Is Value-Based Pricing a Good Idea for Professional Services Firms?
by Terri Eyden on
By Lisa Tierney, CLSC, Tierney Coaching & Consulting, Inc.
Considering that professional services providers have traditionally charged an hourly rate, there are only two options, as I see it, to increase revenues – either they stop sleeping or they continually increase their hourly rate. The former is not a reasonable option, and the latter is hard because such incremental increases are bound to eventually alienate a large group of potential clients.
Accountants should consider using a new approach that determines the value of the services provided from the perspective of the buyer – the business-owner client. In "Pricing on Purpose: How to Implement Value Pricing in Your Firm," Ron Baker reinforces this theory, as follows: "Value is in the eye of the beholder. For any transaction to take place, both the buyer and the seller must profit from the exchange and receive more value – in their subjective perception – than what they are giving up."
A business owner might see the value that the accountant provides from a different perspective than the accountant might think. The accountant may expect to be valued by his or her vast knowledge or expertise in a certain area or in how long he or she has been an accountant. The average business owner really just cares about whether or not his or her company has met its compliance requirements and if the company is paying as little taxes to the government as it possibly can. And for that assurance, the business owner is absolutely willing to pay you top dollar.
Another question you might ask as a service-providing firm is: Doesn't charging hourly actually deter clients from interacting with us – and isn't that interaction what we want?"
Common Obstacles CPAs Face with Their Pricing Structure
We have always charged by the hourly rate. To address this obstacle, I'll tell a brief story: A tax professional gets a call from a distressed client who admits to owing over $400,000 in penalties, on top of some back taxes. The accountant can make a phone call and erase these penalties. One ten-minute phone call could do it – so what should the accountant charge – the hourly rate? What do you think the business owner would pay to be released from those penalties . . . perhaps a percentage? I'll leave you to your thoughts and speculation.
All the other accounting firms the prospect is going to talk to are offering an hourly rate. You can use value-based pricing as a differentiator and, with the proper message, you can assure your clients they're receiving better service with this model – no surprises, clearly defined outcomes, and full-time access to your high-level professionals.
How do we value each engagement when we don't know what to expect? If you don't know what to expect when starting a relationship with a new client, that in and of itself is a red flag. Asking questions of the client in order to establish parameters around the engagement are key to ensuring a successful relationship. The arrangement should clearly define scenarios for which a discussion around additional fees would be warranted.
How Value-Based Pricing Works Best
Let's take this idea of value-based pricing a bit further by exploring the concept that the perception of the buyer is the most important thing. Ideally, prospects should feel that you are the only service provider for them because you'll act as their trusted advisor with their best interests at heart. They want to feel as though you'll collaborate with them, convince them, and connect with them (The Rain Group published "What Sales Winners Do Differently," a case study that analyzed 700 B2B interactions, comparing the winners of the engagement with the second runners up).
To address these important issues, I recommend offering options to potential clients. Fee choices that represent different tiers of pricing and also illuminate various possible scenarios are key to value-based pricing. This also addresses the psychology behind making a selection. A comprehensive look at the effects of psychological pricing are explored in "Psychological Aspects of Price: An Empirical Test of Order and Range Effects," which states, ". . . consumers, on average, will select higher-priced products when prices in a list are presented in descending order and when the range of prices in a list is wide rather than narrow."
What might some of these options look like?
Option A: Fees are represented based on certain specific criteria, such as a five-year contract, with lower fees or varying amounts of cooperation from the client's staff (e.g., "the bookkeeper will prepare . . .")
Option B: The fee will depend on how clean the work papers are or when materials are delivered to your firm – if by such and such a date, the fee will be $X, or, "if we can perform fieldwork during the month of X, then the fee will be $X." So, consider criteria, such as timing, deliverables, and even reliable communication (e.g., "we expect that our requests via e-mail be answered within forty-eight hours").
Option C: When offering three options, make sure the discrepancy between them is clear and reasonable. Think small, medium, large – silver, gold, platinum – the C option is the high-end superior service that would offer something truly special and out of the box that the client might favor, such as unlimited access to a senior manager or support of the CEO's charitable cause – be creative.
In case you're thinking this is a radical idea, let me ask you if you've ever put a clause in an engagement letter stating something like, "If the amount of hours to complete this audit are less than previously anticipated, you will not be billed the full amount."
The gist of value-based pricing is that you consider the value in terms of the perceived benefits that will be received from your buyer.
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About the author:
Lisa Tierney, CLSC, is a certified professional coach and an award-winning consultant to the accounting profession which she has served for over fifteen years. She is a frequent author, speaker, and facilitator of workshops. She currently serves as the vice president of the Philadelphia Chapter of the Association for Accounting Marketing. Lisa can be reached at 267.470.4250 or Lisa@CPAMarketingConsultant.com. Tierney Coaching & Consulting, Inc. serves CPA firms across the country, offering customized marketing plans, business development coaching, leadership development programs, and innovative incentive comprehensive programs.