Value pricing – what’s holding you back?
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 It’s outdated, doesn’t work for efficiency and certainly encourages the wrong behaviour at the team level.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.
Revenue Profit & Cash in an Accounting firm – video # 13 – People to Partner ratio
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.
Revenue Profit & Cash in an Accounting firm – video # 11 – Average Project Value
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.
Revenue Profit & Cash in an Accounting firm – video # 5 – Write ups
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….
Revenue Profit & Cash in an Accounting firm – video # 4 – Average Hourly Rate
If you are like most firms you will have a range of charge rates in your firm. Normally charge rates range from $100 – $350 per person depending on salary & experience level. If this is the case then your Average hourly rate (AHR) or net firm billing rate for client hours will be around $150-$200.
It’s pretty pathetic to think that is all you believe you are worth! This is such a silly system for pricing.
I think you are worth much more but you have to believe it and you have to change the way you price projects.
There are 2 measures of Average Hourly Rate.
1) AHR – client hours. Take your revenue (let’s say $2M) and divide by client hours billed (let’s say 10,000). In this case it is $200.
2) AHR – hours worked entire team. Take your entire team (incl. partners, admin & professionals) and multiply by the working hours in a year to get total hours worked (say 12 people X 1750 hours each = 21,000 worked hours). Now divide revenue ($2M) by total hours worked (21,000). In this case it is $95.
It’s important to look at both of them. You can have a fantastic AHR for client hours (>$400) yet very poor on all hours worked (<$150) because of the productivity, people mix & administration process.
The ultimate measure is to be focussed on AHR – hours worked entire team. It’s this one that will ultimately drive your profit before partner salaries.
If you are pricing projects up front then there are only 4 ways you can dramatically increase your AHR.
1) Charge more for the same project – straight price rise
2) Be more efficient and have less time on each project
3) Sell higher value projects based on value created
4) Change your administration mix and get more out what you have got
Your AHR should be improving every single month. If it is then that is a reflection on your pricing / sales prowess and your efficiency of throughput.
If it’s not improving (or going backwards) make sure you mention this to our coaching team when they do your Business Performance Review.
I have written an extensive report on Accounting firm performance. You can download the full report here with all 12 KPI’s in it.
Enjoy video # 4