Don't let your pricing model sell your practice short

by Neil Davidson

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19 Jun 2012

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IN AN ENVIRONMENT where professional services organisations are continually asked to do more for less, client expectations and demand for advice is growing. Managing a firm means continually seeking ways to increase revenue and improve profitability, and pricing strategies must be designed to support these goals. However, many firms do not re-evaluate their pricing strategy on a regular basis to ensure it reflects business goals for growth. This often means the value of the work completed can be undervalued and firms are under-billing clients.

Effort-based vs. value-based pricing

For many firms, pricing depends on the effort-based strategy for services. This means the amount of energy, hours and expenses are used to create a fee for the client. However, a value-based pricing strategy – one that has at its foundation the perception of a product or service's value – will often be welcomed by a client. Firms should think of their clients as consumers. Consider when consumers look to buy a new pair of jeans or a new car. They rarely consider the effort that went into making, them but instead pay according to how much value they place on the item. Clients are likely to react in a similar way in regards to accounting services, preferring a value-based pricing strategy over an effort-based one.

The benefit of a value-based approach is that firms are able to become more agile, through tailoring the menu of unique services to each individual client and thereby limiting the extra work that is not accounted for or billed. By being able to agree the price and terms of engagement before the work begins, clients have a clear idea of what they are paying for and what they can expect.

While the effort-based strategy may work for some firms, those that do not review their pricing model in light of the company's growth goals may find they risk losing out on maximising profit margin and lag behind more agile competitors. How can practices advise towards optimising client profits if they themselves do not review their own pricing strategy?

Managing the change to a value-based pricing strategy

While there may be reluctance from some firms to embrace this new approach of billing, for fear of the change involved, the reality is that this change is imperative. Virtually every accountancy firm uses some form of billing software to track time and expenses. However, time must be logged before it can be analysed and used to create feedback on the value of services in progress – not ideal for a value-based pricing strategy. Firms need to ensure they have the right tools and technology for real-time accurate and streamlined reports. Feedback on margin growth and how engagements are running in accordance with the company growth goals is essential.

Ultimately, this information will help firms looking to change from an effort-based to a value-based pricing strategy, and to do so smoothly. The visibility afforded by these accurate reports will remove any disconnect between back- and front-end offices and enable staff to better control their work flow, ensuring they are at all times working to the company's growth goals.

Maintaining the competitive edge

The value pricing model is a proven alternative to effort-based pricing and a direct result of the changing, client-driven market place. For those firms that wish to retain the competitive edge and avoid being outmanoeuvred by competitors, isn't it high time that firms assess their pricing strategy to find out whether they are selling their services short?

Neil Davidson is managing director UK of Deltek

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