What Value-Based Pricing Can Do For Your Firm
The rise of cloud-based financial software is making the management of business finance increasingly more efficient. Because of this, the majority of accounting firms are expanding their horizons and moving to a value-based pricing structure.
This move to value-based pricing is designed to reflect the worth of the services now being offered to clients and is a model long-since championed by the SaaS industry.
But what exactly is value-based pricing and how can you integrate it into your firm?
What is value-based pricing
Pricing is not an exact science. But it’s been psychologically proven that people make a connection between perceived value and price. People tend to view more expensive items as more valuable, and cheaper items as untrustworthy.
The idea behind value-based pricing is to recognise this phenomenon and charge your clients based on the value of the services you provide, rather than the time it takes for you to complete them.
The problem with hourly billing
Traditionally, accounting firms, along with other professional service industries, have charged clients for the time it takes to complete a service. But clients buy an outcome, not the time it takes for you to get to that outcome.
The idea behind hourly billing is that it provides transparency to customers and clients, which is a vital part of becoming a trusted advisor. But hourly billing can mean limiting your revenue. There are only 24 hours in the day, and therefore only so many jobs you can take on before the work suffers, or you do.
A recent boom in the availability of accounting and financial software means that accounting services are becoming more efficient and streamlined. This means that jobs are completed faster and clients are charged less.
Benefits of value-based pricing
Using a value-based structure can allow you to separate profit from time. Your potential profit is no longer impacted by the number of hours you, and your team, work.
Value-based pricing makes it easier to accept clients on retainer, as they’ll consistently know what they’ll be billed. This means that you’ll have a source of recurring revenue to help carry your firm’s cash flow.
Spending a set number of hours on a client’s books doesn’t always mean that the job is completed. And removing time constraints can allow you to diversify into other areas such as performance analysis and business advisory.
Yes, projects will often still be time-sensitive but you will no longer be counting the seconds to make sure that your client is getting exactly what they paid for.
Disadvantages of value-based pricing
To achieve the advantages associated with value-based pricing you will need to carry out market research into your current, and potential client base.
Of course, with a change in the pricing structure, there’s always the fear that you will price yourself out of the market. As Ron Baker, value-based pricing expert claims: “The billable hour takes a calculator; value pricing takes courage.”
But with thorough research into your current client base, and your competitors, you can ensure that you’re pricing fairly and competitively.
How to implement value-based pricing
Changing the way you charge clients can be daunting, but moving to a value-based structure needn’t be scary. Here are three steps to integrate value-based pricing:
1.Keep it simple
Offering your clients a choice is a good thing. But confusing people by providing too many options can cause analysis paralysis. Keep your offering simple to ensure clarity of your proposition.
Good things come in threes. Like The Three Musketeers, Destiny’s Child, and examples.
So try sticking to three options for service provision. Any more than that may over complicate both your system and the decision centre in your clients’ brains.
2. Speak to your clients
Speaking to clients is the best place to start when considering changing your pricing structure. After all, value-based pricing is not just good for you, it’s good for them. So, find out what they want and what they need. You can only meet expectations if you know what they are.
Your clients will thank you for transparency, for the ease of understanding, and the consistent billing.
3. Invest in tech
Once you’ve made changes to your pricing structure, and you’ve spoken to your clients, you can decide what technology to integrate into your firm.
Xero’s recent Small Business Insights report, found that 38% of the apps that small businesses use are financial apps. This trend is evidence of the recent push in small businesses to seek more practical and efficient financial solutions.
Now, more than ever, integrating with the right tech stack is essential to increasing your value-offering and enhancing your advisory services. Because, if you don’t have digital solutions for your clients, then someone else will.
In fact, we’ve even got a blog on the four best ways to price Float to your clients. You can check that out here.
Offering value-based pricing to your clients is a step towards your time being as valuable as the services you provide. So think of value-based pricing as a form of upselling, that can benefit both your clients and yourself.