first steps in developing a pricing strategy.
by august j. aquila
price it right
after demand, perhaps the next most important factor affecting a cpa firm’s pricing policies is competition.
more: how demand affects pricing | understanding the product pricing life cycle | 4 ways a production orientation can harm a firm | price to get the maximum fee | 7 issues in partner retirement planning | 5 ways to keep your edge | the toughest job in the world: managing an accounting practice | how to become the firm of choice
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as clients and prospects become more educated about cpa firms in their market, more sophisticated about the services offered and more cost-conscious, pricing becomes more important and more firms are beginning to stress the price of their services, especially in competitive request-for-proposal situations. intensive price competition in most professional service industries is now a way of life, from hotels to airlines, from car rentals to telecommunications and from law firms to cpa firms.
from a theoretical point of view there are four models of competitive market structures that you need to be aware of: perfect competition, monopolistic competition, oligopoly, and monopoly.
perfect competition: a perfectly competitive market structure would involve a large number of service providers all providing the exact same standardized service. there would be no major obstacles preventing firms from entering or leaving the market and no one firm would be so large as to have control over price. this model also assumes that the buyers have complete knowledge of all services offered for sale.
one could make a case that sole practitioners and other small to medium accounting firms would fit into this model. there are very few barriers of entry for a sole practitioner to set up shop. in fact, many accountants start out working from their homes or renting or sharing an office. since the smaller firms are basically providing the same services with very little differentiation, they are under tremendous pricing pressure and compete more on price than on anything else. larger accounting firms operate in either a monopolistic competition or an oligopoly.
the internet has made many markets closer to perfect competition because it is now very easy to compare prices quickly and efficiently (perfect information). also, the internet has lowered barriers to entry. for example, selling a popular good on the internet through a service like ebay is close to perfect competition. it is easy to compare the prices of books and buy from the cheapest vendor. the internet has enabled the price of many books to fall, so that firms selling books on the internet are making only normal profits.
monopolistic competition: the monopolistic market structure includes many sellers who try to distinguish their services so that they have some control over the prices they charge. in this type of environment firms differentiate themselves and their services according to the following:
- location (local, regional, national or international reach)
- differentiation through distribution of information, such as the cloud, client portals, etc.
- human capital differentiation, where the firm creates differences through the skills of its partners and employees, the level of training received and so on
- specialized skills and services. rather than competing on price alone, these firms attempt to add value and differentiate their services through niche development and other activities.
- any other attributes that make a firm different, including any type of high-impact service, industry specialization, technological advantages and so on
- firms operating under monopolistic competition usually have to engage in advertising. firms are often in competition with other local firms offering a similar service, and may need to advertise on a local basis, to let customers know their differences. common methods of advertising for these firms are through the local media and industry publications, linkedin, twitter, sometimes radio, firm newsletters and civic and charitable sponsorships.
oligopoly: in an oligopolistic market structure, there are few service providers. oligopoly is a market structure in which a small number of firms has the large majority of market share. an oligopoly is similar to a monopoly, except that rather than one firm, two or more firms dominate the market. often there are significant barriers to entry for new competitors. for example, there are situations in which the big four and other major national firms will be the only competitors; smaller firms will simply not be contenders.
in a traditional oligopoly, price is not used extensively as a marketing tool, although some would argue that price has been a significant marketing tool for the major firms. granted, you will observe deep discounting in proposal situations, but it would be difficult to find an advertisement or any other promotion that claims kpmp, grant thornton or pwc, or any other professional service firm, provides their services at discounted prices.
under an oligopoly market, every firm advertises their services and products on a frequent basis, with the intention to reach more and more customers and increase their customer base. a recent example is the television commercial for bdo – “those in the know, know bdo.”
monopoly: a monopoly exists when there is only one supply of a particular service or product. monopolies do not exist in the accounting profession. no matter what the niche or the service required, there is not just one firm in the country that offers a unique service. in fact, u.s. antitrust laws prohibit all monopolies, with the exception of major league baseball.