- Pricing is about finding a sweet spot where both your client and your firm’s CFO or finance manager are happy.
- Avoid a one-size-fits-all approach.
- You must then decide your structure, price level and pitch.
By Joel Barolsky
Pricing accounting services can be tricky. Go too high and you lose the client. Go too low and you leave money on the table.
One of the main reasons for this complexity is that the perception of value is different for every client and for every project. Each time you make a pricing decision, it needs to be tailored to the specifics of the client and context. A one-size-fits-all approach to pricing is a recipe for profit disaster.
Keep it simple and memorable
The 2-5-3 method is a simple and memorable way to approach pricing every project.
* The “2” relates to your primary objectives in setting price.
* The “5” relates to the inputs or factors that should go into the pricing decision.
* And the “3” are the three pricing decisions you need to make – price structure, price level and the pitch.
Pricing a project starts with being shockingly clear on your pricing objectives. In most instances, there are just two:
1. Get the client to perceive good value and say “yes”.
2. Deliver a handsome profit to your firm.
Pricing is largely about finding the sweet spot where both your client and your firm’s CFO or finance manager are happy.
Undoubtedly there will be times when your primary objectives will vary – from winning an iconic brand-making project, to getting onto a panel, buying share-of-wallet, positioning for future work, building relationships or maximising revenue rather than profit. But these are more exceptions or variations to the rule.
Once your objectives are clear, you need to start to gather data to inform your pricing decisions. In the spirit of keeping things memorable, these five factors have been labelled the five Cs:
1. Cost – Understanding the cost of selling and delivering the project is clearly important in determining your margin and your best alternative to a negotiated agreement. You should use a simple spreadsheet to scope and cost the project before you price it.
2. Client value – The client’s perceptions of the importance of the project to their business and their relative price sensitivity will have a material impact on whether you can charge more or less. To help you explore what your project or service is worth to your client, you may find Bain’s new 40 elements of client value framework particularly helpful.
3. Competition – Pricing is likely to be quite different if the work is sole-sourced or, at the other extreme, your price will be compared with many other specialist firms.
4. Capacity – Most high fixed-cost businesses such as airlines and hotels use price as a key lever to optimise capacity utilisation. With large salary, rent and insurance bills, accounting firms should take a lesson or two from their corporate cousins. Offering discounts when your team is doing 16-hour shifts is not the smartest way to do business.
5. Connection – Your pricing will clearly be different if the client is a one-off transactional buyer rather than a long-term partner. Interestingly, there are different views on the level of discounting for partner relationship clients. One opinion is that you should offer your best deal to these clients as a loyalty dividend. Another perspective is that your fees should be higher to reflect the extra value you’re creating by knowing their business intimately.
With clear objectives and the right data, you’re in a position to make some choices. Pricing usually encompasses three inter-related decisions: What price structure(s) should we offer? What price level should we set? What’s the best way to pitch our offer?
1. Structure: In law and accounting firms, the most common pricing structure is still time-based hourly rates. Fixed fees, value pricing and retainers have been gaining in popularity in recent years. In consulting and engineering, project fees with variation clauses are most common. Investment bankers usually price with a percentage of transaction value.
An excellent reference article on different pricing structures can be found on the Patrick on Pricing website.
There is no single perfect pricing structure. The structure chosen will usually be a function of, among other things, client preference, relative bargaining power, nature and level of risk, depth of relationship, scope and benefit certainty and degrees of co-creation. Often you can augment your pitch by offering clients multiple pricing structure options. Become expert in three or four structures along the risk-sharing continuum. This way you can offer clients more choices and respond to different contingencies.
2. Price level: This is the amount to be charged within the structure you select. So, if it’s an hourly rate, the level is “$350” an hour; if it’s a fixed fee then the level is “$8,500”.
3. Pitching: This refers to the strategies and tactics of communicating value and getting to “yes”. It includes the approach to presenting different pricing options, project staging, pitch presentation and to conversations about price and value.
To illustrate the importance of price pitching, the Qantas website usually presents its customers with three benefit-price options for every flight. Interestingly, the 8am flight from Melbourne to Sydney on 15 March 2018 had one option ($1030 in business class) that was almost 600% higher than another (a $172 economy offer). These three options involve the same brand, same plane, same pilot, same airports, same flight duration – just a different level of amenity, status and flexibility. The pitch is noteworthy for three reasons:
• it optimises value capture – those seeking more benefits and/or who are less price sensitive pay a lot more
• it “frames” the economy option to look like an amazing deal
• it discourages customers from shopping around: if just one option was provided, most customers would immediately jump on Virgin’s site to compare prices.
It’s not rocket science
Lock the 2-5-3 method of pricing away in your brain. It’s not rocket science, but hopefully it will ensure your next project is priced fairly and profitably.
Joel Barolsky is managing director of management consulting firm Barolsky Advisors, senior fellow of the University of Melbourne and creator of the Price High or Low smartphone app.
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