Increasing profitability through value-based pricing
Has your firm been billing its top tier clients roughly the same amount for the same work for years, maybe even decades? Have you seen firm revenues stagnate and fee earners whither underneath the weight of mundane, highly repeatable tasks that offer no personal growth? If the answer is yes, it’s highly possible that value-based pricing can provide your firm continued financial growth and better operational efficiency.
What is value-based pricing?
Traditionally, professional services firms, such as accountants and consultants, have charged an hourly rate. With hourly billing, your firm makes less money the faster your fee earners work, and their skills are disconnected from the accumulated revenues. Fee earners are disincentivized to learn new skills and to work more efficiently — and your firm’s bottom line is dictated by time rather than expertise.
At its basic level, value-based pricing is a fee, decided upon before an engagement begins, based on what the client perceives the value to be. Many clients are not interested in how long it may take to complete their engagement, but they are interested in how much money they may save or what other desirable company-wide outcomes may occur from it. The key to offering a value-based price for a specific service or engagement is to provide a strong justification to the client as to why it’s worth paying that amount rather than the hourly rate. This justification is extremely important because you are asking the client to share the risk in the final outcome.
Benefits of value-based pricing
- Time is separated from revenues to enable higher efficiency
- Compensation per engagement increases as results prove their value
- Firms can raise rates as their proven expertise shines
- Practices are differentiated from competition still billing hourly
How to succeed with value-based pricing
While value-based pricing can be a profitable endeavor, it is not for every engagement or client. It works best when done with high-engagement clients where you can have honest and clear discussion about their needs and how you can fill them with your expertise and deep capabilities at a noticeable increase in savings to their bottom line or other attractive company outcomes.
Additionally, there are lots of variables to take into account when calculating the value price you plan to offer. Looking at data from past engagements and understanding the true value of your fee earners’ time is central to your pricing strategy.
3 situations where value-based pricing works
There are many examples where value-based pricing can work well for you and your client. But here are a few high-value situations:
- Audit programs with multiple-year arrangement across subsidiaries, where clients get a volume savings from one firm doing the whole program
- Higher risk tax engagements with competitive government programs or complex corporate structures that have entities all over the world
- One-off deals, such as restructurings and corporate bankruptcies, where it’s all about the ROI. Firms can say, “Pay me $300,000 and I will save you $5 million.”
Overall, value-based pricing is a powerful strategy you’ll want to employ with high engagement clients. Just remember to have all your ducks in a row beforehand because you are asking these clients to share the risk on the engagement outcome. As the saying goes — “no risk, no reward.”
For more information on how automation can help inform value-based pricing strategy, check out this ebook.
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