The problem with pricing by the hour is that the assumption is that the price per hour is correct (often calculated by a salary multiple) and the time to do the task was correct. The assumption is that time multiplied by the rate equals the correct price. In my view, nothing could be further from the truth.
When selling intellectual property it truly is a bizarre pricing model. You are valuing what you know and the outcome the client gets based on a salary multiple (to get to the charge rate) and the time taken to do the task. Very strange! I understand it’s an easy way to calculate a price. The issue is this model does not value how smart you are and the impact you make.
There has to be a better way. And there is. It’s all about value pricing. Value pricing is where you price the job upfront based on the value you create for your client. You cannot value price after the fact. That means you have to ‘scope’ the project out first (by talking with the client and doing some research), find the value you are adding and then present an implementation plan to the client based on how you are going to help them.
Now for historical work you have a challenge with pricing. And that’s price parity. You may think it is worth more but if the client has been paying $X for the past few years then they may pay $X + a bit – but not the price you think it is worth. For a new project that the client has not bought before then that’s a different story.
To work out the value you are adding you need to think the following. Without me, they can achieve ‘X’ result. With me that can achieve ‘Z’ result. The difference (‘Y’) is your value that you can add. The impact might be financial, emotional or both.
Let’s look at a couple of examples.
If you know the numbers in advance (cloud accounting helps with that enormously) then you can scope out projects that make a difference with your clients. If you can articulate your value in advance and present in such a way that makes sense financially and emotionally then you’ll win the business.
At the end of the day the only right price is what the market is prepared to pay for it. That means the right price is just before NO. In other words if they keep saying YES without hesitation then the price is too low.
Pricing by the hour is soooo last century. It’s not ideal today. There is a movement happening around the world where firms are not thinking about the future – they’re thinking about being ideal today. It’s about being The Perfect Firm.
The Perfect Firm is very Value centric: The Perfect Firm does not price by the hour after the project is completed. They value their intellectual capabilities and they communicate the price (and the value) to the client before starting the project. You can learn more about how you can become a perfect firm when you attend my upcoming full-day seminar called ‘The Perfect Firm’. You’ll learn practical ‘how to’s and strategies in 8 critical areas. Strategies you’ll be able to apply right away in your firm. We’re presenting the seminar in 62 cities around the world. Make sure you don’t miss out. For dates, locations and tickets visit The Perfect Firm.
About Rob Nixon
Rob has forged a niche to be the world’s foremost authority on how Accounting firms can achieve peak performance. Rob believes that Accountants are the natural trusted advisor to business. He believes that Accountants make a massive difference to their client’s condition. Since 1994 he has been running businesses that specialise in helping Accountants run better, more profitable businesses. His speaking work has taken him around the world where he has spoken to in excess of 150,000 accountants. He is the author of 2 bestselling books “Accounting Practices Don’t Add Up – why they don’t and what to do about it” AND “Remaining Relevant – the future of the Accounting profession”. Both have received rave reviews from Accountants and industry professionals from around the world.