There is a lot of talk about value pricing but most of this is conceptual. Doing a quick Google search of, “How to implement value pricing,” will give you thousands of results that require you to buy an ebook or sign up for a webinar. But is this information that valuable that you’d be willing to spend hundreds, if not thousands, of dollars to learn the ‘secrets’ to value pricing? This article will detail step by step how to properly price accounting services using a value pricing model.
Not all Services are Created Equal
The first step to transitioning to value pricing is understanding that not all accounting services are created equal. Some services are more complex than others and can yield a higher price tag (regardless if they take less hours). For example, a year-end tax return is more complex than monthly bookkeeping, but the tax return only takes a few hours.
Using a flat hourly billing rate assumes that all these services are equally valuable and should be charged the same price. This is because there is a divergence between the concept of pricing services vs. pricing the time it will take to complete a task.
Create Baseline Prices for Each Service
Although most accountants bill by the hour, they have a general understanding of how much they are willing to charge a client for a specific service. If it took five hours to file 1099s then chances are the realization on this job will be quite low.
Creating distinct pricing models for each service instead of charging a flat rate per hour ensures that the client knows exactly what service they’re getting and you know exactly how much you’re getting paid.
- List all the services you are currently providing.
- Determine the average billing and realization for these types of services.
- Compute the minimum price you’re willing to charge (break even analysis).
Once you have determined the baseline price for each service you can now build onto this fee. However, if you are just starting out and don’t know what a good baseline price would be then you’ll have to do some research.
For example, the National Society of Accountants (different NSA) shows the average cost of prepping and filing different tax returns. Or better yet, scope out the competition and see what they are charging. If you are an outsourced bookkeeper than check websites to see comparable pricing.
Create Financial and Non-Financial Pricing Models
Now that you have a base price you will create a pricing model based on financial and non-financial metrics. The following are just a few examples:
Gross Revenue – you can charge additional fees based on the gross revenue of the current or potential client. You want to determine whether to use a linear model or a tiered model
- Linear Model – Create a linear regression comparing the gross revenue of current clients to their average annual billing rates. Use this equation to determine the price you should charge based on gross revenue of other clients.
- Tiered Model – Determine the average annual billing rates for clients between two gross revenue amounts, i.e. between $500,000 to $1,000,000.
Number of Transactions – if you are providing bookkeeping services then you may want to consider charging based on the number of transactions, i.e. between 500 to 1,000 transactions per month.
Complexity – If a client has 10 bank accounts, 20 loan accounts, sales tax and payroll accounts then odds are you’ll charge more. You can set prices based on the complexity of a job based on non-financial factors like which forms they’ll need to file and whether or not they have specified bookkeeping needs like job costing.
Develop Several Pricing Options
The core concept of value pricing is determining how much a client is willing to pay for a desired service. However, it’s not as simple as asking a potential client, “what’s the most you’re willing to pay for this service?” and then charging that amount – but developing tiered levels of services with distinct pricing options allows you to do just that.
The following is an example of tiered pricing options for bookkeeping services in the construction industry:
- Bare Bones Bookkeeping – monthly bank reconciliations, service price determined on number of transactions and number of bank accounts.
- Full Service Bookkeeping – write checks, pay bills, invoice customers, monthly bank reconciliations, payroll tax and sales tax reconciliation based on the number of transactions and complexity of books and records.
- Personal CFO – Budgeting, cash flow management, cost reductions, full service bookkeeping based on complexity and gross revenue.
- Payroll Add-On – Separate cost for filing payroll tax returns based on the number of employees.
- Sales Tax Add-On – Separate cost for filing sales tax returns based on the number of localities where sales tax is collected.
Allowing a client to choose between a number of options will tell you exactly what they are looking for. Start with the most expensive pricing option and outline everything they will receive and then work your way down. The client will essentially tell you the maximum they are willing to pay for and exactly what they expect from your services.
Use a Monthly Subscription Model
The most ideal clients are those who will pay monthly bills for reoccurring services. Clients like to know exactly how much they will pay and exactly what services they will get in return. Charging a fixed monthly rate based on the pre-determined pricing model will do just that.
Think about the monthly subscriptions you currently have and why you’re willing to pay $19.99 per month.
- Consistent monthly price.
- Consistent services provided.
- Content with the value you are receiving at the specified price point.
Monthly subscription models ensures that you get paid throughout the year while redefining how your client views your services. You are not just a one-off cost that has to be paid whenever a tax return has to be filed but instead an ongoing service that provides value.
Focus on the Value Proposition
All these pricing models mean nothing if you can’t properly covey your unique value proposition. To determine your value proposition you will have to answer the following questions.
- How will you save the client time?
- How will you save the client money?
- How will you reduce the client’s headaches?
Focusing on the value proposition forces you to develop a strategy that will put value ahead of billable hours. Clients don’t care how much time it will take to complete a return, they only care about how much time you’ll save them. They don’t care how much the return will cost, they care about how much money you will save them. They don’t care if the return is particularly complex, they just want the peace of mind that it’s done correctly and on time.
When discussing your pricing models with potential clients you will focus on how the price relates to the desired outcome. Detail how you will save them time, calculate how much you’ll save them in tax or accounting fees, and ensure they are confident in your ability to provide superior service.
Implementing value pricing is difficult but can be rewarding in the long run. There is no one size fits all model so its important to test out different options until you find the best fit.
- Understand that 1 hour of bookkeeping is not equal to 1 hour of consulting so they should be priced differently.
- Determine a baseline price for each service you provide.
- Build on this baseline price by factoring in financial and non-financial metrics like gross revenue or complexity of the client’s work.
- Create an array of service options with distinct price points so that the client chooses the price that works best for their needs.
- Use a monthly subscription model to redefine how you get paid and how your clients view your services.
- Focus on your value proposition, how will you save your client time, money and headaches?