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Phasing in value-based pricing

Posted 9 years ago in Advisors by
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In the last step of my ‘Moving your practice to the Cloud‘ series, let’s continue where we left off in our last blog post on value-based pricing and go in-depth on how to implement value-based pricing. As a reminder, I broke the phasing process down into three: Setup, Implementation, and Follow Through.

Value based pricing phases

Phase 1: Setup

Like any initiative, you need a strategy to succeed. The same applies to value-based pricing. You need to determine what you want to do, how to do it, put safeguards in place and begin the change management process. It all starts with a plan:

Step 1: Be strategic and have an initial plan

  • Be informed (e.g. read books like “Pricing on Purpose” from Ron Baker)

  • Get guidance from your peers and learn from the actions of others

  • Make sure you are comfortable with your sales & marketing skills

The first step is always the hardest one. Where to start? What to do? The best first step is to get educated. Read about it – and if you are reading this blog, you are well on your way. Phone a friend, ask your peers, ask the community. Look at what others have done. There is no need to go the path alone and many have gone down it before you. Learn from their experiences – mistakes and successes.

Ask yourself some important questions:

  • Why am I doing this? What do I expect to gain monetarily and personally?

  • Who do I target initially? Who would be my top three candidates?

  • How do I approach those clients? Who from my staff should service these test clients?

  • What are my collective set of services? What should be the range of prices for each and overall?

  • Should I offer packages or tailor to each unique business?

And some words of wisdom: “Don’t worry about making pricing mistakes, with time billing you are making a million mistakes right now and you are not learning a thing from it. When it comes to billable hours there is not any useful feedback, it does not tell you how much money you are leaving on the table,” Ron Baker, VeraSage Institute

Step 2: Create bundled packages of your services

  • Bundle Option #1: Good, Better, Best

  • Bundle Option #2: Minimum, typical, open-ended

Consider the power of 3 – powerful indeed. Marketers around the world utilize it. It helps take a set of options and break them down into 3 simple ones while anchoring towards the middle most option (essentially lifting the amount your collective customer base will purchase). At Xero, we offer our online accounting software in 3 pricing packages: Small, Medium and Large. It is simple to define and differentiate, and, it is easy to choose from.

In bundling, it’s about creating clear separation between the options. In option #1, you offer the baseline services, the average services and your full line of services at varying price points. In option #2, it is essentially the same except it is your minimum services, average and left open-ended at the top level (resembling a RFP-like process). There are other variations, but it is really about the power of 3 and the proper differentiation between the options.

In this step, you need to take a step back and catalogue your services. What do you provide to your clients? What are one-offs and what are routine? What services help drive additional business? One accounting professional we spoke to provides ad-hoc tax advice included in all his packages to help reinforce that he is a trusted advisor. Again, understand the breadth of your services and craft them together starting from a foundational set and building on top of that.

And some words of wisdom: “When you first approach a client, make a small package and offer a medium and large with more value – there is a chance to upsell that you don’t want to miss.” Sandi Smith Leyva, Accountant’s Accelerator

Step 3: Form a pricing committee & set your initial prices

  • Know your relative costs and assumptions per bundle

  • Develop three prices:

    • Price #1: BATNA price (reservation price)

    • Price #2: Expected price (hope for price)

    • Price #3: Ideal price (pump fist price)

Now that you have your bundling strategy, now the art and science come together to come up with your first pass at pricing. However, let’s make it more science than art. The trick is to approach the problem from two sides, the bare minimum (reservation price) you would take to do the work and the maximum (ideal price) a client would pay you for that same bundle of services. When looking at the two prices together, you can take the middle point or instinctively understand what the expected price should be. Again, this isn’t final but a starting point to work from.

In addition, set up a pricing committee (maybe 2 or 3 people who approve all prices). By doing so, you can remove the emotion from the process and leverage others who aren’t as personally involved with the client. For a large firm, it could be a set of partners. In a small firm, it might just be your spouse. In fact, spouses are fantastic at this since they live with the consequences when you work too much for too little money. Again, the pricing committee is to keep you and the price honest, accurate and appropriate.

And some words of wisdom: “The best person to run your price by is your wife or husband. They are much better at putting a price on your value than you are.” Ron Baker, VeraSage Institute

Step 4: Communicate the change (and processes) to all

This is a critical step and typically undervalued initially. Moving from hourly billing to value-based pricing is a shift. It can’t be done by one person, but must be done by the entire firm. It requires new processes (like the pricing committee), new ways of communicating with clients, new billing processes (monthly recurring billing perhaps), and an overall change in mindsets.

This isn’t something like dipping your toe in the water and it isn’t like jumping blindly off a cliff. You strategize your plan of attack, determine your steps to get there, and map out the timeframe by which you achieve your preset goals. There will be bumps in the road, but that is to be expected. You try, learn and try again. Once it is working, you will be much better off and you need to just remind yourself why you are doing this. Like in Step 1, ask others about their experiences, lessons, change management methods and processes.

And some words of wisdom: “Your employees need to embrace that they are adding value back to the firm and not just working on a project for hours. It is important to make them accountable for their work and for them to support the change for it to be successful.” Bernie Lietz, Corbett, Duncan & Hubly

Phase 2: Implementation

Now that the setup process is complete, we get to put value-based pricing to the test. Again, it is all about experimentation and learning. You won’t get it right the first time, but over time, you’ll get it to where you want to be.

Step 5: Assess the client situation

  • Meet: Talk to your client about their needs.

  • Listen: What problem are they trying to solve?

  • Probe: Ask questions about their business.

  • Evaluate: Comprehend client’s issues, establish value scope, determine work scope.

Once you determine your first test client, you need to approach them. For many, they wait for a new customer to test and learn from. Others pick a client they plan to lose, while others have a client they have a great relationship with that they know will be responsive.

