This article was originally published in the August 2013 issue of Accounting Today (http://www.accountingtoday.com/ato_issues/27_8/The-advantages-of-a-pricing-matrix-67576-1.html).
Pricing of accounting services is an important component of the growth and success of any firm. The pricing strategies and clients that brought your firm to where it is today may not be appropriate to grow to the next level, especially in today's collaborative marketplace where technology is changing the entire game -- faster, better, cheaper and easier.
Is your firm taking advantage of these new tools and providing the services that clients are willing to pay for, or are you stuck in the traditional rut of only offering commoditized services such as tax and accounting?
Let's start with a few questions to get you thinking:
- Have you changed your pricing model other than increasing hourly rates in the last three years?
- Do you have a menu of services broken into three levels:
Does your firm have service teams capable of delivering services at all three levels? Or relationships with third-party resources that can?Have you thought about firm growth and how to increase margins?
- Level 1 -- Transactional.
- Level 2 -- CFO.
- Level 3 -- Planning.
These are very important questions that should be addressed by any firm, regardless of size, that wishes to grow and become more profitable. Joseph Schumpeter, an economist and political scientist who taught at Harvard until his death in 1950, defined the term "creative destruction," which is caused by new technology and more efficient processes.
Industry transformers design ways with intellectual capital (technology and unique processes) to bypass the depleted industry, differentiate themselves and create an emerging industry. From the emerging industry comes a growth industry and from a growth industry comes a status industry. The life cycle used to last decades, but with technology and globalization the industry life cycle is substantially shortened.
Jim Collins, in Great by Choice, speaks to the fact that leaders who develop a 10 X approach, along with discipline, creativity and controlled paranoia, are those who create an exciting culture of growth and remain relevant over a long period of time. A 10 X culture is scary to some, but exciting to the best talent who are looking for opportunities, and not just multiple years of experience.
Fortunately, accounting firms are currently profitable and therefore many do not want to change; but the scarcity of talent, new technology and the trend toward meshing (sourcing of financial and technology services) is requiring change.
These trends will either commoditize your existing client base or provide you with opportunities for growth. Cultural attitude will determine success or failure. Most of the growth will come in advisory services and is already occurring in the largest firms. Advisory services require a different cultural attitude than attestation (advocacy versus independence).
Given the fact that the trend toward advisory services is already occurring, how does a firm take advantage of these opportunities? The biggest challenges that we see in most firms are:
- Packaging and developing a menu of services (Level 1-2-3).
- Identifying champions within the firm and resources to deliver the services.
TAKE THE RED PILL
The purpose of this article is to demonstrate how a pricing matrix will help your identify targets (ideal clients), provide pricing guidance, and increase upfront communication between the client/prospect and the firm. For years, I have watched accountants talk about value billing, but remain in the effort-based economy trap.
A pricing matrix will at least move the firm out of the trap and focus on expanding multiple services to existing clients and prospects. Most clients are unaware of or have forgotten the breadth of your firm's services. New technology allows for a collaborative relationship that increases the value from the client's perspective -- the true determiner of value.
Here are the basic questions you must answer in order to develop your initial pricing matrix, knowing full well that it will change as the market changes and your firm grows. Pricing is a complex issue and firms spend way too little time on pricing strategy compared to successful companies.
- What is the profile (criteria) of the ideal client and the minimal monthly fee? Yes, I said monthly; now is the time to correct cash flow, work in process and accounts receivable problems.
- What are two criteria that determine the value or complexity of your target clients (e.g., annual revenues and number of employees -- other options are locations, business units, etc.)? This may vary by industry and type of client, but it forces the firm to establish parameters and is the starting point in defining scope.
- What is the incremental value based upon these criteria?
- What is an acceptable range of fees based upon multiple levels of service? (See "Enter the matrix.") You must determine these amounts for your firm based upon your clients and prospects.
The accompanying example of a pricing matrix is based upon the firm Jones & Co. determining that their minimum target client would start at $1,500 per month and increase based upon company revenue and number of employees. The other primary determining factor would be the scope of services the client selects from a menu of Level 1-2-3 services (for an example of a service menu, see "Today's specials").
These examples are limited in the number of services, but illustrate how firms can use a menu and pricing matrix to grow the firm and improve profitability. Most firms, I know, would accept clients at the Bronze through Platinum levels if the scope is properly defined and the client pays timely on a monthly basis.
This is about progress and not perfection. I can assure you it will create positive conversations within the firm and with clients if you develop this approach.
In summary, the advantages of a pricing matrix and menu of services are that they:
- Focus on value, rather than effort (hours times dollars);
- Identify target or ideal clients;
- Require a conversation upfront regarding scope, pricing and terms;
- Provide a guideline for partners and managers who struggle with selling value; and,
- Allow the firm to filter based upon criteria such as utilizes multiple services, rewards (timely payment of fees), appreciates, enhances capabilities and refers others.