Accountants should not be responsible for setting pricing.
Why not, you ask?
Because most accountants will focus on all your costs (inputs) and add an acceptable mark-up to get to the price.
Here is the problem – customers do not care what your costs are. Why should they? You could be running a very inefficient business with wages that are too high, rent that is too high, and so on.
Costs Do Not Equal Value
Let us look at a car example. It likely costs more to build a Mercedes than a Ford Fusion. Yet, not that much more. In other words, the mark-up on the Mercedes is greater than on the Ford Fusion for the intangible value that the customer places on that 3-star symbol on the hood.
In today’s outsourced manufacturing environment how does a business add value in unique ways to get a higher price?
It seems like everything is a commodity these days. How do you do value pricing when you are selling a commodity?
See It Through the Eyes of Your Customer
This is where, again, you must look at your product/service through the eyes of your customer.
Ask these questions:
- What elements of your product/service does your customer value?
- For example, can you deliver the commodity you sell more quickly than your competitors?
- What about after-market service? When the commodity product breaks down, what does your customer do? What expectations do they have? You could offer awesome after-market service for a price. You could build it into the initial pricing.
- What is a frustration that ALL customers have in your industry? It could be delivery times. No after-market service. Slow service. Indifferent, non-caring attitudes from order takers. Solve this big problem everyone has, and you are now differentiated. You will stand out from the crowd.
- What can be bundled with your “commodity” to add value and create something unique?
An Example of Fixing an Industry Wide Problem
In the accounting industry almost, everyone charges by the hour.
So, the client never knows what the ultimate bill will be until the work is done. All the risk is borne by the customer.
Most clients hate hourly billing. They hate it because they never know what they will pay.
This is where Fixed Pricing comes in. You work out what the value is to the client for the work to be performed and then set that price. You get the client to sign that agreement. The client will then hold you accountable for the results that you are committed to deliver.
All the risk is borne by the seller now. If you are inefficient, you will make less profit. Conversely, the rewards are all with you as the seller now too. If you take less time to fulfill on the promised results, then you will have more profit. (The client does not care; they agree to a Fixed Price and the inputs are not relevant).
Fixed Price Agreements transform something that most clients find annoying, irritating, or downright unfair into a competitive advantage.
How To Turn a Commodity into a Rarity
Again, let us again use the accounting industry as an example…
A tax return could be seen as a commodity now. It is just entering your slips into a tax software program, and the result is spit out and you either pay tax or get a refund. End of story.
The cheaper the tax return the more you save.
Why would you pay more? Where is the value add?
Okay, this is where bundling can come in handy.
You look at all the services you offer as an accounting firm – wealth planning, and retirement planning as two examples.
You create a bundle of services that includes:
- Retirement planning
- Guaranteed tax return. If the IRS or CRA sends any correspondence to you regarding your tax return that year you will handle it free of charge. In other words, audit insurance.
- You provide free phone calls on any tax matter coming up during the year.
As an example, let us imagine that the tax return is only worth $75. However, the entire bundle mentioned above is worth $1,000. Not all the clients of the firm will pay that. Many will, and the profitability could be much, much higher.
The above example could apply to most professional service firms, and even blue-collar industries like electricity and plumbing.
For example, a plumber could charge a fixed maintenance fee to cover a set of deliverables including annual maintenance that many people would happily pay extra for.
Think about, in your industry, a problem that everyone has with your industry. (You may need to ask your customers). Solve that problem and change your prices accordingly.
Lastly, think of how you can use the concept of bundling to add value and increase your pricing for a bundle. Insurance or guarantees are a great way to add value.
Thanks for reading…