Today I want to get into pricing structures.
As the hourly billing model dies a slow, deserved death, firms struggle to find a consistent alternative.
With each structure, I am going to touch on three factors to consider:
Today I want to get into pricing structures.
As the hourly billing model dies a slow, deserved death, firms struggle to find a consistent alternative.
With each structure, I am going to touch on three factors to consider:
- Internal + external pressures/constraints
- Client perspective
- Underlining cost structure
All pricing strategies require a unique cost structure. The biggest obstacle to shifting away from hourly pricing is holding onto an hourly pricing cost structure.
Hourly has been the reigning champion for so long because the cost structure is easy to understand and implement.
With technology – to monitor complete work and to augment team members’ activities – implementing better strategies is far easier and more profitable.
By the end of this newsletter, you should be able to see where you can offer more value to your client by redesigning your pricing and offerings
If you don’t remember anything else from this week’s newsletter, remember this:
Pricing will make or break your success in your firm. Well priced offerings will literally change everything about your firm.
Poor pricing leads to cheap tech solutions, scrimping on paying for good talent and half efforts for marketing – All the while, you’re buried in client work, wondering how you can switch careers.
Hourly
Internal + external pressures/constraints
The biggest issue with hourly pricing is the ceiling created for you and your team. Time is the constraint. I firmly believe that when team members know that prices are determined by how much they work, there is no incentive to work faster, more efficiently or innovate.
Their incentive is to fill the required hours and get out of there.
The next issue is that profit growth is closely tied to the number of clients. Focus on what value you can provide (and ultimately get paid for) gets a bit hazy. It becomes a client quantity over work quality perspective.
Client perspective
I have never met a client who loves finding out the price of something after they’ve committed to purchasing it.
Hourly pricing pushes the risk of the relationship entirely into the client’s lap. To a client, it measures the input of the firm.
Clients are not indifferent about pricing models. Hourly pricing is damaging to client relationships, regardless of how well the work is performed.
I find it contradictory that some accountants advise their clients to use budgets to know what their costs will be, and then refuse to give a solid cost for routine compliance and accounting services.
Underlining cost structure
The support structure is easy to manage. No real-time team or project management is required because you have a built-in margin regardless of how much time is spent on the project. It kind of puts the cost control out of sight and, therefore, out of mind.
Overruns are usually discovered after the work is completed. If the overrun is higher than expected, firms usually have to eat hours to maintain the client relationship.
Fixed Pricing
Internal + external pressures/constraints
Fixed pricing can turn your services into a commodity quickly. You might give your client a unique fixed price, but in your mind you are still tracking and calculating the hours to see what the margin would be.
You are focused on delivering a determined output, that can be compared to the market. Price will be the value proposition for your service, regardless of your skills and expertise.
Given that it still a reimaging of hourly based billing, time continues to be the finite resource available to the team. Revenue growth is still restricted to the amount of time that can be spent.
Client perspective
Fixed pricing is a step in the right direction for building a shared approach to risk around the working relationship. Clients like having a definitive cost for the services they seek. Fixed pricing provides that cost certainty.
Fixed pricing is attached to and measures an output from the firm. This is still lacks clarity of the value of the work that is done.
Underlining cost structure
Most firms that use fixed pricing, continue to use a hourly-based tracking mechanism for their team. The cost structure remains the same, yet the risk of cost overages increases significantly.
Project oversight needs to increase to manage cost overruns as well as team member utilization and profitability.
Value based pricing
Internal + external pressures/constraints
The internal pressures are decentralized. Team members become accountable to themselves, instead of the firm bearing the brunt of the load.
There is an alignment and reward system for team members that want to perform well. Team members will stop filling their focusing on filling their 8 hours, but completing their work.
The external pressures decrease as the services you provide are no longer commodities but unique solutions. Value-based pricing measures the outcome for the client.
Client perspective
The focus of the conversation will switch from what the firm will do to what the client outcome will be. You are no longer talking about finite services, but the value received and a business and personal level.
