Traditionally, accounting firms have made their revenue through the buying and selling of time. Firms hire salaried accountants with various years of experience and knowledge and charge clients per hour based on the accountant’s rate. Unlike other businesses, accountants price their products based on two factors: the time it takes to complete the task and the complexity of the job. Therefore, the biggest factor pushing the needle when it comes to pricing is the inputs on the job. However, what if there is another way to charge clients that isn’t primarily based on billed hours?
Value-based pricing is a pricing strategy which sets the price of goods or services based primarily, but not exclusively, on the perceived value to the customer rather than the cost of production. When effectively used, value-based pricing will yield higher returns and higher value of services than traditional cost-based pricing.
Sell Clients Their Own Time Not Your Time
Value-based pricing for accounting services shifts the focus of charged hours as the primary pricing mechanism to just another cost of doing business. Think of it this way, clients don’t care how many hours it will take for staff accountants to prep their return, they just care that the return will be done correctly. So why would the number of hours it takes to complete the return be relevant to the price a client is willing to pay?
Clients are primarily concerned with the value of their own time rather than the time is takes another person to complete a task; this is why people pay for services in the first place. More often then not a client is paying for convenience when they are purchasing a service, whether it be accounting services or a ride on Uber. The price they are paying is not the perceived value of time from the service provider’s perspective but instead the perceived value of their own time.
Given enough time and effort a client can complete their own tax return. However, with all the time that is required to educate oneself in the intricacies of tax law, a client would be better off running their own business and letting the professionals do the tax work. In this sense, a client is buying back the time it would take to complete the accounting service.
Billable Hours as an Input Rather Than an Output
Even though it seems that value-based pricing would replace billable time, it actually does the opposite. The time it takes to complete a task for a client is still relevant to the profitability of a job but reflects more on the inputs then the outputs. Instead of focusing on the time charged to clients (output) firms would focus on the time it takes to complete a fixed cost project (input).
By refocusing billed hours as an input rather than an output, firms can focus on value added services to clients. Since clients care more about service and less about billed hours, refocusing the attention to providing valuable accounting services aligns incentives down the value chain. Instead of worrying about how much time is being billed to clients, accountants will focus on offering the most amount of value given a set budget.
By aligning the accounting services to the price a client is willing to pay, firms will sell services that align to the clients needs. Accountants will be more concerned with providing value to the customer than providing billed hours. Remember, clients are more interested in the value proposition of a service and less interested in non-value inputs like billable hours.