If Time-Based Billing is Dead, How do We Come Up With a Price?
Here’s a question I get all the time: When you move businesses’ accounting systems onto QuickBooks® Online, how do you come up with a price? Great question.
Of course, one option is to price based on how many hours it takes to do the work, but that's crazy. Customers hate that way of pricing. What they want is certainty about what the final price will be. And, that’s why we have to move away from time-based billing – which, by the way, also means lower prices.
Instead, let's look at better ways to price. One way, which is becoming increasingly common in the UK, is fixed pricing. Under this system, you come up with a single fixed price – £500 (or $647.60), for example. But, as I explained in an earlier blog post, “The Big Pricing Opportunity,” having a single fixed price is also crazy because one of the things about value pricing – and remember, fixed pricing and value pricing are not the same thing – is that everybody values things differently.
If you have a single fixed price, it will always be the wrong price. We have to come up with a better system.
To truly embrace value pricing, we need to have a conversation based around value with each and every client, and then come up with a price that’s unique to him or her. The problem is that this is difficult without a system in place.
Value Pricing is so Flippin’ Hard
So many accounting professionals struggle with value pricing (which is why so many simply resort to fixed pricing instead). The reason value pricing is so difficult is because value is subjective. It's hard to quantify and put a number on it.
It’s also hard because everybody values things differently. That means we have to present each person with a different price. Without a system, it's almost impossible to know the right questions to ask, and to react in real time and come up with exactly the right price for each particular client.
Two Practical Approaches to Coming Up With a Value-Based price
That’s why I’d like to give you two practical systems.
The first is what I call “Starbucks pricing.” If you go into Starbucks to buy a latte, for example, you know you’ll be given three choices at three different prices. It’s a form of value pricing because each individual chooses a price and a package based on their perception of its value.
However, the problem with Starbucks pricing is that it's simplistic – it only offers three prices. That works well when selling coffee, but not so well with professional services.
Iterative Digital Pricing
Instead, you can choose to go to another level, one that has the advantage of being simple to do, while also being very, very effective. It’s what I call “Iterative Digital Pricing.” This is a software-based approach, using a tool such as Cloud Pricing (or, you can simply create an Excel-based spreadsheet).
It works like this.
You ask your client a series of questions and then – based on their answers to those questions – it calculates a unique price. The purpose of the questions is to identify which features the clients really value and exactly what they want. It allows them to tailor the package to their specific requirements, adding in the features they need, and your software or spread sheet then produces the price.
One of many benefits of this approach is that it offers complete transparency. The client can see how the price is building up, and the fact that they’re involved in the process leads to greater credibility and trust. If the final price turns out to be too high, it's not a problem. You simply revisit the questions with the client to identify things they said they wanted, which on reflection aren’t so important. And, you recalculate the price. You can keep doing this iteratively until the client says, “Yes.”
Firms using this approach will vouch for the fact that it consistently gets them much, much higher prices.