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Is value pricing right for you?

written by Editor, 9 July 2014

Blog by Chris Knipe, Digita Business Analyst

Traditionally, there were two ways to charge a client: fixed fee and hourly billing. Now there’s another form of charging – referred to as “value pricing”.

What is value pricing?

Value pricing is agreeing a price before the work is done, based on the value perceived by the client. If the practice offers an arrangement for new small businesses, then value pricing can also accommodate their ability to pay.

Value Pricing
Historically, many practices have used hourly billing – AKA “Time and Expense billing” and this is often perceived by the client as the value of the work. With increased access to data and software, both by the client and by the practice, there’s every likelihood that time spent on a particular job for a client will reduce over time. Thus many more clients will be needed to make a practice viable in order to stop a significant increase in hourly rates. Another approach is to concentrate on the value added by the activities of the practice. This value has to be the perceived value by the individual client and may involve more relationship management in explaining to the client the work done and the value gained.

Strengthening the client relationship

The decision to move to value billing greatly depends on the type of practice and the client portfolio. There’s plenty of advice from the ICAEW and ACCA on this topic. However, one of the key things to consider, as always, is the viability of the ongoing client relationship when a specific pricing model is used. If approached correctly, a change should strengthen rather than erode the relationship as the client can perceive the value for money that they are receiving.Some might say that the use of a fixed percentage in value billing removes a degree of objectivity as the practice seeks to drive up the value in order to achieve a greater return. However, if clear and transparent lines of communication exist between the practice and the client, this shouldn’t cause any problems.

Risks with pricing models

Of course there are risks to the value pricing approach – what happens when the perceived value is low and insufficient to cover costs, or so large that the client is unhappy to pay? Similar risks exist with Time and Expense billing too – was the time recorded correctly? Did the staff member “take too long”? Did the staff member finish too quickly thereby reducing the available billable hours?At least, from the client perspective, value pricing clearly sets the expected costs before any work is started. This frees staff to provide good quality advice without the need for clock watching or creative timesheet entries. It also incentivises staff to become more efficient and more productive and eliminates concerns about time spent on collaboration, which in theory is good practice.

Pricing experience

Although time recording and billable hours have been the mainstay of billing for the last half century, it’s been an approximation based on the accuracy of the person recording the time. If this is agreed, the way forward is value, fixed or agreed pricing. But this needs to be measured against the actual effort or performance so that, in a long term relationship, the pricing evolves over time based on this feedback loop.

To perfect this type of pricing, practices need to gain hands-on experience of the more common pitfalls. One approach could be to select clients who are on the standard time and fees billing and write out a value pricing for the work. Once the work is complete, repeat the comparison again and perform a pricing review.

Many firms also choose to capture the time and expenses for work undertaken even though they don’t directly use it for their billing; instead, it can be used as part of a pricing review process to ensure that the value pricing is in line with the actual cost of the ‘job’.

Is it right for your clients?

So in conclusion “is it right for you?” is probably the wrong question. Is it right for your clients? Only you can answer that based on your knowledge of them. Risk can be mitigated by gaining experience using the blind testing method, but overall the ‘one-size-fits-all’ attitude will always result in missed opportunities (and lost clients). Above all, the introduction of value pricing should be considered carefully and only introduced with preparation to minimise risk.

 


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