For new clients, the key to this process is to listen to what the client is saying and probe on what their business is about and what they truly need. Like an iceberg, it isn’t what you see that is important, it is what lies below the waterline. Small business owners love to talk about their business – they have to since it is their life and their passion. Ask the questions and let them speak. So much can be learned from that initial conversation. That information is going to be helpful in crafting the bundles and presenting the pricing. More on that in a second.

Step 6: Articulate the value of working with you

This is an step that seems to be uncomfortable for a lot of accounting professionals. Be confident and communicate the value you bring. Small businesses drive the world economy and accounting professionals are the trusted advisors that help them to successfully grow and manage those businesses. Own that and be proud of what you do. Reiterate in the exploratory conversation what you do, how you do it, the results you have brought to others and the results you can provide to the client. That communication of value sets up the conversation to talk about bundles and pricing and is critical for you to get the client to understand the value they are willing to pay to have you by their side. Again, clearly articulate the value that you bring!

And some words of wisdom: “Every new prospect meeting starts with the client understanding your value.” Bernie Lietz, Corbett, Duncan & Hubly

Step 7: Start slow

  • Option #1: Pick one small client with same year-on-year fixed cost

  • Option #2: Implement on a new client

  • Try, learn and iterate

I inserted this step to ensure you take a step back and properly reassess things. Did you pick the right client initially? What happened? What went well and what did not? What did you learn? It isn’t how fast you are able to implement value-based pricing, but how quickly you fine-tune it to meet you and your clients’ needs. Again, test, learn and iterate.

Words of Wisdom: “I tell firms who are changing to value pricing to slowly implement. Start with one client whose needs you understand and go from there. It is a constant learning experience, don’t be afraid to fail. Failure equals learning, learning equals success.” Jody Padar, New Vision CPA Group

Step 8: Set your packages, your prices and present

  • Assess each client individually

  • Modify your packages and prices to reflect the client’s needs

  • Whenever possible, check with your pricing committee

  • Present the packages to the client and respond as needed

This is where it all comes together. The exploratory conversation is complete (or is still going on) and you need to talk about bundles and pricing. In most cases, you will outline your bundles in the initial meeting to provide context on how an engagement with you will work. Many people recommend that you hold back pricing until you can have a review by the pricing committee, but not every situation provides you that opportunity. That is why the pre-work on bundles and pricing helps arm you with the information you need.

When setting a price, you need to assess the situation, understand what is needed, outline the complexities, and modify your packages and prices to suit the needs of the client. Is the client easy or hard? Is this work possibly going to lead to additional services? How repetitive are the associated tasks and how efficient will you become? When evaluating all the factors, you set your three packages (if not already pre-set) and present your recommended prices for each package to the pricing committee (one per package) if possible. After approval, you present the packages and the prices to the client.

What is interesting here is that the initial responses and body language of the client will tell you what you need to know. In addition, you can use the bundles to help steer the conversation on what is truly important and what is not. This can help you steer the client to the appropriate package for them or, in some cases, allow you to tweak the packages to offer something that is more on target for what they are expecting.

Again, the power of 3. It helps you and the client work together to determine what is best for everyone – with no surprises.

Phase 3: Follow Through

While the deal might be done, the work isn’t complete. You need to deliver what you promised on-time and on-quality. It’s all about client service. I won’t go into too much detail below, but it is really about establishing yourself as the trusted advisor and reaffirming continually the value that you deliver. By doing this, you will have a great client relationship and great word of mouth. That translates to a better business and to better satisfaction overall – for all parties involved.

Step 9: Be the Trusted Advisor

  • Train: Set client up for success

  • Deliver: Be sure that client’s “ask” is satisfied

  • Support: Be proactive, not reactive

And words of wisdom: “Being there to train and support the client has become a very important part of our business. We build the trust in the relationship and in turn we have now become a very important part of their business.” Lisa Callaghan, Interactive Accounting

Step 10: Reaffirm that you delivered the value

  • Make sure the clients needs were met and to their satisfaction

  • Stay in contact with the client and build your relationship in order to provide more value in the future

And words of wisdom: “If the customer is not satisfied then allow them only to pay the value that they perceive. Put words on paper, that creates that higher value and guarantees your work.” Ron Baker, VeraSage Institute

How does Xero bring it together?

One of the key tenets of value-based pricing is around communication and collaboration. With Xero, we work hard to provide you the capabilities to do that in the context of the online accounting software itself, the practice tools we provide and the ways we allow you to own the client relationship. It is your practice, your clients are on one platform. We provide you tools for free and you can leverage them and our online accounting business editions so that you can bundle your services for one fee billed to your client through you. This provides you the ability to again own the relationship and provide the best client service.

Closing Thoughts

Again, value-based pricing can positively change the trajectory of your business. It isn’t an easy switch from hourly-based billing, but it’s easier if you follow the steps outlined above.

I want to leave you with some things to remember when you start down the path to value-based pricing:

  • Be patient and don’t be afraid to fail

  • Take it one step (and one client) at a time

  • Don’t go it alone

  • It is a team mindset

  • Remember why you are making the change

  • Stay focused to reap the benefits

So that wraps up our value-based pricing topic. If you want to learn more, get more depth in the 10 steps to value-based pricing, listen live or ask questions, feel free to join our value-based pricing webinar series happening this month. There are three webinars to watch and some fantastic speakers joining us. Come, learn and get 1 CPE credit for each webinar:

One comment

Barry Watkins
July 1, 2013 at 12.58 am

Thanks for this info, I’ve been looking at moving to VBP for a while, but I build and market websites where the customer focus has become more about initial cost over long term return. How do I change this mindset?

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