What to Consider Before Taking the Value Pricing Plungeby
Many accounting industry influencers have advocated switching from the traditional billable hours method to value pricing, but one strategy rarely fits all situations or firms.
For those less familiar with the method, value pricing is typically where a fixed price is defined for a particular service or range of services based on their value. Value pricing certainly has the appeal of simplicity; the price is agreed upon before the work starts, it's the basis for the payment terms, and there's no haggling or reviewing the invoice line by line.
In fact, properly executed fixed price projects can produce gross margins exceeding those generated by time and materials-based projects when the resources involved are experienced and knowledgeable, and the available economies of scale have been identified and leveraged. In many cases, value pricing can even improve client relations by eliminating the tension sometimes associated with presentation of the time and materials invoice.
While these arguments are compelling, there are some things to consider before instituting any changes in your billing methodology.
Value pricing is not appropriate for all clients, like those requiring extra work due to sloppy bookkeeping or those with varying year-to-year accounting needs. This information is not yet known for new clients, so the risk is greater there. Some industry experts argue the best way to handle value pricing with new customers is to write a comprehensive engagement letter, and to charge extra for anything outside its scope.
A clear scope of work and agreement is always good practice. However, if several items during the course of the relationship fall out of scope, you could be perceived as nickel and diming. Also ask yourself: has the client expressed interest in switching from time and materials billing to value pricing? While value billing may make perfect sense for the firm, clients may not see the value in switching. Be prepared for objections.
A value pricing strategy needs to account for client perception and plan for clear communication, because it's inherently difficult to understand. It's less tangible than a set hourly rate for a service and getting billed for the work done.
If the proposed value price is higher than the historical time and materials price, perhaps in an attempt to recapture hourly leakage or uncharged out-of-pocket expenses, existing clients may not perceive any added value in the higher price and, in fact, may see the value price as a thinly veiled gouge. This perception makes for both an unhappy client and an uneasy working relationship.
Even if you decide to offer clients fixed price or value price services, the value price must be based on something. Clients and the complexity of their needs change from year to year. Without an accurate, detailed history, the value price is merely a guess.
Accurate fixed or value pricing requires more detailed information, not less. You and your employees will feel relieved when freed from filling out timesheets, but you risk losing sight of changes in the client. For instance, their business may slowly become more complex over the years and your value pricing may not have accounted for that, or your staff may end up doing work the client neglects because they think the fixed price covers everything.
Without an accurate historical basis, firms run the very real risk of underestimating the value they provide. A low price will likely prove difficult to increase later on. Alternatively, the client may change their internal processes or invest in new accounting software and decide to leave your firm because they feel they are not getting the same value as before.
To Value or Not to Value
All of the above is not to say that time and materials billing is sacrosanct. There are convincing arguments for value pricing and for focusing on a service's perceived value.
The point here is that value pricing is not a blanket answer for every firm in every case and there is more to evaluating this strategy than simply compiling a spreadsheet and calculating a price, or as some suggest, defining a price and working backward to ensure the service is deliverable at a realistic cost. It also involves reviewing the kinds of clients you have, properly educating clients if you do switch, carefully considering how it may affect relationships, and ensuring detailed, comprehensive historical information is used to prevent undervaluing services.
Value pricing is not a one-size-fits-all model and firms should keep that in mind. A hybrid approach could involve bringing on new clients using the time and materials billing model with the understanding that it will move to value pricing after a couple of cycles. Another method is to decide to offer one model or the other only after a detailed evaluation of the client, the type of work, its complexity, and your firm's experience and historical reference points.
About the author:
William Cornfield, CPA, MBA, is president and founder of WSG Systems Corp., manufacturer of Empire SUITE, a business management and automation software for accounting firms and other professional services organizations.
William Cornfield, CPA, is president and CEO of WSG Systems, an accounting and resource management solutions provider. He regularly consults with senior management of WSG’s clients regarding all aspects of their professional services organizations.