You know your pricing strategy is working…because your company is taking in revenue every day.
Would it be out of line to suggest…that your pricing strategy may be costing you money?
Test your pricing strategy against these known costs. Does your pricing strategy:
- Delay receivables for 30 days or more after completion or delivery?
- Motivate clients to compare your firm to others and ask for reductions if others charge less?
- Prevent your firm from assigning the best suited expert to client projects, rather than the lowest cost associate?
- Put you at risk of reduced revenue every day?
- Create a concrete ceiling on revenue?
- Squeeze profit?
- Require costly systems to track revenue and administer invoicing and receivables?
Any of these effects of your pricing strategy will cost you money. The costs add up the more effects you have.
This Outsourced CFO was Shocked!
The outsourced CFO we worked with has enormous depth and breadth of experience. He’s a quick and innovative problem solver. His firm’s clients love him and his associates.
We analyzed 6 months of client projects and he learned three shocking things about his own operations:
- Receivables were running at an average of 40 days. That meant that the firm had to wait 40 days after the close of the project before it was paid. Payables and employee compensation expenses continued while they were waiting.
- They charged different rates for different associates. This often meant that clients would ask for a lower priced associate instead of the associate with the best fit for the project. In some cases, the associates with the lower hourly rate took longer to do the work and/or the work was of lesser quality than it could have been.
- They rarely imposed penalties for cancelled meetings and appointments or delays for inputs from the client, even though this was their policy. They wanted to retain good relationships with the client. Cancellations and delays directly caused lower revenue than was projected.
Why Am I Telling You This Story?
Like you, this CFO is an established expert with a healthy roster of clients. The firm ‘s revenue is approaching $4 million per year. And even he, a Chief Financial Officer, didn’t see the harm of their pricing strategy.
With revenue coming in and a profit on the bottom line, it was easy to keep doing what they were doing.
They Took the Test
We did a simple exercise to test the alternative: “What if their pricing strategy had been value based pricing instead of hourly billing?” How would that impact receivables, the associate/project/quality match, and their actual revenue compared to forecast?
Test Results: Major Improvements were Likely
- Receivables would immediately improve because clients would be required to pay for their contracted services at the start of the project. For engagements that lasted several months or longer, a partial payment was due on the first of each month.
- With value based pricing, clients pay for the value the firm delivers. This gives the firm control of assigning the right associate to each specific project. The promised value would be delivered in the fastest time commensurate with required quality.
- Relationships would be stronger because there would be no threat of cancellation penalties. Clients paid for value delivered, not time spent on the job.
Not Pass or Fail
The CFO’s realized that the test wasn’t pass or fail. It simply revealed the costs related to their hourly rates pricing strategy and suggested options for reducing costs and increasing profits.
He engaged Trivers Consulting Group to perform a deeper study and make specific recommendations tailored to his firm. We followed that with a short period of implementation support and then they were off and running on their own.
Their revenue forecast for the following 12 months increased by 25%. They are currently on track and thinking about another 25% increase next year.
Pricing Strategy Test for Your Firm?
Would it be out of line to suggest that your firm could benefit from the pricing strategy test? If you’re curious about what that would mean, hit reply, or text TEST to 703-801-0345, and we’ll set up a Starter Call. You can also schedule an appointment on my Calendar if you prefer.
