Continuing with the theme we began last week, this week we will cover Chapter Two of our best-selling book, Double Your Accounting Firm. In this chapter, we will cover the pricing problems found in most accounting firms. What most firms will find is that when employees are incentivized to get more billable hours and not as much efficiency, you will hit a ceiling in your profits. Worse, you might see your profits sink like a rock. In this audiobook chapter, you will discover:
- How you must start with your mindset if you wish to destroy pricing problems
- When you should use fixed pricing and when you should use value pricing
- How to switch clients to a new pricing model
- How to value price (interview)
- How to make the switch to value pricing (interview)
- Implement value pricing with a legend in the space
The Mindset that Will Destroy Your Pricing Problems:If you do not value the services you provide and understand the ROI for your clients, it's very hard to raise prices. That's why to start you must think about this: "What firms do you know that charge premium prices. Why do you think they can charge that much more than you?" If you don't have the right mindset about your value, there's no point talking about pricing strategies. It all starts with a belief in your ability. Price is about a transfer of value, both perceived and actual: What's the difference between perceived and actual: 1) Perceived: "This accounting firm has helped so many successful companies, we're bound to be successful as well." 2) Actual: "Their quick turnaround time and simple cash flow reports make it easy to see if we're on the right track." Your mindset needs to be centered on the concrete value you bring to a client and not simply the time you provide them. We live in the information age. Google is at our fingertips, we want answers now. Clients want your expertise now. That's worth more than just the time it takes to answer their questions. Remember this --- you've spent years, if not decades, mastering your craft. Why do you discount what you've learned from experience and study to minutes on the clock? Specialized knowledge is worth something far more than time. When you have a heart problem, you don't go to a general practitioner for a diagnosis. Who do you go to? A cardiologist (heart doctor)! They are experts on the heart. You get an expert to work on your ticker not someone with 'general' knowledge. You are the same in your firm. You have financial knowledge. Money makes the world go 'round, meaning you're in an advantageous position. If you just present yourself as a commodity, you make bottom-of-barrel fees. When you present yourself as an expert first and practitioner second, you're able to demand more money for your work. Let's take a look at the different ways to price your services and products. These are the keys to solving your pricing problems.
The Difference Between Fixed and Value Pricing (Forget Billable Hours!)"Billable hours breed uncertainty," says value pricing expert, Ron Baker. It's true. Clients are afraid of giving you more projects due to the 'fear of the unknown' of what the bill will be. Having fixed and value pricing has you shouldering risk as projects can take longer than you think, but that's why you work on your workflow efficiency as we discussed last week. However, putting the risk on your shoulder and not the client makes sales easier. Apple builds a new iPhone each year not knowing if anyone will buy it. They took the risk and are over a $1 trillion dollar market cap. You must shoulder the risk to be successful as well. Let's look at fixed pricing first. Fixed pricing, as it sounds, means you charge a fixed price for services. You define the parameters and scope of a project and agree on a price upfront. With this model, you're able to even take a deposit (something that's tougher to negotiate with billable hours). Normally, fixed price firms operate on a Cost-Plus model. That's "Cost + Whatever Profit We Want to See". The more demand for your time, the more profit you could technically squeeze out. You may still have some time measurements in your fixed price, but you aren't straight billing hours. Some firms operate on a fixed price model without knowing as they agree with the client on what a tax return costs, but still track time to see how long it takes. Next year, they may negotiate a higher fee for a return if the time took longer than expected. It's a step in the right direction, but it's not value pricing. Here's value pricing. Value pricing = "How much is this solution worth to you?" You're happy to pay more for:
- Solving a Pain
- Human Capital: The actual knowledge and expertise you've garnered that can't be replaced
- Social Capital: Your vendors, associations, employees, etc.
- Structural Capital: The physical pieces of the business, your methods, strategies, and workflow
How to Switch Clients to Value Pricing:I recommend switching to fixed pricing first then value pricing. We recommend giving at least 3-6 months to make the full shift in your firm. To start: list out all your services and products. Think about "why do clients NEED and use this service/product?" List out the benefits and look for places to bundle services. Next, you need to actually sit down in front of a client. You should start with a new prospect to practice on and not your best client just so you can practice! First, you must dig up the client's biggest pain points. Start with their "WHY?". Why do they do what they do? Listen to their answers and what they value most. Next, ask more direct questions:
- Why did you switch to our firm?
- Why now?
- How are you currently solving X problem?
- What frustrations do you have?
- What's the cost if you do nothing?