Value-based pricing is rapidly becoming the pricing method of choice for professional service firms from law firms to chartered accountancies.
The premise of value-based pricing is that you set prices based on the value the client perceives they are receiving. “Value is in the eye of the beholder. For any transaction to take place, both the buyer and the seller must profit from the exchange and receive more value – in their subjective perception – than what they are giving up,” says Ron Baker, author of Pricing On Purpose: How To Implement Value Pricing in Your Firm.
For example, a client calls with an urgent problem that you, with all your experience, can fix in a half hour. Do you charge the client for half an hour, or do you charge based on the value you are creating for your client? This concept is difficult for many accounting firms to come to terms with…charge the client for a value perception? Isn’t this deceptive? Isn’t it unfair? Won’t charging the client less make them happier?
In fact, pricing for the value you are creating for a client has farther-reaching benefits than just increasing of the worth of your work. This is primarily because to establish a value-based price, you need to involve the client in working out that price. You need complete information from the client, which necessitates greater interaction with the client, which in turn builds a stronger relationship with the client. Here is a scenario that most of you will have come across. It’s tax time and you have a returning client from the previous year. They are expecting the tax return will cost the same as it did last year, but the work has taken much longer than it did last year, and so the client gets a shock at the bill. They call, upset, trying to negotiate their invoice. You are under pressure to keep the client for repeat business, so you cave, losing money. During the negotiation there is no cash coming in for the work done, so your cash flow suffers; worst of all, your client relationship suffers.
Now consider this. It’s tax time and you have a return client from the previous year. You arrange a meeting to discuss their tax return, giving them a list of all the documents you will need to complete the tax return and ask them to bring it to the meeting. You spend a little time going through this with them, and then provide them with a value-based quote for the job. They might say that this is more than last year, at which point you can explain that there is more work in this year’s tax return, and can show them where. You might request upfront payment, or maybe bill for half upfront, half upon completion. You and the client are on the same page at the beginning, you have everything you need to complete the job quickly, and your cash flow is not impinged and your relationship is stronger.
Benefits of Value Based Pricing at a Glance
- The end-client has a clear idea of exactly what they get for their money for a clearly defined job. The client gets peace of mind.
- It improves the relationship with the end-client – fees do not creep up due to more time being taken on a specific job.
- It allows other services to be “packaged up” and sold as clear definable “add-ons” a client can choose to buy. This simplifying and clarity helps the client identify, from a complex set of services, what is useful to them. Thus it is easier to attract clients to additional services and then sell to them.
- Establishing a value-based fee requires accurate knowledge of the client needs, which mandates a pre-project meeting with a client. This collaborative approach helps build a positive relationship with a client, giving you a chance to take on the role of ‘trusted advisor’ rather than mere service provider.
Obstacles to Value-Based Pricing
Value-based pricing methods are not traditional pricing methods, and they take some getting used to, both as a firm, and for your clients. When attempting to implement this method of pricing, some of the obstacles you may face include:
- Internal resistance: Firm-wide adoption of this pricing method is necessary in order for it to be a success. Training and ‘reprogramming’ staff is an initial investment needed and can meet with resistance, particularly as cost-based pricing (hourly rates) are the pricing method taught at university and the established norm.
- Client discomfort: Despite the premise of value-based pricing being
to set a rate that meet’s the customer’s value perception, some aspects of value-based pricing may seem unfair to a client, particularly as you change from one method to another. The best ways to assuage this discomfort is to prove to the customer they are getting their money’s value: increase communication with them, improve your availability, your responsiveness and ensure the quality of your work and improve visibility of senior partners.
- Finding the value price: Price setting can be difficult if the proper information is not available. This is where engagement letters must be specific; then anything outside the scope of the initial engagement letter becomes an add-on and can be priced as such, without a project running at a loss. In a case where information is scarce, an engagement letter should cover what the project will encompass, as well as what it will not.
While many firms resist using a value pricing method, many still are embracing it, and feeling the rewards of not only increased value from their work, but a stronger and more open relationship with clients. What is stopping you from using value-based pricing in your firm?