinking in terms of Ron Baker's airline analogy. Airlines have made differential pricing into an art as they cater for the needs of different customers - customers who, whatever the fare, travel in the same plane, to the same destination, in broadly similar circumstances and arrive at the same time as everyone else. Yet some pay ten times as much as others! So, for example, instead of offering a flat rate of say £150 + VAT for all tax returns, consider a pricing model that will optimise your profit by capturing clients' perceptions of value, with fee levels to match. The percentages are based on the typical split of fares by major airlines on a single flight, which Baker suggests should represent the ideal proportion of clients in each category:

Economy class (25'55%) ' submit all their data to you by a fixed deadline on pre-printed forms, dealing only by letter or email (no meetings). You can probably predict how many clients will fall into this category and plan your resources accordingly. Clients who fail to stick to the rules pay the 'Full fare'.
Full fare (30-50%) ' this is your current compliance service, with a later deadline (but possibly not the January cases!); usually includes a meeting to review and sign the return, but not necessarily at partner or manager level; re-active tax planning only, although you will send them generic information after the Budget, etc.
Business class (15-24%) - reserve a proportion of your capacity for higher priced work, particularly last minute and more complex cases; typically require regular tax-related meetings over the year; offer more personalised tax publications and targeted pro-active advice
First class (5-8%) ' receive exceptional personal service from partner or senior manager, direct access by mobile phone when required, out of hours appointments at the clients business or home, personal tax planning advice initiated by the firm, especially after Budget.

It may be too late to implement such a plan for the 2005 returns, but it might be educational to monitor how you manage your workflow. Chances are your best clients will get a lousy service in January while your tax staff struggle to mop up a load of unappreciative £75 cases.

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Nigel Harris
By Nigel Harris
30th Oct 2005 10:02

Compare how garages operate
Accountants often compare their hourly billing with garages - more often than not because the hourly rate charged to service their BMW is more than they charge for accountancy work! But if you haven't worked in the motor trade or audited a main dealer you might not be aware of how this works.

Main dealers all have a book of standard times for every service and most types of repair. Those times are used to charge for the work - and of course enable them to quote for any type of work too. The trick, however, is to have skilled mechanics who are incentivised to complete the work in less than the standard time.

So in reality the garage bill represents a fixed fee, but they show a breakdown between parts and labour simply because that's what they have always done.

There has to be a model here that accounting firms could use to their advantage. For example, you could use the time recording system to reward your staff for efficiency and innovation.

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Richard Murphy
By Richard Murphy
30th Oct 2005 10:36

A first rate article
I wholeheartedly endorse what Nigel has to say here

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