Getting your pricing model correct is instrumental in delivering growth, writes Will Farnell.
Getting pricing so very wrong proved to be the biggest single risk to my firm Farnell Clarke a few years back. How we fixed it and the steps we took also re-enabled our ability to continue to grow the firm in a profitable and sustainable way. I have been quoted on number of occasions saying, ‘it is easy to grow a firm it; is much harder to scale a firm’. Get pricing wrong (as most firms do), it is simply not possible to scale.
In the first article in this new series of eight I am writing, we talked about the need to change and the various catalysts to drive change. I highlighted why is it important for us to recognise the shift in client expectations particularly if we want to operate outside of the battle for cost leadership.
I finished the last article with a couple of tasks: one was to think about where you want to be in 12 months', three years' and five years’ time. The second was to segment your client base. If you have not got around to it, now is the time. Review your client list and identify:
Who they are
What they do (what sector/industry?)
What services do you provide to them?
How much do they pay for what you deliver?
What software are they using?
Rate them A to D, A being ideal and D being the ones you would rather not have.
Why bother doing this? First, because most firms don’t have this data readily available. I often ask firms how many clients do you have, response… ‘about’ XX hundred. Further inquisition reveals we often don’t know the answer. If we don’t know the answer to this we don’t have a handle on metrics like our average fee per client. These basic numbers help when we come to plan our growth strategy. It is often easier to grow ARPC (average revenue per client) than it is to grow client numbers. An understanding of the metrics will help you build strategies around this.
One final challenge for you before we move on: take a look at your data and compare a handful of similar clients. How do the fees compare, are they consistent? If not my argument would be that they should be. If you are delivering similar services is there a strong reason why clients should not be seeing relative parity in what they pay?
The reason why fees vary so much is historically we do not have a scientific or calculated approach to pricing, it tends to be a bit ‘finger in the air’. The elephant in the room is often the fact that much of the variation will not be down to poor initial pricing but more around our inability to effectively control scope.
Accountants by our very nature are generally really nice people, often too nice! We care about our clients and will go out of our way to help them; many times we do this without charging for the value we are adding. Clients will ask us if we can do something and the response is usually of course we can. We do it as it is quick and easy and it makes a positive difference to the client. We are adding tremendous value and then devaluing that value as we don’t charge for it.
It would be very easy to fall into the debate around time-based billing versus value billing or the many approaches in between. There are far better people than me to discuss the merits of all of this. All I will do here is stress the importance of a mindset shift away from time-based billing towards what I refer to as output-based billing. I will revisit this shortly. For now back to scope creep.
I have fallen foul of this so many times. When we decided we had to take action on our serious undercharging in 2016, we realised how bad it had got. We were doing regular bookkeeping work that we were not charging for, running payrolls at significant losses and so much more. We also identified areas where we could very easily increase revenue and therefore profitability by charging for things we foolishly rolled into our ‘fixed fee’.
A prime example was the annual confirmation statement. We only recharged the filing fee. The best bit about this was that often clients paid the £13 fee on credit card so we then picked up the card fee! We were losing money on every confirmation statement we filed!
Our poor management of scope is often as a result of our fairly primitive on-boarding processes. The quote is usually in the form of an email (at best) that sets out what we are going to deliver for the client. We file it and that’s kind of the end of it. We don’t always share the details with the team doing the work so they are often blind to scope and fee structure.
As with most things, I talk about combining technology and the right process will solve many of the problems we encounter. This is no different. Tools like Practice Ignition and GoProposal will transform our ability to effectively manage scope. Both in terms of understanding within our own teams but more importantly the expectations our clients have of what we are doing for them within any agreed fixed fee and those things that are likely to be out of scope and subject to extra fees.
We will revisit the process and importance of onboarding when we discuss client experience in the next article.
Input versus output billing
I set up Farnell Clarke in 2007 and one of the defining principles for me then was that we were not going to bill based on time. I set up my firm from a client centric viewpoint, putting myself in the shoes of a client. I believe everything we decide to do in our firms should start this way.
How will the client feel about decision X or decision Y, what impact it will have on them? If I were a client of an accounting firm one of the first things I would want to know is what would I be paying and what do I get for that amount? Transparency is critical. We also took the decision to bill our services as a subscription service.
Professional services as a subscription-based, pay as you go service in 2007 was pretty unheard of. My rationale at the time was simple. Everything we did was monthly subscription, our utilities, our mobile phone, our TV services. Why could professional services not be the same?
This is even more relevant today than it was in 2007. The new generation of business owners live their lives by subscription, it’s not an alien concept. For me it also drives us to deliver first class services when we give clients an easy in and easy out.
This is all about the approach of ‘how we bill’ for the services which is different from ‘how we price’. I mentioned earlier that I firmly believe time-based billing has no place in the modern firm. It removes transparency and certainty for the client and that does not support great client experiences. This is not a ‘should we record time’ question - this is a ‘we should not bill based on time’ statement!
