Unlocking Better Bookkeeping Prices: 5 Key Value Pricing Principles

If you're struggling to get the prices you want for bookkeeping and other core accounting services. In this video we're going to look at what are the five key value pricing principles to get better prices. Get your notepaper ready, get ready to take notes. We're going to go through these five principles fast.

So what are those five key principles when it comes to pricing bookkeeping services? In fact, any core compliance services of accounting firms. The first one I want to talk about, the first thing that we must do is we have to move away from time based billing. Now there are two ways to price services. Two ways to price. That's it. It's really simple. There is cost plus pricing and value pricing. That's it. Everything else you may have heard of are what's called pricing models, things like time based billing, contingent pricing, things like fixed pricing, things like demand based pricing, menu pricing, all of these are pricing models. There are dozens and dozens and dozens of pricing models, but they all fall into one of two categories. They are either cost plus pricing, value pricing, or sometimes a hybrid of the two. So what are those? Well, cost plus pricing is where we add up the costs of providing a product or service. We add on to that our hoped for profit margin and that magically is our price. And it was demonstrated over 100 years ago by the Austrian school of economists. That's a crazy one way of pricing because it ignores the customer, ignores what the customer wants. Whereas in contrast, value pricing really turns that on its head. It starts with the value to the customer, what does the customer value. And based on that value, that's how we set the price. With pure value pricing, costs are irrelevant. So why do we have to switch from cost plus pricing to value pricing? We. Well, there are a number of reasons for that. And when I say cost plus pricing, one of the main ways that we price in the accounting profession historically has always been time based billing. Time based billing is a form of cost plus pricing because the way we calculate our hourly rates is based on our approximation of the costs of our firm plus our hoped for profit margin. And we have to change firstly because, and this is the number one reason we, we have to change because clients hate it. There was a study done way back in, I think it was November 2005 by the software company Sage in the UK. They interviewed thousands of business owners and one of the interesting questions was what do you hate the most about your accountant? And the number one answer by some way was surprise bills. And that's the problem with time based billing. You see the Customer doesn't know the price until you've done the work, until you've added up the hours and presented your itemized invoice. And customers hate it, clients hate it. I hate it. When I deal with lawyers, I want to know the price upfront in advance. So if for no other reason, we should stop pricing based on the hour, based on time, because we must give the clients a price in advance. Now there are other reasons why we should shift away from time based billing and cost plus pricing. Another one is in all of my studies over the last 15 years, benchmarking studies, I found that firms that are moving to value pricing get much, much better prices. They make more money. So cost plus pricing, customers hate time based billing and you make less money. There are many, many other reasons as well why we should shift, but those should be sufficient in themselves. Okay, next thing I want to talk about is we have to recognize that the right clients will pay you more money. Often when I say to accountants they have to increase their prices, what they say to me is, Mark, you don't understand. My clients, my clients are price sensitive. That's interesting because that is the number one myth in pricing. Your clients are not price sensitive. And I know right now you're probably thinking, mark, you are absolutely crazy. But let me explain. We know from research carried out by price psychologists in the world of behavioral economics is that yes, there are price sensitive people in society, but it's not as many as we think. It's estimated to be 20 to 30%. Now we have to recognize that a price sensitive person is somebody who always buys the cheapest. And whilst there are people in society who are price sensitive, they are not the clients of your accounting firm. You see, the clients in your accounting firm are not representative of the population as a whole. Your clients are a subset of that population. Your clients are business owners, they are entrepreneurs, they are high net worth individuals. And what we know about them is if you want to build a successful business, if you want to be a high net worth individual, you cannot do it by being price sensitive. Your clients are what's called value sensitive, which is most people in society. And your clients, so a value sensitive person, when they buy, they look at the profit on the deal, they look at the value equation, they look at what is this thing going to give me, what's the benefits when I buy it? I and what will I have to give up? Think of that as the price. And the bigger the gap between the benefits and the price, the more profit on the deal, the more likely Somebody is to buy. So for most people, most people are value sensitive. They look at the size of the gap in deciding whether to buy and price is only one part of the equation. Your clients are value sensitive, they're not price sensitive. And I can demonstrate that if you think about your client base and you think about how many clients own an Apple product, like an iPhone, like an iPad, like an Apple computer, and anybody who is a customer of Apple by definition cannot be price sensitive because there are cheaper phones, cheaper tablets, cheaper computers. Think about your clients coffee buying habits. If you have any clients who on their way to the office go into a coffee chain like Starbucks to get their coffee, then they are not price sensitive because there are cheaper ways of getting your coffee fix.

