You may have heard of all sort of pricing methods: contingent pricing, dynamic pricing, percentage pricing, hourly billing, fixed pricing, menu pricing…
It can all feel a bit overwhelming.
These are all pricing models – there are probably 40 or more of these that every business could adapt to use.
But really, every pricing model boils down to just 2 ways of pricing: cost plus pricing and value pricing.
Cost-plus Pricing
With cost plus pricing, you add up your costs, add on a hoped-for profit margin and that becomes the price.
Hourly billing is a form of cost-plus pricing - it’s an hourly rate multiplied by the number of hours worked. That hourly rate is determined by the chargeable salary costs, builds in the overheads, and builds in a hoped-for profit. That’s cost-plus pricing.
Over 100 years ago it was demonstrated by the Austrian School of Economists that this is a crazy way to price!
I’ve certainly found the same thing having worked in the accounting profession for the last few decades. I’ve seen firms having all sorts of problems caused by their cost-plus pricing structure which doesn’t give them high enough prices.
We need to move away from cost-plus pricing, if for no other reason than your customers hate it.
Your customers want to know what the price is right up front – hourly billing doesn’t give them that.
Admittedly, there has been a big shift in the profession recently towards fixed pricing, in an attempt to get around the issues that hourly billing presents.
However, fixed pricing is not value pricing.
Whilst fixed pricing is a different pricing model, it is still a form of cost-plus pricing. The way most people come up with that fixed price is by basing it on how many hours they think the job will take from previous experience.
We are still in the mindset of hours and costs – and therein lies the problem…
In economic theory, where the supply and demand meet that is the equilibrium or market price.
The problem with cost-plus pricing is the focus is completely on the supply side of that equation, and the demand side is completely ignored.
It ignores what customers want!
The only other way to price is value pricing…
Value Pricing
Value Pricing starts with the customer first. It focuses on what the customer values.
We then set our price based on what the customer values. It has nothing to do with costs whatsoever.
The great thing about value pricing is it’s a win-win.
By using value pricing, your goals are aligned with the customer’s. The client wants as much value as possible, and when you deliver more value you can charge a higher price.
Of course, there are some challenges with value pricing…
The reason why so many people struggle with value pricing, is because value is subjective. You can’t touch value, you can’t feel it or measure it. As my friend Ron Baker says…
“Value is in the hearts and minds of customers.”
It is a mistake to have a single fixed price for any one service. If you charged $1000 for tax returns, it’s guaranteed to be the wrong price because people value things differently and there will be people willing to pay a much higher price for that service.
One of the things Ron Baker taught me back in 1999 when I first discovered value pricing is…
“You must price the customer, not the service.”
Everyone values things differently. It’s what makes value pricing so insanely difficult to master.
When you do master it – it will completely transform your business. But first, you will need to understand the fundamental foundations of value pricing and how to implement it throughout your business to get higher prices.
I’m running a webinar titled The Foundations of Value Pricing: How to get better prices for Insightful Accountant on Thursday, April 1, 2021 – 12 Noon Eastern (11:00 AM Central) that will teach you how to do exactly that…
Click here to find out more information about that training: REGISTER HERE
The Foundations of Value Pricing: How to get better prices
Thursday, April 1, 2021 – 12 Noon Eastern (11:00 AM Central)
Webinar length: 90-minutes (1.5 hours)
CPE Credits: 1.5 CPE
Cost: $99.00
Refund Policy: Non-refundable
Connect with me on LinkedIn as well and I’ll send you some free resources! You’ll find me here: https://www.linkedin.com/in/markwickersham1/