Stop and think for a moment. If a firm bills on time, where is the incentive to work smarter when the firm’s income is directly driven by how long they take to do a job? Put yourself in the client’s shoes on the receiving end of this. We know clients think preparing a set of accounts is a five minute job. When they get a bill for five hours, even if they don’t say it, they will be questioning it internally. This is not the footing for a long-term deep client relationship. If we don’t get the first step right, we will never move the relationship to a point where the client will turn to us for every question they have in their business. This is the objective for my firm and the relationship with our clients. This is what advisory is to me.
It is critical in my view that we have to focus on the outputs. This is simpler than getting into a position of trying to price value directly. Outputs are clear and easier to define. Our clients only care about the output, yet most accounting firms are built around measuring the inputs. There is a clear mismatch here. When we focus on pricing outputs it makes it significantly easier for us to price consistently across our firms and utilising technology enables team members beyond the principals to be involved in the pricing process.
Once we get to a point where we have consistent fees pitched at the right level it is imperative that we regularly review fees. This was a big problem for us. We managed to run eight years without putting up fees. This means we not only failed to make inflationary increases, but we also failed to take account of clients growing and the increasing complexity of the work we were delivering.
Our failure to do this left us in a position that our growth was significantly stifled. Our client experience was suffering as workloads were increasing and we did not have the fee levels to enable us to recruit the extra resources we needed. In 2016 we made the decision that fixing pricing was our single biggest priority.
The approach we took involved the initial client segmentation exercise you should have already carried out. Identifying who your clients are, what you deliver and what they pay. At the time we had a menu pricing approach so we added the target fee to the client spreadsheet based on the closest match from our menu pricing. This identified the ‘fee gap’. That’s the easy bit!
The next stage is to make a plan. At the time we carried out this exercise we were reviewing around 600 business clients. The magnitude of the project meant it was unrealistic to have one-on-one discussions with everyone so much of the process was managed by email. Still a big undertaking of course!
We reviewed each client and some were fairly close to the target fee so it was an easy process to position the new fee. We explained the fact that it had been some eight years since we reviewed fees and we wanted to ensure fees were at the right level to deliver the kind of services we wanted to.
Others of course were more difficult. As an example we had clients paying £150 a month that should have been paying £300 a month. Clearly doubling a fee overnight was not feasible. The approach we adopted was to explain the fees to the client and move to a position where we billed the correct fee and applied a 12 month loyalty discount. In this example it may have been we billed the £300 and gave a £75 a month discount.
Naturally some of the clients had seen significant increases in workloads and this data was used as part of the individual emails to those clients. The example I use, as it highlights how bad our situation was, involves a client we took on in 2008 as a new Ltd Co. We priced the job at £125 a month. Eight years later they were turning over £1.6m, had 34 staff on the payroll and we were still charging the same fee! This client was very happy with the new fee.
As more firms move away from time-based billing and towards a fixed fee subscription model it is very easy to ‘miss’ the regular review of fees when clients are paying by DD on a regular basis. We have to build a process to ensure that we review the fee position at least annually. The one advantage of a time-based billing approach was that in most cases all work was billed!
We now review each client’s fee in the month before their year-end to enable us to apply any inflationary increases as well as reviewing the specific outputs and adjust fees up or in some cases down where outputs have decreased.
Overcoming the fear!
As we wrap up this article it is important I highlight the concerns many firms’ owners have with regards to fee increases. I certainly had them. They include:
what if our clients leave?
our service isn’t as good as I would like so now isn’t the time to increase fees
we will be too expensive and won’t win new clients
It is exactly what I said when mentors told me I should increase fees. They told me my clients wouldn’t leave, they told me the services would never improve if we didn’t increase fees. I still ignored them as I knew best!
So why did we do it in the end? Simply because we had no choice. Our backs were against the wall.
Guess what, we didn’t lose clients. Well, we did lose 12 over two years directly related to price, but it was the 12 that were the ones we would have chosen to lose anyway!
We added around 13% to our bottom line. We had cash to invest in resources which meant we could start to deliver the services we wanted to deliver. Our clients started to refer us again like they did in the good old days and we returned to 25-30% revenue growth in a more profitable and hugely more sustainable way.
You have your client segmentation. If you want to prepare your firm for profitable and sustainable growth here are some steps to take:
standardise your approach to pricing
review tools like Practice Ignition and GoProposal to provide consistency to pricing and improve onboarding
add the ideal fee to your client segmentation spreadsheet
identify the ‘fee gap’
make a plan for bridging the fee gap
talk to your clients and make it happen
ignore your own internal self-talk. We worked out we could have lost one third of our client base if the other two thirds paid the right fee!
take a moment to think what you will do with the extra 5, 10, 15 or even 20% on your bottom line.
In the next article we will focus on client experience. What it is, how it is different from client service. We will discuss why it is so important and the things we can do to measure and improve the experience we deliver to our clients.
Ahead of the article, have a think about what client experience means to you. When did you last encounter great customer experience and what made it so great? How can this translate to the way you engage with your own clients?
I hope you will stay tuned as we work through the remaining articles to help you bring sustainable growth to your firm.
Will Farnell FCCA – Founder and Director, Farnell Clarke