In part one, we looked at how you can defend your prices. Here we consider how to determine what clients find valuable, and how to charge them accordingly.
More and more firms are moving away from traditional pricing based on billable hours to giving fixed prices up front. The client gets no surprises but, unless the scope changes, you have to stick to the quote even if the work takes longer than originally estimated. This is the problem with fixed fees if you use your expected costs as the basis for your fee calculation.
This type of pricing is, in fact, time-based billing in disguise. It focuses on inputs (namely, time) rather than on outputs or results.
“But time in our profession has no relation to value,” says value-based pricing expert Mark Wickersham.
He explains: “Say, you spend two hours finalising year-end accounts, the first hour reviewing an opportunity to save the client £50,000 in tax, the second in the photocopying room and drafting submission letters. The costs are the same for each hour, but the value to the client of each of the two hours’ work is completely different – one produced a £50,000 tax saving, the other was simply administrative tasks. That’s why pricing based on time is wrong.”
Agreeing to a fixed fee based on the expected outcome, or the value of your service to the client is a better (and more profitable) way to price.
Carl Reader, director at accountancy firm d&t, says: “Whenever possible, our prices are linked to the impact of the advice that we are giving. This might be based on profit improvement, time saved or tax savings.”
Are you helping a client to secure a HMRC payment plan or some external finance? Then why not base your fees on an agreed % of the payment plan or the finance secured?
Wickersham points out that you should price each client individually, even for the same piece of work. It’s true, preparing a tax return for a client with £50,000 of annual income might take as long as preparing the return for a client with earnings of £500,000. But the ‘value’ provided to the higher earner is greater, so you can aim to charge the latter more.
How to determine value
“First, we have a face-to-face conversation with the client and ask lots of questions to understand the overall background and practices of their business,” says Alex Rawlings, operations director at contractor accountants Stonebridge Pay. “Their answers help us build a picture of their situation and their needs.”
You also need to uncover the challenges and problems they are experiencing, and any underlying reasons.
Reader says: “We try to find out what’s on their mind. It could be current pressing issues such as cash flow or time pressures, or longer-term goals such as retirement and exit planning.”
Wickersham says this is when you should flip the conversation to get them to tell you what the results would be if you could help solve their problems. For example, you might say: If we could help you put some systems in place and improve your efficiencies so that you then meet your sales targets, what would be the results from this? How would you benefit?
“This is powerful stuff because when they start telling you the benefits of you solving their problem, they are now doing the selling for you,” he says. This builds up the value and will help you when you link your price to the benefit, or the value of your proposed solution, to the client.
Although before you reveal your price, you really must ensure that the client is absolutely clear on the benefits. “If the client says to you, ‘That’s a bit expensive’, you probably assume that’s because they’re price sensitive. However, that’s never the reason. They simply don’t understand the value. When they see the benefits, the price becomes less of an issue,” says Wickersham.
How to charge based on value
According to Wickersham, menu pricing is one of the most powerful pricing strategies and should always be your first consideration. Ask yourself if it’s possible to give the client a choice of differently priced service options or packages.
Stonebridge Pay offers Silver, Gold and Platinum packages, all with a varied level of service.
Rawlings explains: “The Platinum package includes company incorporation, full book-keeping service and director personal tax return, which aren’t included in Gold. The Gold package includes quarterly VAT returns, timesheet management and a dedicated account manager, which aren’t included in Silver. Also, we offer the full level of advisory related to the service feature included in a given package. For example, if somebody is on Gold or Platinum, we offer them advisory on VAT as well as on personal and corporation tax.”
He adds: “Offering increased value in our higher priced packages gives us the opportunity to sell and move our clients to those packages. In fact, our clients usually pick Platinum.”
When menu pricing isn’t appropriate, Wickersham suggests using one of these pricing methods:
- Contingent pricing
- Percentage pricing
- Retrospective pricing
- Unit pricing
- Fixed pricing
He says: “I really do not recommend the last option, but all the others have a place. For example, percentage pricing can be used for pricing tax planning work.” Mark Wickersham’s offers free monthly training on value pricing.
Iwona Tokc-Wilde is a business journalist.