13 Pricing Models to Consider to Transform Your Profits - Part 1

This blog post is all about pricing models and the different ways that we can come up with a price. This is part 1 of 2: I’ll take you through the first 6 of 13 different pricing models that you could consider using and the pros and cons of each.

Check out the full video on this topic by clicking here.

What are ‘Pricing Models’?

Before we get into those 13 pricing models, let’s go through some important definitions.

The first thing to remember is that ultimately there are only two ways to price:

• Cost-plus pricing
• Value pricing

If you’ve ever studied classical economics, you may have come across the law of supply and demand. Essentially, cost-plus pricing deals with the supply side of that equation. It entails coming up with a price by looking at our costs, and it’s a terrible way of pricing! Very often cost-plus pricing is used because it seems simple, but the big problem with it is that it completely ignores the customer. It ignores the demand side of the equation.

The only other way to price is value pricing. Value pricing starts at the other end, it puts the customer first. What does the customer want and value? When we really start to master value pricing, we realise that, from a pricing point of view, costs are irrelevant.

So, what is a pricing model? A pricing model is a way that we come up with our prices. There are dozens of different models, I’ve come across over 40 different pricing models. I’m going to go through 13 which I would say are the most common in the accounting profession. I’ll share with you an explanation, some pros and cons, and whether or not the model is cost-plus pricing or value pricing.

#1 – Time-base billing

This is the most widely used pricing model in the accounting profession: time-based billing. It involves coming up with an hourly rate based on our costs. Time-based billing is categorically a method of cost-plus pricing, and it’s a particularly bad form of cost-plus pricing for many reasons.

The single biggest reason why time-based billing is a bad way of pricing is that clients hate it! We know this because of surveys. There was a survey done back in November 2005 by Sage, the big software company, which asked business owners what the thing they hated most about their accountants was. The number one answer was surprise bills, not knowing what the price is upfront. That’s the biggest problem with time-based billing, and we’ve inflicted that on our clients for years. They hate it!

Another disadvantage is that firms which use time-based billing get lower prices. So, our clients hate it, and it’s bad for us!

#2 – Fixed price plus hourly

This pricing model is where we have a fixed price element, and an hourly price element mixed together.

For example, you might charge a fixed price for a setup fee or an onboarding fee when a new client joins, and then charge an hourly rate on top of that.

Charging an initial fee is certainly something that can be done, but for the reasons above I still don’t recommend the hourly billing aspect.

#3 – Fixed pricing

Next, we have fixed pricing, or a single flat fee. This pricing model is increasingly common now that people are moving away from time-based billing towards single flat fees. An example of this might be bookkeeping for $500 a month.

This is a better way of pricing than time-based because at least the customer knows in advance what the price is, that way they can plan and budget. However, please be aware that this is still a form of cost-plus pricing – it is not value pricing. The reason for that is that the way we come up with our fixed price is based on our best guess of the number of hours it will take to do the work.

A big problem with having a fixed, single fee is that some clients will be willing to pay a higher price, so we’re leaving money on the table. And for some other clients, our fixed price may be too high, so we’re losing business as well. A single fixed price is never going to be the right price.

#4 – Base price plus add-ons

Number four is what’s sometimes called base price plus additional add-ons. This is taking the single flat fee to another level.

For example, we may take a project like Cloud set-up and say to the client there is a base fee of $300 for the work. What we then go on to do is offer the client a bunch of additional features that they can choose from. For example, we can set you up with your email templates for an additional $100, etc. These add-ons then build on the base price.

This is a better way of pricing because we are giving the customer choices. It’s still largely cost-plus pricing because the set base price and the prices of our add-ons will be based on the best guess at the time it will take and costs. But we are starting to get closer to value pricing here because we’re now giving the clients options so they can choose the things that they value the most.

#5 – Unit pricing

Unit pricing is a pricing system where you price by the unit. For example, this is often used in the profession to price payroll, where it might be $5 per employee per payslip.

The advantage of this model is that it’s easy to communicate the price to the client, and it’s easy to calculate. But again, it’s cost-plus pricing and it’s over-simplistic. There are better pricing models you can use.

#6 – Contingent pricing

Contingent pricing is used a lot by lawyers with litigation work where it’s a ‘No Win No Fee’ arrangement. Contingent pricing means we only charge the client if we get a certain outcome for them.

We’re getting into value pricing now, because if we don’t get a result for the client then they don’t get any value, so they don’t pay.

In my next blog post, I’ll take you through pricing models 7-13 and start digging into the really valuable ways that you can price your services.

If you found this valuable and would like to learn more about value pricing, I run a free live online training session every month with a topic chosen by you. Attend live and you can ask me any questions you have. Click here to register and I will send you an invitation to the next session.

Wishing you every success on your pricing journey

Mark Wickersham

Chartered Accountant, Public Speaker and Author of Amazon No.1 Best Seller “Effective Pricing for Accountants”