Pricing models for professional services


5th October, 2021

Pricing models for professional services firms

Whether you have too much work to handle or not enough, having the right model will help you maintain sustainable business either way.

There has been plenty written about pricing models or pricing strategies, but many accountants say pricing remains one of their biggest issues.

Being too price-sensitive leads to a lack of profitability and being too price-focused causes fear of disengagement, and potentially losing clients. So how do you get it right?

The great pricing challenge for professional services

To price or not to price? That is the question.

Most firms would rather focus on efficiency than price. There’s a logical reason why business owners and managers do this.

Efficiency is up to us and there’s no risk or pain associated with becoming more efficient and effective by systemising the firm. This will only lead to greater benefits such as reduced stress for management and the team overall, as well as improved profits.

What a great distraction from focusing on pricing, right?

The reality is, being efficient and well systemised is highly recommended, but this alone does not guarantee you’ll make money. You still must value yourself and what you do and that’s where pricing becomes important.

Before we get stuck into your approach to changing your pricing model, let’s start by taking it back to basics with a discussion on pricing strategy.

Pricing strategy versus pricing model: What’s the difference?

In short, a pricing model is the format in which you attribute value to your services and charge clients and customers for them. Your pricing strategy includes your pricing model as part of a business strategy that aims to meet your objectives.

Depending on your desired objectives – whether you wish to increase your market share, expand your profit margin, or drive a competitor from the marketplace – you can deploy a relevant pricing strategy, keeping in mind that it may need to be adjusted from time to time.

When choosing the right pricing model for your desired strategy, it is important to have a sound knowledge of your market and customer demographic, strategically factoring in both your short-term and long-term business objectives.

While many pricing strategies appear confusing at first, the secret to pricing strategy success is to keep your mission, vision and values top-of-mind.

That’s because, if you believe in what you do every day (your mission), what you are striving to become (your vision) and that which is non-negotiable in how you get there (your values), strategising about prices becomes a more organic exercise that causes less anxiety.

Attitudes towards pricing strategy: Pricing by design or default

1. Pricing by default

This is pretty much what 80-90 percent of firms do. It’s all based on historical billings: what the gross fees charged to a given client last year were, and has anything significantly different happened this year that would entail raising or lowering prices?

2. Pricing by design

Unlike pricing by default, pricing by design is relatively new. It requires operators is to spend some legitimate time in an ‘R&D phase’ whereby you truly investigate the types of products and services you are delivering, and what you need to do to make sure you’ll make a profit rather than bust your gut just to break even.

How to get started rethinking your pricing model

Before making any changes, it’s a good idea to assess historic pricing activity for your business.

Begin by listing all the current products and services you offer and include the “low, medium and high” price points you have achieved (or want to achieve) over time. After that, include a score for the degree of difficulty to deliver each product is added, plus a relative quality score compared to your competition.

If you like, you can use the Best Practice Group’s Products and Services Planning Template as a guide for this process.

This analysis will go a long way to assist you in working out which products and services you can improve on in terms of both your pricing strategy and your value proposition.

17 pricing models and tactics to assess in R&D

When it comes to pricing by design, the key is understanding what your pricing strategy should be and why.

This is where the R&D phase comes in. It’s a chapter you consciously put yourself and your firm through whereby you create a trial phase and work with a small number of ‘warm and friendly’ clients.

The clients you select should be quality people that are highly engaged.

They not only trust you, but you must also trust them so that you can use their feedback to fine-tune your pricing and value proposition, as you move through this R & D phase.

Beyond value-based pricing, there are a number of other models worth considering, as listed below.

1. Upfront pricing

Upfront pricing is when you scope out all work with the client and summarise this in an upfront proposal.

This may also include asking for full or part payment in advance, such as a 50 percent deposit and the balance when the job is completed.

2. Monthly billing and direct debit

These are methods that break down large annual fees, and the price is set by adding a certain mark-up above the cost of delivering a service, and/or producing and selling a product.

The key here is being clear on what is included and what is not included in the ongoing payment (scope of works).

3. Competition-based pricing

Competition-based pricing is a method of setting your prices based upon your competitors’ prices for comparable products and services. This way, instead of focusing on the perceived value of your products or their production cost, you adopt information directly from the market.

The main advantage of using this pricing method is there’s no need for any calculations, and you can be at peace that you are offering your customers a menu of services that is priced fairly – the same as your competitors, just below or just above, depending on your objectives for market share.

