3 areas of focus.
by rob nixon
the problem with pricing by the hour is that the assumption is that the price per hour is correct (often calculated by a salary multiple) and the time to do the task was correct. the assumption is that time multiplied by the rate equals the correct price.
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in my view, nothing could be further from the truth.
when selling intellectual property, to price in arrears based on time and rate is a bizarre pricing model. you are valuing what you know and the outcome the client gets based on a salary multiple (to get to the charge rate) and the time taken to do the task. very strange! i understand it’s an easy way to calculate a price. the issue is this model does not value how smart you are and the impact you make.
there has to be a better way. and there is. it’s all about value pricing.
value pricing is where you price the job up front based on the value you create for your client. you cannot value price after the fact. that means you have to scope the project out first (by talking with the client and doing some research), find the value you are adding and then present an implementation plan to the client based on how you are going to help them.
now for historical work you have a challenge with pricing. and that’s price parity. you may think it is worth more but if the client has been paying $x for the past few years then they may pay $x + a bit – but not the price you think it is worth. for a new project that the client has not bought before then that’s a different story.
if you know the numbers in advance (cloud accounting helps with that enormously) then you can scope out projects that make a difference with your clients. if you can articulate your value in advance and present it in such a way that makes sense financially and emotionally then you’ll win the business.
most people get the concept of value pricing. price based on your value.
the biggest question i get around this topic is “how do i work out the price?” here is the definitive way to price knowledge-based services. if you follow this simple guide you’ll never need to ask the question again.
there are only three areas you need to focus on to get to the right price.
- your value belief in the project, your team and yourself
- your value contribution to the client’s condition
- your client’s value perception of what you are doing for them
the diagram below will help you determine the right price.
here are some pricing scenarios around these three critical pricing areas.
let’s say you have a high value belief and your contribution is high (zone 1) yet you have not articulated your value to your client; then you will not maximize your price. let’s say your client value contribution is high and your client’s perception of your value is high (zone 2) yet your self-belief is low; then you will not maximize your price. the worst one is when your client’s value perception is high and your value belief is high (zone 3) yet your contribution is low, then you will not maximize your price – you’re basically lying!
if you want to maximize your price and get a great return on your intellectual property then all three areas must be working together. you need to be in zone 4.
let’s look at each one in detail and see if i can help you with the dark art of pricing.
your value belief
it all starts here. unless you believe in yourself and what you and your firm know is worthy of a high price then you will always price low. i find self-esteem in the accounting profession to be a major issue when it comes to pricing. you might be different but most of those whom i meet lack the confidence and courage to price appropriately.
as you look at the scope of work to do and as you work out the value you’ll scratch your head (like the accountant below) and you’ll have a lot of chatter going on in your head. you’ll be thinking of charge rates, value, competitors and the one you most think of is “what will my client think?”
who cares what others think?
get over yourself. they are not really thinking about you. they’re too busy worrying what you think of them! what people think of you is none of your business anyway, that’s their business.
get some courage and believe in your self-worth as an awesome, smart accountant. it’s taken you years to get to where you are today. you used to do the same project in five days; now because of your experience you can do the same project in two hours. you should be rewarded for your years of experience, and not how long it took to do the project.
here’s your new value belief system:
“i really value what i know. i articulate my value eloquently. i sell my intellect and information based on my value contribution rather than my time.”
your value contribution
to work out your value contribution you are adding you need to think about the following:
without me, they can achieve x result. with me they can achieve z result. the difference (y) is your value that you can add. the impact might be financial, emotional or both.
let’s look at a couple of examples.
cash-flow improvement. if the client is constantly juggling cash, never has any surplus money and always stretching creditors and arranging payment plans then that is the current situation. if you can educate them, put systems in place, show them how to improve profit and then monitor their behavior, let’s say the outcome over the year is that they are $200,000 better off. your cash “value add” is $200,000. they are also sleeping better at night, less stressed, have more working capital to expand and are generally happier. your emotional value add is massive. how much would you charge? well a 10:1 return is a pretty good deal. so maybe $20,000 to $30,000.
tax minimization. if your client has a tax exposure of say $550,000 because of their current structure and trading environment then that is the current reality. you come along and restructure their affairs and negotiate with the tax department and you get their exposure down to $150,000. then your cash value add is $400,000. what can they do with $400,000? maybe expand the business, pay the family home off sooner, retire early and get some of their life back. your emotional value add is huge. what’s that worth to the client? pick a number – maybe $30,000 to $60,000.
without high value contribution you will not maximize your price. you need to work it (value contribution) out in advance and show the client with confidence that you can help.
your client’s value perception
how you articulate how you are helping your client improve their condition will make a massive difference in whether a) you win the business in the first place and b) you maximize your price.
it’s all in the language. and if you want to master the dark art of pricing then you need to become an eloquent user of value pricing language.
here’s the problem that must be addressed:
most accountants talk to their clients about what they are going to do rather than what they are currently doing will do for the client.
what i mean is most accountants talk to me about inputs (activities) rather than outputs (results). most accountants tell me all of the work they have to do rather than what benefit i will get when i buy the work.
i see engagement letters that look like this:
included in this project is:
- analysis of your current situation
- recommendations to improve your structure
- a cash flow forecast statement
- tax planning for entities x, y and z
- annual financial returns for entities x, y and z
- personal financial returns
throw in an audit and you have the entire shopping list at the grocery store!
you must change your language and articulate the benefits of the project. it’s the oldest radio station in the world, w.i.i.f.m – what’s in it for me!
talk to me about profit improvement, wealth creation, asset security, lifestyle improvement, etc. just tell me how much better off i’ll be by buying your ideas.
at the end of the day, the only right price is what the market is prepared to pay for it. that means the right price is just before no. in other words if they keep saying yes without hesitation then the price is too low.
value pricing is a wonderful tool to use. it gives certainty to the client of the price and the scope and you maximize the years and years of experience you have.