Every company is a sum of the value it delivers to its clients. What differs from one company to the next is how that value is delivered and perceived. All too often, it is based solely on the fee you charge.
As you may know, there are three basic methods of charging fee for services:
• Cost-based: Your fee is a multiple of pay rate or cost rate
• Market-based: Your fee is based on what competitors charge
• Value-based: Your fee is based on the value you provide
Cost-based fee is easy to calculate. Figure out overhead and desired profits, divide by 2,000 hours (or some other hour goal) and add that to the pay rate. You have an hourly fee. Cost-based fee applies whether you are charging an hourly, monthly or fixed fee. They all start with the hourly rate.
However, when you invest in technology, productivity gains decrease your costs. In some situations, companies employing a cost-based fee structure may lower their hourly rates, but that is extremely rare. And if you don’t lower your rates, you are no longer following a cost-based fee structure.
Market-based fees is essentially ‘follow the other guy' policy. If others charge $125 an hour, you charge $125 an hour. This mimicked fee is the most common approach among professional services companies. It is also the greatest threat to profitability. Why? Because real world actions show that companies tend to compete on fee alone. You cut the fee by a few dollars to get the business. Your competitor, wanting to stay in business, counters it with a lower fee. This downward spiral leads to commoditization. In short, you train your customers to value your services based on price and not value delivered.
Again, when you invest in technology and productivity gains accrue, you may be able to sustain good profit margins but only in the short-term. Unfortunately, efficiency and productivity gains too often lead to conventional marketing decision to lower fees, creating a Death Spiral – competitors lower their fees, you lower your fees, they lower their fees and so on. In this process, a fundamental marketing concept is ignored: differentiation.
The truth is that most professional services companies already set fees based on value. Not sharing technology-based productivity gains with clients is a basic form of setting fees based on value. However, beyond this, most firms stop dead in their tracks. They continue to follow routine steps for bidding on projects. Going beyond this requires an understanding that value is not solely based on internal efficiency. The greatest value is perceived by your client. It is how you differentiate yourself from your competitor.
An accountant may use technology that automates turning financial numbers into a pre-written financial analysis. Hours of work are saved. If this accountant thinks “I can deliver more for the same fee”, he continues to feed the downward spiral into commoditization rather than break out of the spiral. Few clients will recognize high value from the extra but free information. However, if the accountant charged separately for this extra service and laid out the real benefits to the business owner, the perceived value rises significantly.
Setting fees based on the value of services is only part of the story. You may think a particular service is worth $500 per hour, but if your clients or prospects do not, then it is not.
In the second part, I will talk about the differentiation brought about by value billing to your firm. (This is the first part of a three-part series on value billing. Stay tuned! )
About the Author: Bob Wolff is an accountant-turned-Channel Manager at BQE who helps to offer consulting and software solutions. He likes to share his business expertise here on the blog whenever he can.