Is Value Based Pricing a Good Idea for Professional Services Firms?
Considering that professional services providers have traditionally charged an hourly rate, there are only two options, as I see it, to increase revenues – either they stop sleeping or they continually increase their hourly rate. The former is not a reasonable option and the latter is hard because such incremental increases are bound to eventually alienate a large group of potential clients. Accountants should consider using a new approach that determines the value of the services provided from the perspective of the buyer – the client – i.e. a business owner. Ron Baker published “Pricing on Purpose: How to Implement Value Pricing in Your Firm” in the Journal of Accountancy (June, 2009) which reinforces this theory, as follows: “Value is in the eye of the beholder. For any transaction to take place, both the buyer and the seller must profit from the exchange and receive more value—in their subjective perception—than what they are giving up.”
A business owner might see the value that the accountant provides from a different perspective than the accountant might think. The accountant may expect to be valued by his/her vast knowledge or expertise in a certain area or in how long they have been an accountant. The average business owner really just cares about whether or not his/her company has met its compliance requirements and if the company is paying as little taxes to the government as it possibly can. And for that assurance, they will are absolutely willing and able to pay you top dollar.
Another question you might ask yourself, as a service provider, is: “Shouldn’t we encourage interaction with our clients?” Doesn’t charging hourly actually deter our clients from interacting with us?
What are Common Obstacles that CPAs Face
with their Pricing Structure?
We have always charged by the hourly rate. To address this obstacle, I will tell a brief story: a tax professional gets a call from a distressed client who admits to owing over $400,000 in penalties, on top of some back taxes. The accountant can make a phone call and erase these penalties. One 10-minute phone call could do it – what should the accountant charge – their hourly rate? What do you think the business owner would pay to be released from those penalties … perhaps a percentage? I leave you to your thoughts and speculation…
All the other accounting firms the prospect is talking to will be offering an hourly rate. You can use value-based pricing as a differentiator and, with the proper message, you can assure your clients that they are receiving better service with this model – no surprises, clearly defined outcomes and full-time access to your high-level professionals.
How would we value each engagement if we don’t know what to expect? If you don’t know what to expect when starting a relationship with a new client, then that in and of itself is a red flag. Asking questions of the client in order to establish parameters around the engagement is key to ensuring a successful relationship. The arrangement should clearly define scenarios for which a discussion around additional fees would be warranted.
How Does Value Based Pricing Work Best?
Let’s take this idea of value-based pricing a bit further by exploring the concept that the perception of the buyer is the most important thing. Ideally, the prospect should feel that you are the only service provider for them because you will act as their trusted advisor with their best interests at heart. They want to feel as though you will collaborate with them, convince them, and connect with them (The Rain Group published “What Sales Winners Do Differently” a case study which analyzed 700 B2B interactions, comparing the winners of the engagement with the 2nd runners up). To address these important issues, I recommend offering options to potential clients. Fee choices that represent different tiers of pricing and also illuminate various possible scenarios is key to value based pricing. This also addresses the psychology behind making a selection. A comprehensive look at the effects of psychological pricing are explored in “Psychological Aspects of Price: An empirical test of order and range effects” was published in Marketing Bulletin which stated, “… consumers, on average, will select higher-priced products when prices in a list are presented in descending order and when the range of prices in a list is wide rather than narrow.”
What might some of these options look like?
Option “A”- fees are represented based on certain specific criteria such as a 5-year contract, with lower fees or varying amounts of cooperation from the client’s staff (i.e.” the bookkeeper will prepare…”)
Option “B” might represent that the fee will depend upon how clean the work papers are or when materials are delivered to your firm – if by such and such a date, the feel will be….or if we can perform fieldwork during the month of….then the fee will be X – so, consider criteria such as timing, deliverables, and even how the relationship is – “…we expect that our requests via e-mail be answered within 48 hours…”
Option “C” – when offering three options make sure that the discrepancy between them is clear and reasonable. Think small, medium, large – silver, gold platinum – the “C” option is the high-end superior service that would offer something truly special and out-of-the box that the client might favor – such as unlimited access to a senior manager or support of the CEO’s charitable cause – be creative.
In case you’re thinking this is a radical idea, I ask you if you have ever put a clause in an engagement letter stating something like…”if the amount of hours to complete this audit are less than previously anticipated, you will not be billed the full amount….”
The gist of value-based pricing is that you consider the VALUE in terms of the perceived benefits that will be received from your buyer
Lisa Tierney, CLSC is a certified professional coach and an award‐winning consultant to the accounting profession which she has served for over 15 years. She is a frequent author, speaker and facilitator of workshops. She currently serves as the Vice President of the Philadelphia Chapter of the Association for Accounting Marketing. She is a member of the CPA Leadership Institute’s Leadership Panel and an active member of the International Coach Federation. Lisa Tierney can be reached at 267.470.4250 or Lisa@CPAMarketingConsultant.com.
Tierney Coaching & Consulting, Inc. serves multi‐partner CPA firms across the country offering customized marketing plans, business development coaching, leadership development programs and innovative incentive comprehensive programs. Visit our website at www.CPAMarketingConsultant.com.
This article appeared in Accounting Web on December 12, 2013