Are you getting a Fair Profit or you actually making a Loss?
The thing is we simply don’t know how to get the prices right. No matter whether Big 4’s or other firms, for past few years the whole profession is facing pressure on fees. It is hard to see the professionals struggling with the price and not getting the fees they deserve.
One of the biggest problems we face as a professional is that we all are stucked to same conservative pricing methodology i.e. traditional time based pricing. It is because we are clinging to the myth that the clients are price-sensitive. Infact, clients are value-sensitive.
On exploring all the pricing methodology, I have concluded three basic ways to price our services namely: Time Based, Fixed Rate and Value based pricing.
Talking about time based pricing; it focuses on hours spent by a professional in completion of work. This hourly billing gives no incentive to get the clients work done faster, ultimately resulting in revenue loss. Infact, time has no relation to value. Say, preparing a tax return for a client with an annual income of Rs.3 Lacs might take as long as preparing a return of a client with annual earning of Rs.30 Lacs. But, the value in terms of tax savings provided to client with high earnings is greater, thus a professional should goal to charge the latter more. But, this is not the case with time based pricing. Although, the method seems simple to clients to understand but has actually no worth. Thus I believe it to be an outdated pricing model.
The drawbacks of time based pricing has lead to a big shift from hourly billings to giving fixed prices upfront. But the problem here is that fixed fees is too linked with amount of hours going to be spend on work. Say, for fixed fees if firms use billable hours as the basis for their calculation, they in reality are adopting time based approach.
The very first step to solve this problem is to link prices with value and not with time. Of course, linking price to value is not an easy task but as soon as clients seek the benefits in it, the price becomes less of an issue for clients. ‘Not all clients are created equal’ should be the basis of value pricing. We should better grade or clients accordingly. Value based pricing means that ‘one price won’t fit all’. Value based pricing takes into account ‘What Feels Right’ depending upon the intensity of the circumstances of their individual client. This method also ignores ‘market rate’ i.e. what our competitors charge. The best part about this pricing methodology is that a professional need not try to explain away for the rates he is charging. If you are charging fee with confidence explaining what your clients are getting, it says to the client you know what you are doing and that your fee is the best that you can offer. Just start by believing in the value of your services.
The only thing I actually want all the professionals to understand is that our goal should be to provide value to the clients and not the time and for this our fees should reflect that value to the clients.