4. Cost-based or cost-plus pricing

Cost-based (or cost-plus) pricing is a method of pricing your products and services whereby you add a mark-up over their associated production costs.

Increasing profits is one of the main goals of every business, and the cost-based is a sure way to recover all costs and make profits.

5. Absorption pricing

This model aims to absorb all the variable costs and a portion of the fixed costs associated with a product. This method is similar to full cost-plus pricing – profit is usually factored into the final price.

6. Break-even pricing or penetration pricing

This is when a business sets its pricing with the intention of purely gaining market share, and as such, earning no initial profits from their products and services.

A simultaneous strategy is to increase the volume of production and reduce costs, and once the objective of driving competitors from the marketplace has been achieved the business can now focus on earning profits by subtly increasing its prices.

7. Dynamic pricing

Dynamic pricing is a method where prices are adjusted according to each customer’s ability and willingness to pay – a pricing system that is partially technology-based.

8. Freemium pricing

Freemium describes when a business offers a certain amount of services or product inclusions for free and then charges a fee for premium features and inclusions.

Typically, a large portion of its customer base will end up using the free business offerings, and a smaller portion will become premium paying customers. This concept proves to be highly successful for online (cloud/internet-based) services while enabling the rapid scale of a business’ customer base.

9. High-low pricing

High-low pricing is a method of pricing most products higher than competitors and some items below market rates. The objective here is to attract customers due to the low-priced items who will then also spend more on the higher-priced products, and as such, strategically increase overall profits.

10. Limit pricing

A competitor minimisation strategy that works by selling products and/or services at prices that are just below the market rate. The goal with this pricing method is not for the business to earn the biggest profit per product or service, but to deter competition.

11. Loss leader pricing

Loss leader pricing is similar to the high-low pricing concept, in that a business strategically sells a small number of products at costs or below cost, as an incentive for customers who will potentially also purchase other more profitable products that are positioned next to the loss leader products.

12. Marginal cost pricing

This is a short-term pricing strategy of products and/or services that are priced exactly the same as their variable production cost or just above. This is usually due to the inability to sell at a higher rate or when a business wishes to use up any of its remaining capacity.

13. Premium pricing

A high-pricing method creating the impression – through extensive marketing – that your products and/or services are of higher value and quality. The Apple Principle, if you like.

14. Price leadership

Price leadership is when a business achieves exceptionally low production costs and dominates its industry, pricing its products and services by undercutting its competitors – who then have no other choice but to follow its lead when setting their own prices.

15. Price skimming

Price skimming means selling products and/or services at high prices due to consistent or high demand.

This strategy enables the business to generate high profits and high returns on investment – when a product or service is new to the market. However, when deploying a price skimming strategy, businesses must be mindful of potentially missing out on larger (quantity) sales of products and/or services that could be priced lower.

16. Time and materials pricing

Less often seen among accountants, time and materials pricing is primarily used in the service and construction industries. As such, customers are billed by an hourly – market or skills and experience-based – rate, plus any additional cost for materials.

17. Value-based pricing

Referring to the strategy of pricing products and/or services based upon their perceived value to the customer, this can work favourably for businesses that can persuade their customers, resulting in high prices and high profits.

Typically, value-based pricing is the method adopted by specialised services, such as criminal lawyers.

Value-based pricing: The struggle is real

Many professional services firms struggle with the concept of value-based pricing. Not the theory, but the practice.

It brings wide debate regarding one’s sense of value or the value proposition you offer your client, and whether they (the client) value you or your service enough to even consider this conceptual pricing model.

The ethical concern from most accountants regarding value-based pricing is that they struggle to see how they can charge a client substantially more for work done, simply because the client outcome resulted in a whopping saving on taxation for example.

How to better value your services

The biggest challenge most business owners face is valuing themselves and what they do for their clients. This isn’t because professionals fail to place value on themselves, but because they fear the lack of value their clients place upon them and what they do for their clients.

In other words, many in the professional services fields do much of their work ‘behind the scenes’ and tend to fail to properly educate their clients on how much work has been done, the value of that work, and what it has achieved for the client.

Slowing your clients down means also slowing yourself down to take the time to review the value you have created with the client. This requires you to go through the work you have done one-on-one with each client.

The logical time to do this is once the job is completed, with the invoice in hand.

Demonstrating the value in an itemised invoice or separate document is the ideal way to also present your invoice for final payment. This is how true value is created and sustained.