Intro to value-based pricing


Valued-based pricing gives accounting practices a great opportunity to be properly compensated for years of experience and expertise, but it’s often difficult to calculate and understand. Harvard business review describes value-based pricing as “the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitors.”

In other words, we don’t bill by the hour, which is a big difference from what most firms have historically followed as a billing model.

The struggles associated with hourly-based billing are many. To start, hours are too easily lost simply because they’re not tracked well. Despite apps, reminders, technology and tools to try to keep us on track, our days simply are too busy to ensure that everyone within our organizations is capturing all their minutes properly, all the time.

We also run into myriad other human behaviors that can cause our hourly billing to be less than ideal, the firm will write off hours for training new staff when projects take too long or staff will make the decision not to record all their hours when they think they are taking too long. Clients will not always call us when they need us to ask questions before making decisions because they do not want a bill. When we disincentivize clients to use us as trusted advisors, we are inadvertently driving our own value down.

How do you go about implementing value-based pricing from an hourly model? This can be a big step and it can help to start to transition your clients to flat fee pricing based on their current projects. Tax return preparation and our consulting and planning projects can be an easier place to start by setting flat fees.

For example, if a client is being billed hourly for tax planning and consulting, take their average hours last year and offer to convert their bills to a flat monthly fee that makes sense based on their past usage of firm time. You can re-evaluate at the three, six or 12-month marker. Value-based pricing is a step beyond this though.

Value-based pricing takes the attention away from the time clock and puts on providing the very best to our clients in a way that we are also being fairly compensated. It’s a win-win model.

True value-based pricing is understanding what your clients are willing to pay for the same services as one of your competitors and then understanding what you uniquely bring to the table that would provide enough inherent value to merit those same clients paying a higher price to work with you. It is critical to evaluate what sets you apart from your competitors.

It can be hard to differentiate ourselves in the accounting field, but it is critical in a value-based pricing model to understand why you bring more value to the table than the average CPA firm that your client could hire. Maybe you have designed a system of superior communication or perhaps your technology allows for more efficiency resulting in fewer tax return extensions. Maybe your team offers a KPI performance dashboard with every business tax return prepared.

Whatever you do that is beyond just the average call of duty is what to focus on when setting your value-based pricing. If you use the example of providing a KPI dashboard with every business return, think about what clients would normally pay for that, maybe the value is $500, that is the value you can now add to your competitors’ pricing because of what you uniquely bring to the table.

After you implement value-based pricing strategies, make sure you still track internal costs and regularly do cost comparisons, and evaluate gross profit margins on business segments and projects. This will help identify any areas where pricing may not have been set up well at the beginning. Well assessed and implemented can not only improve profit margins, but it can also enhance client satisfaction, increase focus on customer service and improve the overall quality of services being provided.

Value-based pricing takes the attention away from the time clock and puts on providing the very best to our clients in a way that we are also being fairly compensated. It is a win-win model.

Like what you’re reading?

Subscribe to our FREE newsletter and we’ll deliver content like this directly to your inbox.