I recently attended a seminar on value pricing. The presenter started with a seven-minute video on “the backward bike.” This bike turns left when the rider turns the handle bar to the right, and vice versa. Of the dozens of people who tried it in the video, no one could ride that bike. The presenter was trying to demonstrate how hard it is to break a habit.
Then the presenter explained what value-based pricing is. And then he tried to demonstrate how to apply the value pricing concept to get higher fees for services rendered.
At the end of the presentation he asked if there were any questions. More than half the attendees raised their hands. It seemed attendees were more confused after the presentation than before.
And then it struck me that value-based pricing truly was as complex as riding a backward bike.
So I asked myself: if value pricing is so complex, does it have much value in the accounting profession?
My assessment is that while a small percentage of firms with specialized practices could benefit from value pricing, most accounting firms (based on tax, accounting, audit and payroll services) will at best derive marginal benefit from value pricing on the consulting services they offer.
So why are we trying to solve a complex problem that has limited practical value?
In this post, you’ll learn:
– The real facts of the current environment for accounting and other core client services.
– Why core services, including accounting and payroll, have become low-margin commodity services.
– Tangible steps you can take today to break away from traditional commoditization and make these services highly profitable.
Let’s start with some basic facts.
Fact 1: A vast majority of CPA and accounting firms generate more than 80% of their revenue from the following services:
- Audit & review
- Accounting, including write-up, bookkeeping, trial balance, and preparing compiled or SAARS 21 compliant financial statements
Fact 2: These services are either compliance services or commodity services.
The primary function of tax, audit and review is to meet regulatory requirements which most clients perceive as a nuisance. Most clients consider money spent on these services as an expense. How do you create value in an expense? There is only one way – by reducing the expense. That means reducing your fee, which I’m pretty sure you don’t want to do.
Meanwhile, accounting and payroll are important business functions. Offering these services usually doesn’t require highly specialized knowledge. Virtually every accountant has the knowledge required to offer these services, so they have become commodity services.
Fact 3: You have already created a perception of your value in your clients’ minds.
The accounting profession has historically charged clients for services by hourly fees. This created a perception in clients’ minds about how they view your compensation for services. In their view, you are paid for the perceived effort (i.e. hours) and skills required to perform a service, NOT for the value you bring.
Another problem is that the perceived value of your skill set is weakly correlated to your skill set. It is all based on perception. If you’re a sole practitioner and charge $150 per hour, then that is the value of your skill set in your clients’ mind. If your friend, who is no smarter than you, is a partner in a Big 4 firm, then her clients have a higher perceived value based on historical norms, and might gladly pay her $450 per hour.
You established the value of your and your staff’s time in the minds of your clients. You also establish how much time of different staff members is needed to perform a service. Based on this perception clients expect a certain fee to be a reasonable compensation for different services you offer. It is etched in their minds, and it’s very hard to change that perception of your compensation.
It is very likely that, assuming you have great client relationships and offer excellent service, if you were to increase your fee by 10-15%, most clients would still stay with you. That’s thanks to your personal relationship and quality of service. But if you try to do it using the concepts of value pricing, you’re actually likely to have less success.
It isn’t necessarily impossible to raise your bottom line in core services using value pricing. But in this case, I must commend the honesty of Greg Chambers, a proponent of value pricing. He wrote an article for Accounting Today entitled:
“The Impossible Journey: Transitioning to Value-Based Pricing.”
Thanks Greg, for proving my point!
So you must be wondering, is there any way to make more money from core accounting services?
YES. Even though accounting services have become a commodity, you can add 20%, 30% or even 50% more to your bottom line from accounting services.
To learn how that’s possible, we need to first understand some suprising realities of the digital age in which we live.
The common notion is that the price anyone pays for a product or service is the value of that product or service in buyers mind. That’s why sellers of a product or service work hard to create a perception of high value for their product and services, so they can charge higher prices. That’s the basic premise of value billing.
But today, that’s simply not true. Here’s why…
Ready to learn more about how to break the commoditization of your core services and boost your profitability?
Download our free whitepaper, “Forget Value Billing. Think Value Building.”