The accounting or professional services firm of the future will price its services based on external value provided, not internal efforts generated. One of the most successful methods adopted to implement value pricing is the Fixed Price Agreement (FPA). Essentially, this requires meeting with each of your customers to determine the services they need and want over a given time period.
It is important to keep in mind any FPA drafted between your firm and a customer is the result of a conversation. This is your chance to provide the customer with a customized list of services to meet their specific needs and wants, to offer a fixed price for those services, specify the payment terms, the scope of services to be provided, and any other level of agreement reached.
Advantages of the FPA:
Pre-qualifies the customer. Discovering the customer’s perception of value––before your firm commits any resources––is a better strategy than finding out after the service has been performed the customer has a lower value perception than you do, no matter how you price your services.
Opportunity to cross-sell. By brainstorming with the customer regarding future goals and aspirations, you will inevitably learn of many opportunities to cross-sell your firm’s services. You cannot expect to automatically receive additional work from the customer––you have to earn it, by demonstrating your firm is a better alternative than the competition.
Value pricing gains “ego investment” from the customer. All of us want to be in control; this is basic human nature. By giving customers a sense of ownership over your firm’s services, offering them choices, and customizing your delivery to meet their needs, you will get their “ego investment.”
Quoting fixed prices projects confidence and experience. Being able to quote a fixed price before the service is performed shows the customer your firm is experienced and confident in its ability to perform, a trait valued by the customer, even if subjectively. Imagine an airline not quoting airfares before the flight, but instead charging by the minute. How would you feel? Would you begin wondering if the pilot will deliberately slow down? Would it lower your confidence in the airline?
The argument the profession can’t provide fixed prices, up-front, is specious. Every other business has to do it, and we are subject to the same laws of economics, consumer and price psychology as everybody else. If you cannot quote a price before performing the work, perhaps you don’t know enough about the nature of the work and shouldn’t be doing it in the first place.
Increases a customer’s switching costs. The more services you perform for the customer, the more you know about a customer, the more expensive it will be for the customer to defect.
Forces your firm to be effective. By offering fixed prices, you must delegate the work to those in your firm who can perform it most efficaciously, and not let surgeons pierce ears. It also forces you to review every procedure, work review level, etc., and ensure each task adds value to the customer. And when you can do more work in less time—because of technology, the cloud, and the learning curve—you are not penalized.
Overcomes buyer’s emotions. Price resistance (sticker shock), price anxiety (buyer’s remorse) and payment resistance (not paying the invoice) will all diminish by utilizing FPAs. By discussing value, price and terms upfront, you will diminish the negative impact of these emotions on the customer, not to mention your firm’s profitability.
The firm maintains the pricing leverage. A service that is needed is worth more than a service that has been delivered. If this is true––and it is––then why do firms insist on pricing their services after they’ve been delivered? Because they don’t know down to the last six-minute increment how much time is going to be spent.
By pricing your services before you begin, you will obtain a higher price since you are removing the risk of the transaction from the buyer. You will also have the opportunity to educate the customer as to the value you are providing (if they don’t agree with your price) or withdraw from the engagement completely.
Prices can be increased each year. When was the last time you raised your hourly rate? Do you believe there is a concomitant increase in value to any one customer? I can assure you your customers don’t view the world that way. However, when you have customized services and pricing for each customer, it is easier to increase the price annually.
Provides a competitive differentiation. Since each price is customized, the perceived value of your firm increases. In contrast, by using hourly billing, you are simply treating all customers the same, which is not a prescription for success in today’s marketplace. Customers prefer fixed prices, upfront, and will continue to gravitate to those firms willing to offer them.
Obviously this is not an exhaustive list of the advantages of value pricing, just some of the most important ones.
Firms around the world have successfully implemented the Fixed Price Agreement and have seen many salutary effects as a result. They are cross-selling more services; obtaining a larger percentage of the customer’s wallet; able to extract a premium price since they are bundling services into one FPA; speeding up accounts receivable collection since the payment terms are agreed to upfront; and many of them are reporting negative WIP (work completed ahead of time) in some areas of their practice.
The future is here, it is just unevenly distributed. The firm of the future will offer fixed prices, upfront, for every service it provides, just like every other business. Firm leaders will remove the artificial ceiling they have placed over their firm’s head by the antiquated hourly rate billing method. As a result, they will finally begin to get paid what their customers already believe they are worth.
If you want to learn more feel free to join in Ron Baker’s value pricing webinar “Value Pricing: Where to Begin” March 26th at 1-2 PM Pacific Standard Time (click through to check other time zones).