It is often suggested that the average life of a business is seven years. This factoid has been accepted for many years and applied to the average time an accountant will serve a business owner.
However, scientists at the Santa Fe Institute in New Mexico reveal that based on their research their magic number for the life of a business is 10. So, choose a number between 7 and 10 to consider the cost of getting the price wrong for a new client.
How do you quote a new client for the work they are asking you to perform?
Some firms advise the new client that the price is based on time while perhaps feeling obliged to offer a minimum and maximum range. The danger with this approach is that the client will invariably hear the lower cost while the service provider is thinking top end – maybe even higher.
Key point: Some accountants think that they are in the business of selling hours. Nothing could be further from the truth. No client ever buys hours – clients buy solutions to problems.
The quoting game and the fundamental flaw
It is natural in any scenario when selling that the vendor wishes to secure the highest price, while the buyer wishes to ensure that the price is as low as possible. In the professional services marketplace these ‘negotiations,’ or perhaps they should be characterised as discussions, tend to be conducted on a friendly basis with the service provider, initially, having the upper hand.
Consider, “What have you bought in the last year where you did not know the cost in advance”? I have asked this question in seminars on countless occasions and have mostly found that the question is followed by a period of silence. It is easy to understand that we all wish to know the price – in advance. Being told that it depends on time is an unsatisfactory and uncertain position for the buyer.
As accountants, we understand that we cannot know for sure how long it will take for a new job to complete. What problems will arise? What unknown factors are around the corner?
The reality is that for on-going year-on-year work the normal basis for pricing is to uplift the prior year’s price by reference to the current rate of inflation. However, that too, while easy to understand, has its own fundamental flaw. Go to a restaurant, and you will pay for that meal based on what you order – every meal could well be different, and so will the price. However, go to the accountant and even though the work may well be different we dare not raise the question of a [much] higher price for fear of upsetting the client.
On the basis that the purchaser wishes to have a clear price understanding, it is almost inevitable in the future that nearly all work will have an agreed price.
Here are a couple of solutions that my clients have employed that help to fix the problem of lost profitability as a consequence of a poor approach to pricing.
Let’s look at an example whereby you under-price a new client by, let’s say, £250 (I am sure you will convert that into a similar amount in your currency). If that is not addressed, then the 7-10 year cost will amount to £1,750 to £2,500.
One solution: Well, you may seek to increase the fee. However, the client is, of course, well within their right to say “no.” What needs to happen here is to discuss with the client their agreement to the first year’s fee. Let them know that this might need to vary if for example the key control accounts, e.g. the bank, or sales and purchase controls, are not balanced. It might also vary if the turnover is, say, 20% higher than initially indicated. Now, while price adjustments can be triggered in these circumstances how do you deal with the mispricing? The key is to let the client know that while the first year cost is agreed you reserve the right to revisit the price for subsequent years in the light of the experience of actually undertaking the work. This is a critical component of the new client onboarding strategy.
Then at least you can avoid the trap of performing the work year-on-year with little hope of ever doing the job within the fee — a situation that is unsatisfactory for owners and staff.
Inserting a sentence into the first and subsequent engagement letters indicating that the price for subsequent years may be the subject of discussion is a strategy that has been used by my clients both sole practitioners and partnerships. Interestingly, I have a client with more than 40 partners, and they tracked the effect of this policy over three years. During that time, they estimated that this practice had resulted in price adjustments for 20 per cent of their new clients. They determined that this had increased profits per firm owner by 1.25%. OK, that might not sound a lot but the multiplication over 7-10 years is considerable.
Steve Jobs was famous for ending his internal company meetings with “Oh, and there’s just one more thing” [Check out YouTube – Steve Jobs Just One More Thing]. So, just ‘one more thing’ from me on job profitability [a topic that is the most requested internal firm workshop by my accountancy business clients].
When a builder is asked to add an extra double socket in an extension, the immediate response is “yes” followed by the price for this extra, and more than likely that verbal quote is followed up in writing. Purchase a new car, and you will be given the option of a range of extras – all of them individually priced. The same applies to a restaurant. The point? So many accountants do not approach clients over what I call client-caused problems as and when they arise. How to address this? Watch this space. We will look at this in future blogs.