The words “value pricing” are banded about like a bouncing ball. As professional firms’ you are meant to be moving your pricing model to value based. Some could argue that the fees charged on billable hours is based on value, as the price paid by a client meets market forces – what a willing purchaser is prepared to pay for the service. But…..

….. As the debate around professional firm pricing leaks to the wider population, your clients become more aware of what ‘value’ may look like to them. Their understanding of the efficiency gains achieved by professional firms using technology, like the automation of the production process, is now something that they expect to be for their advantage. Many firms have passed on these efficiency gains to their clients, as they use billable hours to price. These gains should be kept for themselves to have the funds available for technology improvements and training. Hence the first step in the transition process – a modern mindset.

‘Commoditised compliance’ is another term being thrown around. This concept goes hand in hand with a ‘value pricing’ model, as the idea is to automate the compliance and increase value added services, such as advisory. You then bundle up the services to create a ‘value priced package’. As the cost of compliance reduces (through automation), this service becomes cheaper and people shop around for the lowest price. The ‘value priced packages’ become even more important to retain market share.

I often meet traditional professional firms that continue with what they have always done, as it is easier to retain their billable hour model, after all, it’s what they know. They will often tell me that they are still making money and are busy and they don’t see a change in their clients’ expectations. I am sure this is true for them, but I wonder if they are measuring their client loss rate and their average client fee? I suspect that they are losing more clients than they attain, and their average fee is dropping. They have become comfortable and set in their ways, however clients are seeking new ways of doing business. Their bottom line will be affected if these firms don’t address the ‘commoditised compliance’ issue.

Consider that your billing strategies influence your profitability, so you should pay attention to this strategy and think about it carefully. So, what are the pricing options?

Well the first is billable hours. This is based on a model that is over 120 years old, created in the ‘second industrial revolution’. We are now in the ‘information revolution’ where information is at our fingertips and all things are being digitised! Automation is the name of the game! As professionals, we are normally laggards when it comes to innovation, but now is the time to move your business into this era.

The second is a ‘fixed pricing’ model, which is still based on the hours taken to complete the task. The estimated hours usually come from experience for that particular client (prior year) or a similar client’s work. I see this model as a transition to the third pricing model,‘value pricing’. It will take time to change the mindset of the directors, as well as the team, to move to value pricing. Most of us don’t like change and it is often harder for professionals. I often see in the ‘fixed fee model’ being used in firms, where there is a blend of hours taken as well as an uplift factor for the value for that package. This is at least a starting point.

Next month, in part 2, I will look at what is ‘value’ and how to start the transition process.
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