Today I look at how value pricing has had a big impact on the way that accountants charge for their services.
Have you noticed how professional accountants (CPAs, chartered accountants, certified accountants) have gradually moved from charging on a time basis to charging a fixed price for an agreed service?
As fixed pricing involves risk and accountants are not usually associated with taking risks have you ever wondered why?
Perhaps you believe that it’s market driven.
It’s what clients want isn’t it?
A known price that clients can budget for rather than a nasty shock at the end of the year when all the time based costs are added up.
Accountants Use Value Pricing To Make More Money
What if I told you that the change of accountants moving from time based charges to fixed pricing has been driven by a desire for the accountant to make more money.
In the ground-breaking book, “Professional’s Guide to Value Pricing” (affiliate link to Amazon.com), Ron Baker of VeraSage Institute explains why accountants and other professionals should throw away their time sheets and agree a price with the client for what the service is worth.
I call this a move from input pricing (what you have to put in) to output pricing (what you get out that is valuable).
This is an important distinction that cost-plus pricing totally ignores. Here is no automatic link between cost and value. As cost goes up, it’s assumed that any product of service is more valuable but that’s nonsense.
Let me give you a simple example.
Cost Plus Pricing Can Build In Inefficiency
I find the UK payroll systems very complicated (even though I am a qualified accountant) and I am too mean to buy computer software and pay for updates to a payroll for one person.
So I do it manually but it takes me a long time so I don’t pay myself very often.
If I offered a payroll service to my small business clients, my inputs would be very high and I’d want to charge a big fee to do it.
Unfortunately the value is very low because efficient competitors are very efficient and no one would pay what I would want to charge.
This is a far-fetched example but I am trying to make the point that customers shouldn’t be asked to pay for any production inefficiencies or poor purchasing.
Customers Shouldn’t Automatically Gain From Your Increased Productivity
Customers should not automatically gain from your improved productivity.
Just because you have invested in new technology or improved your processes or sub-contracted the work to a lower-wage economy, it doesn’t mean that the price you charge to your customer should be cut.
Can you learn a lesson from your accountants
I encourage people to adopt the Jay Abraham technique of funnel vision – to look at other industries and try to learn from changes that are happening and seeing whether they can be applied to their own.
So how well do your prices reflect the value of your service?
If it costs you £50 to make, you charge £100 but your customer gets £1,000 of value then you could be leaving a lot of money on the table.
If you base your prices on competitor prices value pricing still works.
If your competitor sells a similar looking service for £75 then initially it looks like a problem. Perhaps you will have to swallow hard and match or beat the £75 price.
But before you do, take a look at the value your competitor offers.
What if his £75 service only generates £500 value for the customer?
Then you’ve got something to sell. By spending another £25 the customer could get an extra £500 of value.
And that looks a great deal. In fact it looks too good!
Instead of reducing your prices you should be increasing them and (provided your competitors can’t match your extra value) not by a meagre 5 or 10%.
You would be giving your customer an extra £500, so what should the customer give you back in your price premium?
£100? £250? £450?
The right answer depends on your ability to convince your customer of the extra potential value, the likelihood that the extra value will be generated by the customer and that the value is unique to you and not generally available. And that’s where your selling skills have to be used.
Where the returns are certain and there are no risks would you give me 90p for a £1 coin?
Of course you would.
Back To Those Fixed Prices Charged By Accountants
The accountancy fee for one year is normally provided as a service a few months after the year end to complete the accounts and the tax returns. A traditional accountant will do the work and then send out a fee note after everything has been signed off and wait several months for it to be paid. For example, the accountant make complete the service in month 16 and get paid in month 18.
In contrast, a fixed fee accountant will suggest you pay one twelfth of the annual fee due each month, starting off in month 1. So by the end of month 12, the fee has been paid and the accountant may not have done any work.
This is a huge cash flow advantage to the accountant.
The client benefits from the fixed element of the fee. There are no big surprises if the records are in a state although the fixed price agreement may have a sting in the tail if things are really bad. There will be conditions to be met.
The disadvantage of paying the feel early is a small problem if the fee is only £50 or £100 a month. The bigger the fee, the bigger the issue.
The fixed price agreement is also likely to include some bonus services like you can call with a question, any time you want and get an answer. It sounds good but just ask yourself how often you would use that services and how much it’s really worth.
A common complain is that it’s very hard to get through to a partner – your “accountant” – and instead you’ll get fobbed off with a junior member of staff who will take a note of your question and then get get back to you. This can be awkward if you then have follow up questions.
Can You Use Value Pricing?
It sounds like I’m against value pricing.
I’m not. I think it’s important you get a fair element of the value you provide as profit.
I’m against the way the accountants present the fixed price fees to clients as if the accountants are doing the clients a huge favour. They should be more open and say that it is good for the client because of X, Y and Z but good for the accountant because of A, B and C.
Your accountant is often considered to be your most trusted advisor but how can that be when there is a business technique that could be of benefit for you to use in your own pricing if only you understood the full picture.
You may want to read Pricing On Purpose by Ron Baker.