What is value pricing, and when should we use it in payroll?
We all like making money, right? Especially when it happens doing a job we enjoy. However, it can be deeply frustrating to be doing a job that we love while struggling to make money out of it. And yet, countless accounting practices, bureaux and bookkeepers are not making as much money as they could - by charging at a fixed cost rather than exploring value pricing.
Few of us go into business thinking that we are creating a career in sales; but, regardless of business type, unless we can market and sell our products or services, we will ultimately fail. And for small businesses it is unlikely that we can justify a dedicated sales team.
When starting out, most of us dislike the sales aspect of our roles enough that either we will take any business that comes our way, or quickly settle on a pricing model and perennially stick to it.
And that means that we are not maximising the potential of our business - not maximising our growth opportunities, not able to generate sufficient revenues to recruit the best staff and not generating enough time to service our clients to the best of our abilities.
So how can we overcome this? We all know the answer, because we hear the message repeatedly at various conferences, yet it’s amazing how few businesses actually do it. The answer is value pricing.
So, what is value pricing?
In essence, value pricing is charging a price to clients based on the perceived value to them rather than on the cost of producing the product. Some simple examples:
- A restaurant charges the same prices for a vegetarian main course as a meat one despite the large variance in the price of the ingredients;
- Art sold in a gallery tends to have a fixed price, but if you have a highly sought after piece, then its price at auction is all about the value that the highest bidder places on owning it;
- The value placed on accountancy services by a client might be based on either “as cheap as possible” or “I want a better service where an accountant will actively advise me on how to save money within my business”, while
- Exclusive brands deliberately price their goods artificially high because otherwise they wouldn’t be exclusive.
As a specific example, let’s take a brief detour and look at the mayfly-like craze that was fidget spinners. Before fidget spinners were a “thing”, the manufacturers would sell the ball bearings and other components at about 25 cents a pop.
Within a 5 month period in 2017, fidget spinners exploded from complete obscurity to 17% of the total US toy sales market.
So, what did manufacturers of the component parts do? Did they say, “we sell at a fair price, so we will just sell far more and keep our existing margins”?
No, they acted rationally and increased the pricing of those parts by between 50 and 200% as the demand boomed around the world.
Their buyers cried “foul”, but in practice the manufacturers appreciated that fidget spinners were a fad and that the value of having those constituent parts to the toy industry had rocketed. The buyers may not have liked the fact that they were paying more, but they weren’t going to take a moral stand and not buy those parts - that would’ve been irrational.
Of course, once demand died off, prices went back to normal.
Obviously, the fidget spinner boom is far more of a rollercoaster ride than the payroll market, but it illustrates the point.
Who does use value pricing in payroll, and when?
Excitingly, it is almost exclusively used by accountants (usually partners) and even more interestingly, they don’t normally realise they are doing it.
When quoting for audit, tax or consultancy services it is not uncommon for the partner to “clinch the deal” by throwing in payroll services either for free or at a substantial discount.
Why do they do this? Because the partner values one area of work over another and don’t have sufficient confidence in the services provided by their payroll team. They therefore break the link between cost and pricing.
Of course, it may be that the client doesn’t value payroll as a function either, but it is equally likely that the partner doesn’t understand the payroll service that the practice offers, hence the lack of confidence/value that they place on it.
The other common time when a form of “value pricing” is used is when a practice or bureau asks the client what they are currently paying and then uses this in isolation to undercut the incumbent’s pricing.
And yet, if the prospect was genuinely happy with the existing service they were getting, why would they be looking at alternatives in the first place?
Probably not, in which case we already know the minimum of how much they value their existing services, because they are paying it. So, why try and undercut that? And at what cost to service levels? Surely it makes more sense to try and up-sell from the existing point and add value and quality of service to the prospect?
Now, it may be that their incumbent practice is bigger and more prestigious and inherent cost saving is one of the reasons that the prospect is considering using you. This is fine, but still an opportunity to apply the art of value pricing.
In this scenario, you probably already have other inherent advantages to the existing practice (personal service or a particular expertise), almost certainly you will be using more efficient technology, have lower overheads and/or lower aspirations.
But how do you then price it? Do you use the same pricing structure that you use for your existing clients? You can, but then you are not improving your profitability and you are not maximising the value that your prospect sees in you.
Have you ever had that feeling when clinching a successful sale that the new client was a little too eager to accept your prices?
How do we get it right?
Personally, I like to think that the best outcome is where both sides think they could have done marginally better in the negotiations. This implies that a fair balance has probably been achieved and that neither partner is thinking that they have been “screwed” and augurs well for a long and fruitful partnership.
On this basis, you should be pricing higher than you would for your normal client base, as you know that the prospect already values your services higher than your normal clientele. There is an opportunity to clinch the deal, increase your margins and to provide you with an incentive to ensure that you treat this new client to the best service that you can give.
And in this scenario, all sides win.
This still leaves how to construct and roll out a value pricing structure, and this is covered in part 2 of this article - coming soon.