Adverse Effects of Time-Based Pricing

Source: Ric Payne's Blog--Confessions of a Lazy Accountant

Ric lists some thought-provoking adverse impacts of time-based pricing. Here are excerpts, reproduced with permission.

• Some customers would be willing to pay more for the firm's services but are not being asked. Your attention and marketing efforts should focus on these people NOT on the ones who are looking for lower prices.

Customers who are price sensitive are never going to be as profitable to the firm as the former category because they are not good referral sources, they are not inclined to buy additional services, they lower your sense of value and self esteem by constantly questioning your fee, and they are more likely to switch to lower cost suppliers.

• Technology has resulted in an improvement in output per person that's reflected in higher revenue-based performance metrics such as revenue per person and revenue per partner. But these metrics are misleading indicators of performance because technology improvement has flattened organizations by enabling higher skilled and experienced people to do what lower skilled people previously did and could continue to do! As a result, average labor costs have risen, leverage (i.e., team members per owner) has declined, owners are working longer hours, and profitability per owner in real terms has declined.
  
• The solution is not to trash time sheets, but to design time recording systems so that they are a source of valuable management information rather than pricing systems.

I will address how that might be done and how to undertake an analysis of client profitability in my next post.

To read the entire post, click here.

From Ric Payne's Blog--Confessions of a Lazy Accountant, http://theconsultingaccountant.com, November 29, 2009, "Challenges With Time-Based Pricing."