Is pricing an art or a science? We think successful value-based pricing is a bit of both.
According to a recent survey we conducted on Orange Select, only two in five think that they effectively price their billable advisory services. One in three base their pricing decisions on past experience.
Earlier this month, we asked Peter Magner and Adriaan Basson, the founders of Iridium and Wingman Accounting respectively, to share their advice and learnings on how to price customers for scalability.
Here are the key insights.
First things first, an introduction to Iridum and Wingman Accounting
Interestingly, while Peter Magner, Director of Iridum, and Adriaan Basson, founder of Wingman Accounting, have both based their firms on the cloud, there are subtle nuances in their respective pricing strategies.
While they both use fixed-fee, value based pricing models, Basson published pricing guidelines on Wingman’s website and determines pricing on an informal dataset. Magner chose not to show prices on Iridum’s website and use a more formalized, data-driven pricing approach.
What is value-based pricing?
Value-based pricing marks a fundamental move away from the old-school pillars of accounting. As you introduce time-saving tools and software into your business, your fees will decrease exponentially even though you’re providing more value to the client.
Value-based pricing reflects the additional value-add: getting the nitty-gritty core pieces of compliance work done as quickly and effectively as possible, so you can make up that time interpreting the data.
Yet, 38% of the firms surveyed still use time-based billing.
“Please no more timesheets!”
Both Magner and Basson come from an auditing background and vowed never to use timesheets as a result.
If a project feels like it’s running out of scope, ask your team members to track how much time they’re spending on the client. You can then build a snapshot of the work and review your pricing accordingly.
Time-based vs time spent
There’s a subtle difference.
Time-based drives the creation of your monthly fees.
Time spent recognises the amount of time allocated by the individual to complete that piece of work.
You can ask your team categorically, ‘Which clients take up most of your time?’
If you’re basing your billing on time spent, fee revenue will exponentially decrease as you introduce more software, along with decreased client expectation on the value and quality of work they’re getting.
Tools used to price services
There’s a huge variety in the tools available to price services.
Our survey highlighted that most accountants rely on past experience, though many use a basic check-in to the general ledger. Tools such as Xavier give you an in-depth health check so you can be more data-driven, and combine this with your client experience.
Data-led value-based pricing
Rather than basing your pricing on gut instinct, data-led pricing enables you to create a more logical way of reaching your price.
Basson and Magner recommend the following:
- Use a core fee as a baseline. This is less about the amount of work and more about the commitment to the team. You don’t want to overload them with clients.
- Determine key value drivers of a client. This is a combination of quantity (number of monthly bank transactions, staff complement, etc.) and quality (elements that make it more complex, such as client expectations, VAT registration, type of industry, etc.).
- Look at your client-base. You want a mix of complexity in your portfolio, and to split between your team accordingly.
- Include tools like Receipt Bank into your fees. See your tech stack as the ultimate value-add for your business.
- Remember that you are the experts. If clients want specific services, you need the tools to deliver them.
- Focus on relationship-building. Prioritise open, transparent conversations and strong relationships. This gives you the grit for even the toughest conversations.
Sorry always seems to be the hardest word
Almost one in three of accountants surveyed said that they lost money because of underestimating the complexity of work.
In the last few months, this problem has only grown. With many advisors writing off work completely, an efficient delivery mechanism is essential to manage scope.
For Wingman Accounting, Basson sets an all-inclusive cookie-cutter solution for clients. This is designed to set the bar for scope and complexity. They then bake in all of their overheads, such as software, and stipulate this in the SLA agreement.
“If you offer a thousand different services, it’s incredibly difficult to manage that expectation on an ad-hoc basis,” says Basson.
Download the 5 Tips to Pricing for Scalability infographic today – created in collaboration with Adriaan Basson and Peter Magner.