you’ll end up with 4 main kpis.
by rob nixon
the idea of value pricing is that your clients know how much the price will be before the work commences and you get a healthy margin in return for your intellectual capital/property.
more on strategy: get rid of all your rates | never charge by a time unit | put your own oxygen mask on first | define client wants vs. needs | the entrepreneurial accountant: an oxymoron?
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with the implementation of value pricing your average hourly rate (ahr) should increase dramatically. there are two ways to measure ahr.
the first is if you have timesheets; then it is revenue / client hours charged. so if your revenue was $3 million and your fee-earning team (including partners) did 10,000 client charged hours for the year then your ahr would be $300.
once you get rid of timesheets you gain a new value-priced focus but lose some of your measurement metrics. you can however measure ahr based on your total employee base. the equation becomes revenue / total working time. so if your revenue was $3 million and you had 10 people (total team including partners) who were paid for 1,687 hours for the year then your total working time is 16,870 hours. that would mean your ahr without timesheets is $178.
the objective is to increase your ahr every month – or as a minimum every quarter. at the time of writing, most firms start their journey with timesheets and an ahr around the $150 mark. our coaching club program is designed to triple your starting figure as quickly as possible – without tripling the price your client pays.
there are six logical steps to increase your margins as illustrated in the model above. as you move through the steps your ahr should be going through the roof.
your margins will increase based on three key factors:
- your value belief in yourself and the project – courage and self-esteem
- your clients’ value perception – how much value they perceive they get
- the tactics and strategies you adopt – the six steps implemented
for now i want to focus on the tactics and strategies as you quickly move up the margin ladder.
you will notice that there is a “waterline” halfway through the strategies in the chart. if you are operating below the waterline you will be drowning in margin poverty. if you are above the waterline you will be surviving in margin abundance.
as you understand each step, do not be concerned that you have to take one step after another. you can jump steps and go right to level 5 or 6. you need to get above the drowning point as quickly as possible. the faster you get to the top, the higher your margins will be.
step 1. price arrears + ahr aware + charge rate increase
most firms start here. they price in arrears with timesheets and they are aware of their ahr. they may not be happy with where the ahr is, but it is where it is. to increase your margin simply put your charge rates up. put them all up by 15 percent. do that today. no one will notice and make sure you do not adjust salaries at the same time. if you do 10,000 client hours and your ahr was $150, now with a price rise of 15 percent it is $172.50. you just made an additional $225,000 profit.
step 2. price arrears + ahr targets + some new services
you are still pricing in arrears (with an increased charge rate) and now you have an ahr target. the price rise got you to $172.50 ahr and now you might set an initial target of $200. to get to a higher target you may need to introduce some more valuable services that are worth more to your clients and more to you – such as business advisory or management accounting services. as you move through the levels, keep having a higher and higher ahr target, however be warned. once you get into value pricing, the focus cannot be on the ahr target because you will start to price services based on the target rather than the value of the project. you are still drowning in margin poverty.
step 3. some price up front + some write-ups
you have gone through the first two steps and now you have put your toe in the water and tested some up-front pricing on some clients. the clients are always happy and as a result of this you inadvertently become more efficient and you get some write-ups. you are just starting to put your head above the drowning line and heading toward margin abundance. however it’s a bit like being pregnant with this “price up front” strategy. you can’t be half pregnant and you can’t be half doing this strategy – you either are or you are not.
step 4. 100% price up front + efficiency + charge rates still
now you’re starting to move into margin abundance. you have committed to price every project up front and now you are really driving time down by being more efficient. your margins are climbing, your write-offs are eliminated for good and you are getting through the work much faster. you’ll be running out of work soon – be prepared. you are still holding on to charge rates. while you still have charge rates, your internal budget will be based on a dollar figure that the team will achieve (“you have $x worth of time to do the job”) and you will set the price based on your ahr target or based on charge rates – albeit they are higher than before.
step 5. value pricing + $1 per hour + time budget
it’s now time to get rid of the charge rates and the ahr targets. if you get rid of the charge rates and move to (initially) $1 per hour per person you will be less inclined to price based on time but on the value of the project. you can still measure and monitor what is going on because you have not eliminated the timesheet recording system – yet! when you do an internal team budget (for the project) you should do it in hours, not dollars, and the team cannot associate the time taken with the price the client has agreed to pay. you should always challenge the time and drive it down by being more efficient. your team is even more inclined to record all the time and you’ll get an accurate ahr. your write-offs were eliminated in step 4 – you will only achieve write-offs in step 5 if you are really inefficient. every firm that has gotten to step 5 will never go back to having charge rates. they are redundant and surplus to requirements.
step 6. no timesheets
the step every accountant wants to take but is scared to take! getting rid of the timesheets. the tyranny of time will finally be lifted when you do. however, be warned. many firms have eliminated timesheets too early. i think it is a sensible option, and one that you will not regret. you should do it when the time is right.
- i know of some firms that have eliminated timesheets too early and they have nearly gone broke in the process.
- i know of some firms that have eliminated timesheets and not priced jobs up front – they literally made up the price after the fact. what a mess.
- i know of firms that have eliminated timesheets and have had a blowout of people costs.
i think the time to eliminate timesheets is when
- your ahr with timesheets is already high (say more than $300),
- your turnaround time on jobs is fast (say less than two weeks) and
- your profit margin is already high (around the 50 percent mark before partner salaries).
once you get rid of timesheets, some of your measurement systems go as well. this is not a bad thing. your main kpis now become profit, turnaround time (not wip), debtors and ahr (based on revenue / total working time). it certainly simplifies things and saves a huge amount of time filling the darn things in.
these steps are there to be jumped. get to level 6 as quickly as you can and you’ll never look back.
to make all of this happen you should announce your new intentions to your clients. be bold and send them a letter that reads something like this:
dear [client],
since our firm was started in [year] we have been using a “time multiplied by rate per hour” method to determine the price of the work. nearly every accounting firm worldwide uses this method.
we have come to the realization that this method is an archaic method of pricing. it is also a conflict of interest because what it means is (as an industry) we are directly rewarded for how inefficient we are. the longer we take to do the job the more we get. it is not promoting good customer service of faster completion time. this also means you have no idea how much the job will be until the bill is received. we don’t think that is fair to you.
as a courtesy to you we think you deserve to know in advance how much the job will cost and what it entails. as a modern and progressive firm we have decided to change this old business practice as of [date]. this means that before every job starts we will advise how much it will cost. there will be a written communication that you will need to sign off on. if you are uncertain about the project, the price or the benefits, you will have the opportunity to discuss these with us at the outset. to get the new system up and running, we are clearing out all of the time that we have accumulated to date on your behalf under the old system. accordingly, please find enclosed an invoice that brings you right up to date. other than for minor incidentals that we attend to from time to time, this is the last time you will receive such an invoice from us. we are indeed bringing in a bold new era for accountants. we appreciate your business very much and are confident that this new method of pricing will enable us to give you far better service. we look forward to working with you under the new arrangement.
yours sincerely,
[partner name]
by sending this letter, you have cleaned out your work in progress in one go and you have just made yourself accountable to the strategy.