The problem with pricing by the hour is that the assumption is that the price per hour is correct (often calculated by a salary multiple) and the time to do the task was correct. The assumption is that time multiplied by the rate equals the correct price. In my view, nothing could be further from the truth.
When selling intellectual property it truly is a bizarre pricing model. You are valuing what you know and the outcome the client gets based on a salary multiple (to get to the charge rate) and the time taken to do the task. Very strange! I understand it’s an easy way to calculate a price. The issue is this model does not value how smart you are and the impact you make.
There has to be a better way. And there is. It’s all about value pricing. Value pricing is where you price the job upfront based on the value you create for your client. You cannot value price after the fact. That means you have to ‘scope’ the project out first (by talking with the client and doing some research), find the value you are adding and then present an implementation plan to the client based on how you are going to help them.
Now for historical work you have a challenge with pricing. And that’s price parity. You may think it is worth more but if the client has been paying $X for the past few years then they may pay $X + a bit -but not the price you think it is worth. For a new project that the client has not bought before then that’s a different story.
To work out the value you are adding you need to think the following. Without me, they can achieve ‘X’ result. With me that can achieve ‘Z’ result. The difference (‘Y’) is your value that you can add. The impact might be financial, emotional or both.
1. Cash-flow improvement. If the client is constantly juggling cash, never with any money and always stretching creditors and arranging payment plans then that is the current situation. If you can educate them, put systems in place, show them how to improve profit and then monitor their behaviour and let’s say the outcome over the year is that they are $200,000 better off. Your cash ‘value add’ is $200,000. They are also sleeping better at night; less stressed, have more working capital to expand and are generally happier. Your emotional value add is massive. How much would you charge? Well a 10:1 return is a pretty good deal. So maybe $20k – $30k.
2. Tax minimisation. If your client has a tax exposure of say $550,000 because of their current structure and trading environment then that is the current reality. You come along and re-structure their affairs and negotiate with the tax department and you get their exposure down to $150,000. Then your cash value add is $400,000. What can they do with $400,000? Maybe expand the business, pay the house off sooner, retire early and get some of their life back. Your emotional value add is huge. What’s that worth to the client? Pick a number – maybe $30k – $60k.
If you know the numbers in advance (cloud accounting helps with that enormously) then you can scope out projects that make a difference with your clients. If you can articulate your value in advance and present in such a way that makes sense financially and emotionally then you’ll win the business.
At the end of the day the only right price is what the market is prepared to pay for it. That means the right price is just before NO. In other words if they keep saying YES without hesitation then the price is too low.
Starting on Monday, March 17 I am presenting a full day workshop (visiting 14 cities) called ‘Capitalising on the cloud’. It’s all about helping your clients based on you knowing the numbers. Pricing is part of the program. Bring your team along and learn how to use cloud accounting as a service offering which adds value to your clients. Check out www.cloudseminar.com.au for more details.
The topic of pricing is the most requested topic I have had in 19 years advising Accounting firms. Just recently I did a webinar on the topic on had close to 3,000 people listen in. I think it is so popular because Accountants are not taught how to price their intellect and value contribution.
As as result of not being taught how to price appropriately most adopt the archaic “Rate X Time = Price” system. It’s outdated, doesn’t work for efficiency and certainly encourages the wrong behaviour at the team level.
I have devised a formula for pricing “Value Belief + Value Perception + Value Contribution = Ideal Price”.
So to get to the ideal price you must believe in yourself/team/project, put your value across in an articulated way and make sure you are contributing to the clients situation.
If you are not contributing to your clients results, you do not believe in the work that you do and you cannot put that across to your client then expect to have low margins.
What holds Accountants back from pricing appropriately are limiting pricing beliefs (see picture) and talking too much in inputs (things we are going to do) rather than outputs (what the client gets as a result of the work that you do for them).
All of this can be fixed with appropriate training. The type of training I am talking of has helped our member firms be 29.8% (on average) more profitable per partner than the rest of the Accounting profession.
To help you out we have created an ‘office / home study’ training program just on the topic of pricing. It’s 11 modules of video based training. It comes with checklists, forms, letters, workbook, examples, templates and a price list of 275 services priced by 300 Accounting firms. You can investigate and buy the product here.
To increase profits per partner you have 4 key strategies only:
1) Reduce costs whilst maintaining revenue
2) Increase revenue whilst maintaining low costs
3) Reduce the partner headcount whilst maintaining revenue and low costs
4) Maintain partner headcount whilst growing revenue and lowering costs
Many “high profit percentage firms” have low leverage of people per partner. That means they have too many partners for the headcount and the revenue. As a result of this they may have high profit in percentage terms but in absolute terms they will have relatively low profit per partner.
Think very carefully about the next person you want to bring on as a partner. Do you have too many partners now? Can a better management structure suffice? Are you looking to bring on the next partner to retain them as a team member or are you doing it for good business reasons.
If you like the current partners you have and they are working well together bringing in lots of new business – then don’t get rid of them. Grow the headcount and the revenue into the partner base.
For great profits per partner (more than $1M per partner) you need to be thinking of leverage of more than 13:1. That’s at least 13 full time equivalent people per partner.
Enjoy the final video in the series.
I have written an extensive report on Accounting firm performance. You can download it here.
A project is not the annual fee with a client. Annual accounting is a project. A business plan is a project. A finance proposal is a project. A tax return is a project.
What is your average project value? It’s simple to work out. All you need to do is divide the number of invoices sent into your revenue for the year. If you have multiple invoices for one project then that should be classed as one invoice.
Your average project value multiplied by the number of projects per client per year will equal your revenue per client.
It’s a great way to look at your client base. If you have a very small average project value (but lots of clients) you will have a large administration function just for invoicing. The objective should be to increase the average project value whilst increasing the number of projects that each client buys from you each year.
If your business clients are not spending at least $20,000 with you annually and buying at least 4 projects from you (therefore average project value is around $5,000) then I think you are under-servicing your client base.
I have written an extensive report on Accounting firm performance. You can download the full report here.
Enjoy video # 11.
What waste it is to discount before billing. Often called write offs or write downs. It’s measured by the value of the time charged to work in progress (WIP) less a discount applied before billing. So if $2.3M was charged to WIP in the year yet only $2M was billed then the write down was 13%.
In some countries they record it in a more positive light by using a bigger number– “we had an 87% realization rate”. What a complete joke. Trying to put a positive spin on a negative number.
Face up to it – you discounted 13% or $300,000 in work last year! That’s an apartment or a house in some locations. You destroyed a small house. You would have had more fun if you burned the house to the ground and watched it burn whilst having a cold beverage.
Most firms have them and most firms justify them with blame and excuses like “we couldn’t charge the amount on the WIP” or “the client would never pay that much”. My question is HOW DO YOU KNOW?
Writing down work is at the heart of the self-esteem issue with partners of accounting firms. Why do it? You made a decision to write down – so make a decision to stop it.
If you price in arrears then your business model says whatever is on the clock you should charge – not a minute more. Writing up after pricing in arrears goes completely against your business model and is considered fraudulent behaviour. It’s ‘ripping people off’.
If you price up front, you have agreement from the client on price and scope of the project, and then you do the project in the most efficient means possible you’ll have an abundance of write ups. Much more of a positive result!
You should be aiming for a positive result with write ups – no negative numbers or numbers less than 100%.
I have written an extensive report on Accounting firm performance. You can download the full report here with all 12 KPI’s in it.
Tell me what you think of video # 5….