Making the move to value pricing
Selling your firm's services using value-based pricing – sometimes called value pricing – is becoming an attractive option. New technology and business practices are changing the accounting and bookkeeping market.
Payroll services are now a profitable option to offer your clients. This model of pricing is potentially much better than the old way of billing for your work by the hour. But once you've made the decision to move to value-based pricing, how do you go about implementing it? We've broken down the process into 10 steps, which we explain in detail.
1. Be prepared and have a great strategy
Changing your pricing policy isn't something you can do overnight. It needs careful planning and a good strategy. The better your preparation, the better the results will be. Here are some ideas:
- Become informed: Read up on value-based pricing. Use resources and documents from industry experts. That includes other accountants and bookkeepers and accounting software providers. Anyone involved in value-based pricing will have their own perspective on the topic.
- Learn from other accounting and bookkeeping firms: Other firms are likely to be cautious about revealing their value pricing structure in detail. But if you have friends in other firms you could at least ask them about the process. For example, how did they reach their decisions on bundle structures? What did it take to make the transition? What mistakes were made? What technology do they use?
- Work on your sales and marketing skills: This isn't always a strong point for traditional accounting and bookkeeping firms. But you're going to need to communicate clearly. You'll have to explain to your clients exactly how they can benefit from value-based pricing.
2. Create bundled packages of your services
Bundling makes life easier for your clients and for you. It means grouping services together into packages, which are then sold at a fixed monthly price. This lets your clients choose a package that best fits their needs. They don't have to worry about the detail, or pick and choose from a long list.
But which services should you bundle – and how? A good approach is to offer increased value for your higher-priced packages. That gives you the opportunity to upsell to your clients and move them to a higher tier. Here are two possible structures:
- Good, Better, Best: When offered these three options, people tend to gravitate towards the middle option. On one hand they don't want to be seen as cheap, or get a package that's insufficient for their needs. On the other hand, they don't want to pay for something they won't make full use of. But they might grow into the ‘Best’ package over time, with your guidance.
- Minimum, Typical, Open-ended: This structure gives you a lot of flexibility. 'Minimum' is the lowest service level that you can provide while still making a profit. It would include only basic accounting services. 'Typical' is an average bundle that would suit most of your clients, based on what you know of their existing needs. 'Open-ended' means taking the 'typical' package and then fine-tuning it to suit a client.
3. Set up a pricing panel
Once your bundle structure has been set, how much do you charge? It's vital to get this right, because charging too much or too little will affect your profit dramatically.
The pricing panel’s goal is to determine the best possible initial price. Ideally you should include people from all departments within your firm. That will help ensure you take everything into account. You might also want to bring in people from outside, such as business advisors. But be sure they understand the importance of confidentiality.
It helps to identify three prices per bundle:
- Reservation price: The lowest price you could possibly sell a bundle for and still make a profit.
- Expected price: What's reasonable to charge for a bundle. It means fair profit for you and good value for the client.
- Ideal price: At the top end of what a bundle is worth. That doesn't mean you're overcharging, but it's the most you could possibly ask.
4. Communicate with clients and employees
Now you have your bundle structure and price ranges, you can start the communication process. You need to tell:
- your clients: They need to know what you’re doing – and why and how you’re doing it. Think about how you will communicate the change and how you want to position this to your client. A personal connection often works very well.
- your employees: They need to buy into the idea that they’re adding value to the firm, not just putting in hours on a one-time project.
Although this sounds easy, it's actually one of the hardest steps to accomplish. You'll need to repeat the reasons for the change many times, to clients and employees. That's because it's not just a change in pricing – it's a change in business strategy and culture.
5. Assess each client's situation
Offering bundle pricing doesn't mean treating your clients as clones. Every client is different. That's part of the challenge of creating bundle packages that will suit everyone.
Your clients' business models and practices may differ widely. Still, their accounting or bookkeeping requirements will often be quite similar. Much of accounting or bookkeeping is defined by tax and payroll legislation, which applies to every business. However in the changing climate of the industry, small businesses are more and more seeking an advisory service, so consider bundling as part of all your packages. You could try to do it in a stepped phase.
It pays to learn more about your clients' needs. As well as helping you to refine your bundles and pricing, it will also help you communicate better. And it will help you become a connected advisor, which is the ideal position for a firm to be in.
So talk to your clients about their needs in person. Listen to the problems they are trying to solve, and consider how you can help them solve those problems. Ask questions about their business. The answers will help you to build up a picture of their situation and their accounting needs.
Ultimately you will need to:
- understand what issues the client is facing
- establish how you can help them solve their problems
- determine the scope of the work you will undertake to solve those problems
6. Explain your value to the client
With the knowledge gained from step five, you can refine your communication with the client. You can explain:
- how the engagement will work and what it’s like to work with you
- specific ways in which you will collaborate
- what you’ve delivered to other clients in the past
- how much time you can save them
- the value of your service
This is a critical stage. If you can’t communicate your value clearly, the client won’t see any value. And that means they won’t be willing to pay for it. Ideally the client should emerge from this step seeing you as an extension of their business.
7. Start slowly
Don't roll out value-based pricing to all your clients at once. That would be a recipe for disaster. Instead, start with one or two clients and work from there. You might pick a small client with stable accounting or bookkeeping requirements. Choose an easy client to engage with, preferably a business that doesn’t change much from one year to the next.
Alternatively you might simply start with a brand new client. That would simplify the work involved, and the pricing conversation will be easier too.
We've covered more about this step in our other guide to value pricing. Remember, your goal is to learn from these initial roll-outs. Examine what works and what doesn't. Then you can tweak your pricing and bundles as needed.
8. Offer your value pricing bundles to clients and prospects
You can modify your packages to reflect each client's needs. But ideally you'll want to keep them fairly consistent. The fewer bundles you have, the easier it will be for you to manage them.
You can tweak pricing on the fly, based on each client's needs and ability to pay – remember the pricing scale you worked out earlier. Keep referring back to your pricing panel. Check that any new pricing is still going to meet the two main criteria. It should be profitable for the firm and valuable for the client.
9. Become your client's connected advisor
A connected advisor is so much more valuable than an accounting or bookkeeping provider. You can encourage each client to see you as a trusted advisor by helping them in ways that a traditional firm might not:
- Training: Set the client up for success. Give them practical advice and help them handle their in-house accounting or bookkeeping responsibilities. That in turn will make your work easier.
- Delivery: Be sure the client's needs are being satisfied, by providing what you promised. Solving problems also defines you as more than just an accounting or bookkeeping firm.
- Support: Be proactive, not just reactive. The old hourly billing model was based on being reactive. But with value pricing, you can solve problems before they even become an issue for the client.
10. Keep delivering value
The purpose of changing your pricing model is to deliver better value for your clients. This should lead to greater revenue and higher profits for your firm.
It will also bring you closer to your clients and help strengthen your relationships. That in turn will let you provide greater value in the future, by moving clients to your higher-priced service bundles.
Value-based pricing helps keep your clients happy. That's different to hourly billing, where clients can feel overcharged even when the opposite is true.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.