How to Price Business Advisory Services for 10:1 ROI
You’ve probably been to 10 conferences where the keynote says something about how “all of your compliance work will be automated in 5 years” and “if you want your accounting firm to survive, you need to transition to business advisory services.”
It’s everywhere. It’s compelling stuff.
Whether you believe all of bookkeeping or accounting compliance will be automated in the near term or not (I don’t), by now I’m willing to bet you do understand the added value in advisory work, not just as a long-term strategy but also as a major profit center for your business.
It’s high-margin work, positions your business for long-term success and it’s actually fun. Strengthening the partnership between your company and your clients and becoming an integral part of their team is incredibly rewarding. It’s the kind of work that makes it easier to recruit new talent to your team and give you more time to spend with your family.
That said, a popular question I get from accountants looking to make the transition is around pricing advisory services vs compliance work since it’s vastly different in nature.
It’s unfamiliar territory: compliance work is typically more task-oriented and advisory tends to be a bit more subjective (although it shouldn’t be, but I’ll save that for another post).
As you’ve heard time and again, the answer is value-based pricing. It’s about pricing for perceived value of your services rather than marking up the cost to deliver them.
Moving Away From Cost-Plus Pricing and Into Value-Based Pricing
Getting the formalities out of the way, according to Investopedia, value-based pricing is a price-setting strategy where prices are set primarily on a consumers' perceived value of the product or service.
By contrast, cost-plus pricing is a pricing strategy in which costs of production influence the price. Companies that offer unique or highly valuable features or services are better positioned to take advantage of value-based pricing than are companies with commoditized products and services.
So value-based pricing focuses on setting prices high enough to maximize profits and maintain a happy customer base, it really has nothing to do with the cost needed to produce your product or service.
Trends and general sentiments about an item or service also influence pricing under this strategy.
Customer sentiment is largely influenced by your presentation. Your marketing and brand image are valuable pieces to influencing prospect and customer sentiment.
Most advisors we engage with are currently building advisory reports in Excel and delivering to their clients on a monthly basis.
The trouble with this? Perceived value is low for Excel. Excel is a free tool, everyone has it, and it’s a very manual process to create a report. There’s a perception in receiving an Excel report that a significant amount of time was put into creating it.
Excel has associated and perceived labor costs involved that the customer understands and therefore will continue pegging you to cost-plus pricing. For example, I’m paying you $150/hr to work on these reports for 4 hours, the perceived value is in the report, not the insights and direction you deliver with it.
The most important point to stress here is this:
The strategy you help set as a result of your advisory report is what your customer is paying you for. Not the report itself. You must bring this to the forefront of your marketing.
How Do You Actually Set Pricing For Business Advisory Services?
Like anything else in sales, it’s about understanding your customer’s whole situation, the problem(s) they’re experiencing, how big those problems might get if unsolved, and presenting a solution to solve it (what they’re paying you for.)
The absolute key to pricing is to develop a process that gets the client to articulate what they are trying to achieve and the impact that will have on their business (and them personally). This is referred to as SPIN selling and an age-old lesson for anyone looking to get into value-based work.
To uncover the value you’re pricing for, ask questions:
Situation: How did they get to this point?
Situation: What is really motivating the client to solve this? What is their personal goals?
Problem: What do they perceive the issue to be? A good trick to really drilling down and understanding the fundamental problem is asking “why” four to five times.
Implication: What might happen if this problem goes unsolved? Personally? Professionally?
Need-Payoff: How will you measure progress toward solving this goal? What KPI best describes the problem?
Need-Payoff: What will solving this problem mean to the client from a financial perspective?
Need-Payoff: How long can they survive without solving this problem?
For example you might uncover through this process that your client’s sales are going up but profitability is remaining stagnant. They want to increase profitability to match efforts of their sales team because the company is 10 years old and it’s time to start thinking about a transition plan.
You and the client have spoken about how their business will be valued based on earnings and earnings potential, that earnings growth rate needs to start ticking upward over the next 3-4 years.
Additionally, the client wants to buy a vacation home with their spouse in the shorter term so wants to take home more earnings distributions.
The both of you agree that to do that they’ll need a 10% increase in take-home distributions.
The client perceives the problem to be their overall margin, but after diving into their product mix, the problem actually appears to be a particularly low margin product line that sales team’s have been pushing harder than others. This gave the illusion of a hot product but didn’t help earnings, which isn’t aligning with the business goals.
Let’s say the goal for profitability improvement is $100,000 annually over the next 2-3 years. That’s $300,000 in value to start.
Distributions as a result of increased profitability? Another $100,000 increase over the next 3 years.
Quality time with the family at the beach as a result of increased financial position? There’s value in that too.
All said and done it wouldn’t be far-fetched to say this engagement will contribute $450,000-$500,000 in added value to the client. If you’re shooting for a 10:1 ROI, this can reasonably be a $45,000 engagement over 3 years where you could bill around $1250 per month.
Extrapolate this out to the rest of your team and client base and you’ve landed on an incredibly lucrative business.
How Do You Sustain Value-Based Pricing?
This type of discovery and pricing process works great for kicking off with advisory clients but how do you create a sustainable model with recurring advisory revenue? How do you demonstrate your ROI throughout the three year engagement and land more business with that same client later?
In the words of one of my favorite venture capitalists, Jason Lemkin: It’s all about the dashboards.
Dashboards help you continuously display the results of your work and give clients a tangible, automated tool to rely on. Moving from Excel to a dashboard tool like Malartu increases your efficiency as a firm but also greatly increases the perceived value in your advisory work.
Your ability to repeatedly prove ROI will guarantee your business for the long-term while growing your profit margin. Proved a great ROI on the first project? The next project is bigger. After all, the business is now bigger, which means the value of your work is now higher.
That’s why we work with our partners at Malartu to maintain best-practices in their client engagements through our Traction Program. Interested in learning more?