Are you stuck in a billing rut? If your accounting firm charges by the hour, you could be missing out. Setting a price based on the value of your services – known as value-pricing – rather than the time needed to complete them could help you to work more efficiently while increasing your profit margin.
What is value-based pricing?
Value-pricing is when you charge for your product or service based on its perceived value – that is, how much your customers think it’s worth and how much they value it. Unlike hourly billing, where you charge a set rate per hour for your services, or cost-plus pricing, where you charge for the cost to deliver your product or service plus a small margin, value-pricing isn’t an exact science. It’s typically determined on a case-by-case basis, which means you’ll have to spend more time with each client at the start of the project to understand their needs and look for ways you can add value. Once the price is set, it’s fixed.
What are the advantages of value-based pricing?
- Improved efficiency: By decoupling the cost of your service from the time it takes to provide it, value-based pricing gives you an incentive to adopt faster, more efficient work processes.
- Greater profitability: If compensation is tied to knowledge and outputs rather than time, then you can expect to earn more for tasks that can be finished fast but are deemed to be valuable.
- Clearer forecasting: Charging a fixed fee upfront means you’ll know exactly how much revenue you’ll draw from each client before you start work, which makes for more accurate financial forecasts.
- Client transparency: With value-based pricing, clients know how much your services cost upfront. There’s no guessing and no bill shock.
- Talent incentive: Unchaining your accountants from the clock will be a powerful selling point when you’re trying to attract the best talent. And happy employees generally mean satisfied clients.
What are the disadvantages of value-based pricing?
- Greater pressure: Value-based firms tend to charge higher fees. That’s fine, but you need to maintain and deliver the perceived value you promised or you risk losing your clients.
- Higher costs: Maintaining perceived value could mean you need to invest more in employee training and engagement. You’ll also need to ensure your clients understand the extra value you’re providing – which is usually achieved through branding and marketing – both of which require additional investment.
- Low-cost competitors: Firms working on a cost-based pricing structure may be able to offer cheaper fees and steal market share. That’s why it’s important to clearly justify the added value and high price point.
How can you use value-based pricing in your accounting firm?
Because value-pricing is based on perceived value, it’s subjective. In saying that, there are a few key things you can do to prepare for the switch:
- Get to know your clients: To understand how much someone values your services, you first need to understand what’s important to your clients. Conduct some market research or ask your existing clients to complete a short survey – and, of course, try to define value as it relates to each project.
- Define your unique selling position (USP): Is there any specific value your firm brings to the table that your competitors can’t? This could be knowledge, or expertise, or technology. If it’s deemed to be of value, then it should be considered.
- Take advantage of technology: Cloud-based accounting tools, such as QuickBooks Online, make adding value to or upselling your services easy. This lets you charge a higher price point and create efficiencies in your own work processes.
Moving to a value-pricing model will take some getting used to. Create a plan before you make the switch, with ideas for how you’ll get both your employees and your clients onboard.