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Quantifying the Value in Fixed-Rate Pricing

Oct 19th 2018
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One of the challenges for tax and accounting professionals who are new to value pricing or transitioning from hourly-based billing is the concept of “quantifying the value.”

When we bill hourly, our “value” is tied to the time spent doing the work, using the cost as the justification or quantification of the value provided, which is then tied to our client billings. However, what you have to remember is that value has nothing to do with cost or time.

When we offer a fixed-fee service, which really is the essential first step to implementing value pricing, there are three possible ways to establish price:

  1. Estimate the time it will take to do the work, slap an hourly rate on it and hope that there are no surprises and/or variances from the original time estimate.
  2. Charge based on the output of the finished work and tie some sort of market sensible rate that is probably comprised of the perceived average rate across all competitors. This is seen very commonly with tax preparers who charge per form or producing the one-off sales tax report without thinking about turning the activities into a monthly engagement.
  3. Price based on value, a.k.a., “value pricing,” that bears no time or output quantification; instead, the priced is based 100 percent on how the customer feels about paying that price.

Most accountants can justify or quantify the first two ways, but value pricing is a bit trickier with regard to the question at hand: “How do I quantify the value?”

I have a simple answer: make your clients feel great about paying the price you are offering. How? Well, the value derived from working with you needs to be higher than the price charged, and that value is affected heavily when you or your firm fit into all of these conditions:

  • Your reputation to be reliable or the fact that you will undertake the responsibility to do what you said you were going to do. This lowers the risk of uncertainty, while risk mitigation is a huge value creator.
  • Your experience and expertise imply that you are capable of achieving the outcomes you promised. This is where your area of specialization or niche creates value for your customers.
  • Your sales process, client interview and/or onboarding process is congruent with the promised outcomes.
  • You take financial risks away from the client through a guarantee of some sort. For example, you can guarantee your work with promised outputs, or better yet, measurable outcomes. If those outputs/outcomes are not met, you simply refund the entire fee or a proportionate fee based on partial outcomes.

Pricing Ain’t Easy

In all honesty, certain subjective outcomes such as peace of mind, pride in the service providers and a sense of security, are nearly impossible to measure. However, as accountants, we can pay attention to the outcomes we can monitor, including an increase in sales, decrease in costs, increased production speed, decreased idle time, increased close rates and other measurements.

According to Mahan Khalsa’s book, “Let’s Get Real or Let’s not Play,” your job as the professional is to identify the measurable outcomes the client is looking for and bring them all to the surface by using this six-question framework:

  1. What exactly is the measure?
  2. How do you measure it?
  3. What is it now?
  4. Where do you want it to be?
  5. What is the value of the difference?
  6. What is the value over time?

Have Some Answers

A good example is, “I need to reduce the amount of time we spend on accounting,” so we then come up with some answers:

1. What exactly is the measure? The amount of time spent by the business owner and office manager doing the accounting work.

2. How do you measure it? The amount of time spent working inside your accounting software.

3. What is it now? 40 hours a month

4. Where do you want it to be? 10 hours a month

5. What is the value of the difference? 30 hours a month x $50 per hour = $1,500 per month

6. What is the value over time? $18,000

Now follow up with: “If I can come up with a service that would guarantee reducing the time you and your office manager work inside your accounting software by 30 hours every month, saving you $18,000 a year ... would you be okay with paying $6,000 for this service?”

The client would answer: “If you can guarantee it, yes.” Then, you can start thinking about offering a service that aims toward that or maybe not the full $18,000; perhaps you can aim for $9,000 in time savings and sell the service for $3,000. The result is that your clients feel great about working for a professional who quantifies their services with measurable and objective outcomes.

And that is it, the simplest way to quantify the value for your services. Multiple that times two to four more measures we can quantify, plus the added premium of all the subjective parts of our services, including reputation, reliability and brand, and it becomes quite easy to provide fixed prices based on guaranteed outcomes.

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By Michael Abrams
Oct 20th 2018 08:51 EDT

Nice article. I agree that the price of the finished output really doesn't have much to do with our time/billing rate, but rather a perceived value that the client has.

I like quoting a fixed-price for services with a caveat, that if anything unusual presents itself, this MAY be cause for an adjustment, either a fixed cost adjustment or an hourly fee, depending on the nature of the exception.

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