It’s a simple fact that most accountants and bookkeepers are working far too hard, for too little money. We’re an overworked profession that doesn’t earn as much as other professions (such as lawyers, doctors, and even plumbers!).
The single biggest reason is getting pricing wrong.
Price is the most powerful lever in the profit equation. Get it wrong and you end up working for no profit. Get it right and your profits soar.
The trouble is, there is a great deal of confusion over pricing. People use phrases like time-based billing, fixed pricing, value pricing, package pricing without any real understanding of what they mean.
Ultimately there are only two types of pricing:
- Cost-plus pricing, and
- Value pricing.
Everything else – fixed pricing, percentage pricing, menu pricing, dynamic pricing and so on – are different methods of pricing that are a form of either cost-plus pricing or value pricing (or a combination of the two).
Cost-plus pricing is where you add up the costs and add on a ‘hoped-for’ profit or mark-up. The old-fashioned way of pricing in the accounting profession, time-based billing or hourly rates, is a form of cost plus pricing. Charge out rates are arrived at by multiplying hourly salary costs by a multiple to give a rate designed to cover salary costs, fixed costs and to give some profit.
Cost-plus pricing is a terrible way to price because it completely ignores the demand side of the equation, i.e. what matters to the customer. The customer does not care about your costs, only about the value to them.
The only other type of pricing is to ignore cost and focus on the customer and what they value. This means you should set your price based on the value to the client.
When you master value pricing the rewards are huge, both financially and emotionally.
So why are so many accounting firms getting value pricing wrong?
Very, very few accounting firms are successfully value pricing (although the numbers are growing fast every day). One of the big problems is a lack of understanding and misconceptions. Here’s a big one.
Fixed pricing is not value pricing.
This is one of the biggest myths in the profession.
So, let me explain why fixed pricing is not value pricing…
Value pricing is difficult. It’s one of the hardest skills to master (but when you do the rewards are big). It’s hard for 3 reasons:
- Value is subjective, it can’t be touched, felt or measured
- Everybody values things differently
- Accounting services are hard to price because every client is unique (different sizes, different trading sectors, different trading entities, different quality of record keeping, different needs etc.)
Having a fixed price for any service cannot be value pricing because of the second point above; everyone values things differently. Let’s use a simple example…
Imagine you help businesses get their accounting systems onto the cloud by setting them up with QuickBooks® Online. Perhaps in the past you priced that as an hourly rate. And now you decide to have a fixed price of £350 to transfer their accounting system onto QuickBooks® Online.
That £350 price cannot possibly be a value-based price because everyone values things differently. You have to have a value conversation with the business owner to identify what they value and then give them a unique price (every customer should have a different price).
In fact, a single-fixed price is always the wrong price. In this case £350 will always be wrong!
You see, when you are talking to a business owner about your service – in this case setting them up with QuickBooks® Online – they will have a number in their mind they are prepared and willing to pay. The chances of that number in their mind being exactly £350 is so remote it’s practically impossible. They will have a number in mind. That number will either be bigger or smaller.
If their number – their perception of value – is less than £350 you lose out because you are too expensive and they don’t buy.
If on the other hand, their number is greater than £350 you make a sale. But you still lose out because they would have paid you more. You’ve left money on the table.
You always lose with a single fixed price.
By the way, if you do charge £350 for setting up QuickBooks® Online then you are too cheap. Put your prices up! My research shows that most accountants and bookkeepers in the UK charge less than £350 and about one third will do this for free.
Anyway, where has that £350 come from?
It can’t be based on value because it’s a fixed price offered to all clients (and all clients value things differently). No, that single fixed price has been arrived at as a best guess of how long it typically takes to set someone up on QuickBooks® Online. That’s why fixed pricing is just another form of cost-plus pricing.
So how do you give a value-based price up front that ensures you will make a profit every single time?
I will be revealing the answer to this during my workshop at QBConnect in London on 27th February, 2018. I’ll share with you how some firms are using the concept of Optimal Pricing to get much higher prices (for example, how you can earn fees of over £1,000 every time you set someone up on QuickBooks® Online.
In particular, we’ll explore the 7 types of questions you must ask to understand the scope of work and what you client values. These questions are critical if you want to get the best price.
I’ll also explain the psychology behind your clients’ lack of understanding of what your price should be and how you can use it to get better prices.