We continue with our series of articles looking at how you can improve your job margins.
In our second article we looked at the importance of not misstating job costs, for any reason, but importantly not charging time ‘because the job won’t stand it.’ We also looked at the harm that is caused when there is an over emphasis on recovery rates. Managers, in particular, often endure stress as a consequence of, in their view, performance and promotion being linked to achieving recovery targets. This is unfair to say the least. This was highlighted by the Jennifer case study which is based on a manager in a firm I have acted for.
The article continued to look at the two components of write downs – a term that I have suggested is entirely inappropriate and should be eliminated from your firm’s vocabulary – and reporting systems.
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Finally, I referred to Stuart Dodd’s book ‘Smarter Pricing, Smarter Profit’. Stuart was formerly the Global Pricing Director for Baker Mackenzie, the law firm. I gleaned a really important idea from thinking about his role, rather than from the content of his book. This is shared in this article.
THE PRICING HANDOOK
Setting the scene: Let’s look at a firm with, say, 5 partners. Imagine that a prospective client comes along seeking their services. The prospect is the owner of a 30-person engineering company. They use Sage, have an in-house, competent but unqualified accountant. You are advised that the current accountants report to their client that this accountant does a good job and that they only ever have to make a few adjusting journal entries. They seek to instruct you to finalise and audit the accounts together with taking responsibility for the company tax computation, and filing and agreeing with the tax authorities.
The prospect, without knowledge of the other partners, meets with each of the 5 partners for a quote. He states clearly on each occasion that he is seeking alternative service providers because he would like a more personal service. Each partner is able to ask as many questions as they see appropriate in order to better understand the business and its needs and expectations. They all ask for clarification of the request for a ‘more personal service.’ The response indicated that while in the early days the firm was attentive, your prospect considers that the partner must have moved onto bigger and better clients as he rarely makes contact other than once a year.
At the end of responding to these questions your prospect smiles and asks for a price for undertaking the work outlined.
The result: I have conducted this ‘case study’ on many occasions. I always insist that partners write their answer down before I proceed (heaven forbid that they change their mind based on what others are saying!). Allow me to share the results from this exercise.
Standing by my flip chart I go around the room asking for each partner’s price proposal. Without fail, and I have conducted this exercise over 20 times, the difference between the lowest price and the highest is normally in the region of 225-300%. The range is amazing, and I watch to see the response as each of the price proposal is posted onto the flip chart.
With all the prices now visible I might ask one or two of the higher pricers how they arrived at their decision. Usually, it is because they envisage performing additional work. Sometimes it is because they are pricing in regular client advisory meetings. This exercise reveals who the stronger pricing partners are and those who are weaker or not so bullish in this regard. Fear of not winning the prospect as a client might also be a factor
Conclusion: Most accountants do not have a firm-wide and consistent approach to pricing. One that each partner follows and delivers a fair (to the client and to the firm) price. Note: Read on for the solution to this profit-reducing problem.
1. Be very careful about trying to find out the current cost is for the services you are being asked to quote for. Or for trying to match that price.
2. Why? You do not know their hourly cost structure. You do not know how much time has been written off. Most clients change accounting firms as a consequence of dissatisfaction with the level of service received – as is the case in the above scenario. Quote less and is there not a good chance that your prospect might wonder how you can give the required higher level of service for the same price as currently charged.
Key Point – Don’t focus on the current costs incurred by the business.
THE RISK OF QUOTING A PRICING RANGE
- It is not uncommon to indicate a price range. After all you cannot be certain how long it will take to complete the work; what unexpected hurdles you will encounter; what delays might arise; or what unexpected risks will surface.
Herein lies the risk. Quote a price range of 10,000 to 13,000. What does the client tend to hear? Probably the lower price – after all no one wishes to pay more than necessary. But, if you ask yourself what you think you might bill, the answer may well be somewhere over the 13,000! In the first year of acting one thing, you must surely wish to avoid is a misunderstanding and challenging conversation regarding price – that does not augur well for the future
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Question: And this is a question I ask in many of my courses. “What have you paid for in the last year for which you did not know, in advance, the price?” I wait, and no one ever comes up with an answer. You may, I do not know. But the point is that whatever the purchase we expect to know the price – in advance That is one of the results of the Internet. You search and see a price. The Internet provides price transparency. Furthermore, you can easily compare one service or product with another.
We should refrain from telling a prospect or client that the cost depends on the time to do the job. Big mistake. That might have worked years ago, but not today. Consider, do you care how long it took to manufacture your car? Build you house? Make your shirt or blouse? No, all you care about is ‘What is the price?’ So, it is with clients – why should they care how long it takes to perform the work? One person will take longer than another. That’s the way it has always been.
A further risk: When telling a client that you will invoice them based on your time you are asking them to take the risk. Therefore, they will, most likely, do all they can to minimise that risk. When you give a client a fixed cost the risk is revered and now you have to manage the time input to the work.
Key Point 1: Clients do not buy time, neither are you selling time.
Key Point 2: People do not buy your services; they buy what your services will do for them. Essentially, people will buy only two things: good feelings and/or solutions to problems.
PRICING OPTIONS AND A RECOMMEND
How do you currently price? Experience, gut instinct, your view of what you can charge, a price somewhat related to the previous accountant, using the output from pricing software or Apps? Or maybe a combination of these?
As mentioned, the Internet provides for pricing transparency. Occasionally, you come across a website that does not disclose a price but asks you to call or complete an online enquiry form. Unless their offering is compelling many people move onto another provider.
Accountants are already quoting online prices: There are already accountants whose website quotes prices for certain engagements. There are also those firms that provide continuous services for a regular monthly payment. However, there are those firms that precede their price by inserting these words – ‘Prices from.’ Don’t you loathe that? Someone quotes a ‘price from’, and can you ever find that offer? You’ve guessed not my favourite approach.
A future forecast: I am convinced that there will be an increasing number of firms who will display a range of fixed costs for their services. Why fixed? Because that is what consumers (aka clients) see elsewhere. It becomes what they regard as normal. It is becomes what they are and will come to expect.
Finally, my recommend that will go some way to solving the above problems of pricing transparency and pricing consistency.
THE PRICING HANDBOOK.
Let’s describe this so it is evident what I am recommending:
Open a spread sheet and populate as follows:
Column A – Work type – Identify the main work types that cover a minimum of 85% of your firm’s service revenues: EG: Audits, not for profits, Tax returns, Financial Statements etc.
Columns B and following columns– Size of entity, where appropriate. This could be turnover. In the case of Tax Returns this could be – straightforward, detailed, very detailed etc
You should not have a pricing grid in all the cells. Using your experience start to populate this with your prices.
This is what you now have: A Pricing Handbook that partners need to understand is the minimum price at which work can be undertaken. If they wish partners could use the word minimum in any pricing conversation with prospects. You may also wish to consider how you will approach bundling – for example rolling in advisory meetings, personal tax returns etc. This isn’t a rate card for public consumption. But…
Pricing on your website: Come the day when you decide to indicate your pricing on your website you will, hopefully, have had time to ensure that the prices are all tried and tested.
Well, this is a long article but I trust insightful and problem solving. If you would like a sample Pricing Handbook worksheet, do email me: firstname.lastname@example.org.