Pricing isn’t just about covering your costs and making a profit – it’s about valuing your expertise and sending a clear message to your clients about what they can expect from you. So, let’s dissect the advantages and shortfalls of some of the most popular pricing models, so you can decide which model fits your firm best.
Turning guesswork into strategy
Hourly Rate – Charging by the hour is by far the most popular billing strategy amongst accountants. It can provide flexibility to cover any unpredictability and allows clients to see exactly how much time is being spent on tasks.
Hourly billing however, can tend to focus more on the efforts, inputs, and activities rather than the results and value delivered. It can also be difficult to track exactly how long you’re spending on a client, which means income can fluctuate.
Fixed Fee – Charging a fixed fee is a common pricing model that lets businesses control costs. This method involves taking what it costs to provide a service and adding a suitable percentage to determine your price. Many clients prefer a fixed fee. It also means you’ll try to be as efficient as possible.
The major downside to fixed-fee pricing is that while income remains fixed, costs may not be. A fixed-price contract may increase the risk of operating at a loss.
Cost Plus Pricing – This pricing strategy involves charging clients for every cost associated with a job and adding a specified percentage to achieve your profit. Cost-plus pricing is simplistic and predictable, and it allows you to have total control over what you charge for your services.
The biggest downfall of a cost-plus pricing model is that it disregards clients’ budgets and ignores market demand and competition.
Regular Retainer – Charging a monthly or annual retainer allows for more financial predictability than other pricing models, as well as improved cash flow, and long-term client relationships.
Charging regular retainers allows you to bundle up your services into different packages to help clients pick one that best suits their needs. However, there can be limitations on earning potential due to time commitments to existing clients and you risk not being fully compensated if the work goes beyond the agreed scope.
Value-Plus Pricing – Value-plus pricing is a customer-focused model, based on the perceived value of products rather than cost. It is often influenced by what competitors are charging. This pricing model emphasises what each customer is willing to pay, focusing on the worth of the service to the customer, rather than the cost of providing it.
With value-plus pricing, it can be challenging to accurately determine the value of a service, as each client’s needs and perception of value can vary. The perceived value of services can also change over time due to many different factors – so prepare for regular price reviews.
Choosing your pricing model
Each pricing model carries its unique benefits and challenges. Your choice should reflect your firm’s ethos, operational structure, and the value you wish to convey to your clients.