By now most accounting professionals are aware that the concept of hourly billing, with a reliance on timesheets for capturing billable (and non-billable) time, is regarded as an outdated pricing structure for service delivery businesses.
As accounting professionals, we are told we should replace hourly billing with value-based or value-led pricing.
While I definitely agree that value pricing is the right pricing structure, I believe that activity tracking is critical to successfully implementing the new model.
My Value Pricing Journey
My own value pricing journey began in 2013 when I attended SleeterCon, now known as Accountex USA, in Las Vegas. At that conference I heard Ed Kless, the Senior Fellow at VeraSage Institute, speak. What he said about value pricing really had me thinking. Yes, I got it, value pricing is the way to go forward. The concepts made sense. I left that session determined to do something and ended up doing nothing. I didn’t know where or how to start.
Twelve months later I was back in Vegas at SleeterCon 2014 to see what more I could learn about value pricing. This time I had an agenda: To walk out of there with an action plan on how to introduce value pricing to my bookkeeping practice and to my clients.
The reality, however, was that I still wasn’t comfortable with the “how to” of value pricing. There were aspects of the discussion, specifically around the removal of timesheets, that I didn’t agree with.
What I did understand is that there are three key pricing models:
- Hourly Pricing
- Fixed Fee Pricing
- Value Pricing
Since they are based on actuals, the first two models are easy to implement. Bill for time spent, or calculate a price based on cost and mark-up. Calculating a value price is much more arbitrary and I wanted to be able to approach value pricing in a way that took away the guesswork.
A Twofold Value Pricing Model
To make it easier to calculate, I developed a view of the value pricing model that:
- Produces a risk-free, scope-clear, calculated pricing strategy for the prospect, and
- Incorporates processes for internal business analysis.
1. Developing a calculated pricing strategy
A calculated price has the following characteristics:
- It accounts for cost,
- It has an allowance for gross profit,
- It incorporates risk management, and
- It contains an addition for determined value.
For value pricing to work well it is important that the above points are considered and incorporated into any pricing strategy.
An effective pricing strategy must eliminate the guesswork of calculating a price based on value.
The pricing strategy should enable a value price to be generated that is consistent and comprehensive – each and every time.
2. Incorporate internal tracking and analysis
As I see it, being able to calculate a value price using the strategy above, is only part of the value pricing model story. The second part of the model involves having internal business processes that track and analyse time.
Internal business processes include the following:
- Delivery management
- Client change management
- Risk management
- Individual team capacity monitoring
- Overall team capacity forecasting, and
- Development of performance review systems: practice, price, and team.
The monitoring of each of these internal business processes is achieved by the tracking of budgeted effort against effort used.
Simply put – this is the time allowed to achieve the required tasks, time vs. activity. Effort is tracked back to an item of scope and to the person fulfilling that role.
Being able to define the effort required in internal processes involves further steps a Discovery Phase, Solution Development and then Activity Tracking during Service Delivery. I’ll go into those details in Part 2.
About the Author
Diane Lucas is a multi-award winning bookkeeper who is passionate about helping business owners and industry colleagues simplify their businesses with systems that are effective and innovative. Her business Direct Management advocates the use of cloud-based solutions where ever possible.
As an extension to the services provided by Direct Management, Diane offers advisory and mentoring services to hand-picked businesses who are driven to write the next chapter of their journey. Diane believes that the only constant is change.