So clients are not price sensitive, they are value sensitive. The reason we think they are price sensitive is because at some point in the past you've perhaps presented your price and as they've looked at your price, they've said to you, that's a bit expensive. And we assume when they say that that they are price sensitive. And when several clients say that's a bit expensive, we extrapolate in our mind and start to assume most people are price sensitive. But we have to understand why do people say that's a bit expensive? It's not because you're expensive, you're too cheap, you have to put your prices up. But not only that, they say that people say that's expensive when they don't understand the value. And that's our fault because as a profession we are not great at communicating value. So first foundation is we have to move away from time based billing and cost plus pricing to value pricing. Second one is the right clients will pay us more money. They are value sensitive, not price sensitive. But we have to become better at communication. Communicating value is so, so important. Okay, number three is we have to understand the value pricing journey. You see, I've been teaching value pricing since the year 2000. I discovered it in my accounting firm in 1999. And I realized that it was difficult to move to value pricing when we are so used to keeping timesheets pricing based on the hour. And because it's difficult, and it's difficult because value is subjective. We can't touch, feel and measure value. And everybody value things differently. Not only that, in the accounting profession, services like bookkeeping are different for every client because of the scope of the work. So we have to think of it as a journey. And if you are currently pricing based on the hour keeping timesheets, the first step in the journey is to move to fixed pricing. Fixed pricing is where we give people a fixed price in advance. Now, let's be really clear about this. A big misconception. People think that fixed pricing is value pricing. It's not. Fixed pricing is still cost plus pricing. Why? Because when we give people a single fixed price, let's say 750 bucks for doing a tax return, when I ask where that number come from, they say, well, based on my experience in the past of doing tax returns and doing a return of this kind of complexity, I know it's going to take me about three hours. And my hourly rate is 250 bucks an hour. So fixed pricing, the way that we do it in the profession, is still cost plus pricing because our fixed prices are based on our best guess, our estimate at the cost of doing the work. Now, it's a better way of pricing because it overcomes that problem with clients. At least we're giving the client a price in advance. It's a fairer way of pricing. Clients like it, but it's still cost plus pricing. Nevertheless, it's the first start in the journey. It's the first place to move to. And I would argue it's the hardest part of the journey because we have to figure out how do we come up with a fixed price based on the scope of the work. And we teach that in the value pricing academy. Exactly how to do that.

But once you've moved to fixed pricing, you then have a platform to start to move into value pricing. I always teach the first step of value pricing is menu pricing. So let's talk about that, because that's the fourth key concept I want to talk about, menu pricing. So what is menu pricing? Well, essentially, it's giving people different choices, different options, because everybody values things differently. Think of it as the bronze, silver, and gold packages. So for your bookkeeping service, for example, you must have a bronze package, a silver package, and a gold package. And you give people a choice. This is so powerful for so many reasons, Partly because of what we learn in behavioral economics, partly price psychology. What we know is everybody's different. Everybody likes choice. You have no idea what somebody values your product or service at. You have no idea what people are willing to pay if you do not offer a premium option. People can't choose to pay you more money. And yet we know that there is a proportion of people in society, it's about 20% of your client base, who would gladly pay a premium price because they want more. So we have to offer more. Also, what we find when we give people three choices is that most people choose the middle option. It's called the magic of three. It's a extremely powerful. So you must be using menu pricing. In fact, all the most successful companies on the planet use menu pricing. Why? Because it works. For example, Apple, Apple use menu pricing. If you go to their website to buy an imac computer, you will see a screen that looks something like this where they give you a choice of three different options. Why? Because it works. It makes them so much money. And we're starting to see this in the accounting profession. I'm starting to see accounting firms offer three different options, sometimes four options that can work in some cases. Although the version on the screen here, there are lots of problems with this. It's not a great version of menu pricing. They're making lots of rookie mistakes here, but at least they're giving it a go. So we have to move to menu pricing. So let's just quickly recap on those first four. We have to change the way we price from pricing based on the hour to pricing based on value. We have to recognize our clients are value sensitive, not price sensitive. That means we can put our prices up, but we also have to communicate the value and create value for clients. The right clients will pay us more because they want more from us. Number three, we have to understand the concept of the pricing journey and take things one step at a time. And so let's start with moving to fixed pricing first. Once you've mastered that, then start to use menu pricing. And once you've done that, we can then add in other principles and ideas of value pricing. And then number four is the first stage of value pricing, which is menu pricing, giving people choice. Why is that? Value pricing? Because people will choose the option, the package, based on their own individual perception of the value of what's that package. And finally, number five is if you want to get better prices in your accounting firm, if you find you are working crazy long hours not making enough money, it's because currently you are too cheap. And whilst most people, when they move to value pricing, start with brand new clients, which is a great thing to do, what we really have to do is figure out how do we reprice our existing clients. Because that's where your big problem is right now. If you have lots of clients and your prices are too low, you probably find yourself running yourself ragged, working crazy hard, crazy long hours. And if you win more clients, that's just going to make you busier. So what we have to do is tackle that initial problem we have right now and one of the things we can do when we do it the right way is I've seen many, many firms over the last 20 years follow a process where they've increased their average price by at least 20% average and not lost clients. And some firms have increased their average price by 30, 40%. That has the potential to double your bottom line. So if you want to get some quick wins, if you want to change your prices, your profits fast, if you want to make more money fast, increase your cash flow, the very best place to start is to start to tackle the issue of repricing your existing clients, putting the price up, communicating what you do better and giving them choice. If you found this valuable, please give it a thumbs up. And if you want some more information, you will find that below in the description. I've got some links to some free resources to help you with value pricing your accounting services. Thank you for watching this. I know your time's precious. I really appreciate it.