Value pricing: How to gain a competitive edge and make more money
The current coronavirus pandemic and the damage it is inflicting on the economy are affecting virtually every industry, and accounting is no exception. As markets shrink, revenues dry up, and companies struggle to stay afloat, finding ways to increase their firm’s value and not just maintain revenues but increase them is becoming Job One for accounting practices large and small.
Some firms may try one of three strategies: cut prices, keep them the same but add more features to current services, or try to boost volume to make up for any loss. But those are all losing propositions over time. The key instead is to boost value and adopt a value-pricing model that will make your firm and its services more attractive to current and prospective clients.
In its simplest terms, value pricing is setting a fixed price for a product or service based on the value perceived by the seller and the buyer. It provides more predictability than hourly billing and can drive higher margins than market-driven pricing.
Research: the key to boosting value and revenues
One major reason why so many accounting firms struggle with growing revenue, even in the best of times, is they fail to develop a comprehensive, accurate understanding of their clients’ needs.
At the Hinge Research Institute we recently completed a study of accounting firm service challenges in an effort to help develop strategies for adapting to the “new normal” in the aftermath of the pandemic. Our research revealed that accounting firms have significant opportunities to add value to their buyers and their bottom lines if they restructure how they package and price their services.
In a survey we conducted with accounting service buyers, we found that 56 percent of buyers did not see their accounting firm as highly relevant to solving accounting-related business challenges and were nearly three times more likely to want their accounting firm to become more familiar with their business or industry.
In contrast, buyers who do see the relevance of their accounting firm’s services are less likely to want lower prices and better customer service. In other words, firms whose clients felt they understood them, their industry and their needs had no need to cut their prices or add more features to their services.
Nearly twice as many buyers expressed a need for consulting services compared to buyers that currently purchase them. Think about that for a minute — only one-third of buyer demand for advisory or consulting services is currently met by their accounting firms. This presents a huge growth opportunity for accounting firms willing to position themselves as experts.
Accounting firms may be able to increase monthly client revenue up to 50 percent by providing strategic advisory services. We found buyers who purchase advisory services from their accounting firm pay 43 percent more each month on average than buyers who do not. Buyers who did not purchase advisory services from their accounting firm would expect to pay 50 percent more for a package that included advisory or consulting services.
While third-party research such as this can provide valuable insight, it’s important to know that you can — and should — conduct research on your own. You may be surprised at what you think you know, but don’t, about your clients and prospects.
For example, nearly two-thirds of accounting firms believe their client engagements begin with an assessment followed by tailored recommendations. However, less than 40 percen of buyers reported that to be the case. Disconnects such as this are more common than you think, which is why research is so critical.
How to develop your own value-pricing model
Our research has shown there are four proven ways to increase the perceived value of an accounting firm:
- Develop and promote niche subject-matter expertise. Focus on what your firm does best and boost the visibility of those experts.
- Communicate more frequently, more clearly and more often.
- Reevaluate the value of routine accounting services. Your clients value them more than you think.
- Adopt client accounting advisory services. There is great opportunity in providing outsourced financial operations services.
Here are some tips for creating a successful value-pricing approach:
- Evaluate your competitors and see where you can create differentiation and value, such as being faster, more efficient or more reliable.
- Conduct research to determine what your clients would pay for this value (you might be surprised).
- Realize that time does not equal value. Remember the old plumber’s joke: “You pay me for what I know, not for what I do.”
- Split the value created with your clients. Strip out any unnecessary or unused features in your services and then price the remaining valuable parts fairly. Don’t be greedy. Clients who feel they are treated fairly will be loyal over the long term.
- Don’t just deliver value; clearly communicate it. Your prospects and clients won’t see the value of your service if the person selling it doesn’t either.
Adopting a value-pricing model provides a number of benefits to both your firm and your clients. They get valuable, vital services at a fair price, and you avoid unnecessary price-cutting and revenue losses while gaining client loyalty, long-term relationships and stability. You will be setting up your firm to successfully weather whatever future storms await it.