Communicating value is something that many firm owners struggle with. We have relied on the ‘need’ factor to land clients.
- The need for bookkeeping
- The need for sale tax filing
- The need for tax preparation.
Value based pricing is based not on a need but rather the want for a better result than what they have been achieving. Clients have to be walked through this process. Check out TFYW #015 for the VALUE sales process.
Underlining cost structure
The underlining cost structure can be viewed as very unorthodox in the traditional accounting world. Team members will be responsible for their portion of the cost of sales that pays for their salary. Meaning, each engagement will be broken down by cost into distinct parts that are assigned to team members.
That cost is fixed for the team member. The system measures value, in dollars, and the team member has to deliver that value, instead of the number of hours.
The team member is accountable to themselves to get the work down quickly and correctly. The time it takes to complete that work is up to them. The task objectives need to be clearly defined, support to complete the work has to be available, and project communication and feedback must be abundant.
The faster the team member gets, the fewer hours they will have to work. It always demoralizes high performers who are rewarded with more work.
There can be a dynamic pay system wherein team members, once they have completed their regularly assigned work, can take on other work and be paid extra for the value they deliver. Salaries won’t be fixed for an entire year but will fluctuate based on the value the employee delivers.
Subscription
Internal + external pressures/constraints
Subscription pricing is very similar to value based pricing, but a longer term. The external pressures disappear as you are in a league of your own when it comes to the value you provide.
I don’t disagree that other firms could do what you do, but subscription pricing turns your firm into a partner, not just a service provider.
Businesses want a stable, dependable financial partner that will be accountable not only for the tax return but the growth of the business and, ultimately shareholder wealth. Subscription-based pricing measures the long-term outcome for the client.
Subscription pricing is the only way to provide that.
Client perspective
Subscription pricing is predictable and will easily become a cost of doing business for a client. Clients want to offload some of that burden of leadership of their business to a trusted, qualified advisor. Leadership is lonely and no one has all the answers.
Not all clients will see the value of the subscription relationship which is ok. Before clients can access the value you bring to the table, they themselves have to be teachable.
As the relationship grows, you will become more entrenched in their business and become irreplaceable. The relationship is no longer attached to the services, but to the results the firm helps the client achieve.
Some of my clients that embraced the subscription model are still close friends years after I stopped being their advisor. They know that I care about their business and them.
Underlining cost structure
The cost structure is similar to value-based pricing. Team members have a fixed value that they need to deliver. Clearly defined tasks and expectations that are communicated frequently will ensure that deadlines are met and value delivered.
Good team management is crucial, but leadership to empower your team to take ownership will be more important. Dragging team members is the biggest barrier to growth for any firm.
The greatest impact to your firm is the potential to significantly increase prices. Not by 15 to 20% but by 3 to 6x. That may seem ridiculous, but as a partner committed to the growth of a business, even at those higher prices, the client is still the major benefactor of the relationship.
Making the Transition
Moving from fixed pricing to value-based pricing and then onto subscription pricing, takes more than a change in tactic or a pricing chart on a website.
- New entity. Some firms create an entirely new entity, so as not to create different offers. It will give mixed expectations to the market. It is hard to sell a $35,000/yr subscription engagement to a client whose friend, who is also client, is paying only $4,000 for corporate taxes.
- Forward-thinking employees. These employees like the idea that they can earn more by working smarter. They are the linchpin in the success of the transition.
- Progressive tech strategy. Time saving technology compounds exponentially. It offers a better experience for your team and your clients.
- Methodical sales script and strategy. Accepting all times of clients will not work. There has to be a clear alignment of value. Meaning, they want to grow. They want to leverage your expertise. They can visualize the value you will provide.
- A plan to get you away from client work. Your ability to do client work may have motivated you to start your firm, but you will have to stop doing it to focus on sales, team management and client relationships.
Here’s to delivering more value and getting more fulfilment and flexibility in your firm and life!
Build The Firm You Want,
Mark