Do you know the clearest way to know if you’re charging too little? All of your clients say yes to your price without reservation.
If every single person you approach agrees to your price without hesitation that means that even the ones with the tightest purse strings think they’re getting a great deal for your price.
When you’re setting your prices, you should be setting them according to the value you offer. You shouldn’t be setting them according to the notion of giving your clients a great deal at your expense.
Recognising your value
It’s a mistake to think that you are selling services to your client. What you’re selling is your years of experience that have helped past and ongoing clients out of financial pits, or to achieve their financial dreams.
You’re not selling services, you’re selling your expertise. Services are how you transfer your expertise to your clients. And chances are, you’re not charging enough.
The impact of proper pricing
One of the benchmarks on the subject of pricing is a study by Michael Marn and Robert Rosiello published in a 1992 edition of the Harvard Business Review. They found that a 1% improvement in pricing can result in an 11.1% increase in operating profit. On the other hand, 1% improvements in variable costs, volume, or fixed costs only resulted in a respective improvement of 7.8%, 3.3%, or 2.3% in profit.
So while increasing the volume of work you do or cutting overhead or any other option may boost your bottom line a bit, without a proper price on your expertise you’re leaving a lot of money on the table.
This is where value-based pricing comes in. Value-based pricing revolves around how much your clients are willing to pay for your expertise.
This is different from (for example) where you base your prices on those of your competitors. While this can serve as a starting point for your own prices, it leaves out the fact that you might be far better than your competitors at doing what you do. Or that you may be serving a specialised niche field of clients, whereas your competitors are jack-of-all-trades-but-masters-of-none-style firms.
The perceived value to your client is where your true price lies and is what you have to find out.
The wrong price
Considering that the whole point of accounting firms is that they provide financial wizardry to the unknowing masses, it’s amazing how many of them use archaic methods to create their pricing strategies.
They try to maximise revenue by looking at anything but their prices. They’ll shoot for mass volumes of work (which requires more people which in turn requires more overhead). Or they’ll try to squeeze more hours out of their existing team (resulting in high turnover rates resulting in hiring costs).
Some will try to pay their team less (a recipe for disaster). Or they’ll try to cut down on overhead not directly related to personnel like cheaper computers or furniture or they’ll look for cheaper office space, none of which is going to help them keep the expertise that accounting firms are supposed to be selling under their roof.
Additionally, they’ll assign ungodly amounts to write-offs. Some firms put write-offs right at the top of their annual operating budget. Others will routinely write off a chunk of time spent on a file because they don’t believe a client will pay the full amount.
This mill-like approach is pricing the wrong things. It’s selling work-hours (a.k.a. labour) instead of value. No single client will ever care how many files you can get through in a month. They care about how much value you can bring to bear on their file. That’s what they want to pay you for.
Finding your price
The first thing to remember is that finding your value-based price is an ongoing experiment. You’re allowed to change your prices as you go along.
Take a look at the services and packages offered by your competitors. Are they offering extra services in their packages that you don’t have? Can you make an adjustment to your services and packages that will offer more value to their clients?
Not only does this give you a starting point for your prices, but it also shows you where you need to catch up (or preferable surpass) your competition. It also shows you where you’re superior, and those superior points are what you hang your marketing on.
Additionally, if your competition feels the need to strike back in certain areas of value, then you’ll have identified what points are the most important to the clients that you’re competing over. You can put more effort into boosting the value of those particular points instead of exhausting yourself trying to be all things to all people, saving yourself the effort of trying to compete on points that don’t matter to clients.
Your packages will thus be created out of customer demand, and that in turn will allow you to raise your prices. Don’t guess which packages will do well – put them out there and let your clients do all of the decision-making for you.
The packages and services that get gobbled up are being perceived as the good haircuts (allowing higher prices), while the packages that get left behind are the bowls-on-the-heads and require additional value before they’ll be profitable for your firm.