GreySuits Advisor Shares How Companies Can Price Their Services More Strategically

AUGUST, 2021 Toronto.
CPA, Rodney Davis of GreySuits Inc. a strategic accounting firm was interviewed on how business leaders can follow a better framework for setting prices on their service offerings.

Q: What’s the most important factor when setting a price for services?
Rodney Davis: I’ve been in the service space almost as often as I’ve been in the product space, so I have a very keen sensitivity to how you price services. And the one thing I tell entrepreneurs is that valuing a service should always come down to how much time it takes to deliver that service. With a product, you set it, the machine runs and the time it takes to deliver is predictable. With a service, you have to manage the resources to deliver that service in as efficient a way possible. So on pricing services, it’s about time as well as anything else that may go into delivering that service.

Q: What guidelines should I follow in setting a price?
Rodney Davis: First figure out what it’s going to cost you to deliver that service. Then you determine the margin you’d want to make on that delivery service, just as you would for a product. After you’ve done that, it’s important to compare that number to the standard market rates. I tend to price internally first, independent of the market, and then compare it to the market. This exercise is great for entrepreneurs. Once you’ve priced out your service based on the delivery costs, you can determine whether or not you’re operating efficiently as a business. If you’re way off from the market, either high or low, it might mean you’re either way more efficient or way less efficient than the market, and you’d have to go back and look at your service delivery model. But at the end of the day, the market dictates everything.

Q: How do we factor employee costs into the equation?
Rodney Davis: When you’re pricing a service, the employee costs should typically be reflected as a markup on your cost for that employee. Certain industries have benchmarks for what that markup should be. In many professional services, it’s typically a 3-to-1 ratio when setting your rate. For example, if a person costs you $10 an hour, it’s not uncommon for that person to be charged out at a billing rate of around $30 an hour. If you’re paying somebody $40 an hour, it’s not uncommon to have a metric that says the billing rate for that person is $120 an hour. But again, you’re guided by the market and the level of efficiency in delivering the service. So it’s important to keep that into account when setting your price.

Q: What if the value of service is worth more than an hourly rate?
Rodney Davis: Well, that’s where the market prevailing rates are incredibly important. I might deliver a service that takes me three hours, thanks to my 40 years of experience, whereas somebody with far less experience at a similar charge out rate might take three or four times longer to do the same job. The important thing to keep in mind is that whatever you ultimately charge the client should be agreed upfront. When you’re in the service industry, you should not be trying to figure out what you’re going to get for a service after it’s been delivered, because once it’s been delivered, it’s gone. The benefit to the client has already been received.

Q: Is it fair for a client to pay for every hour of service?
Rodney Davis: The law profession is still one of the few remaining professions that mostly bills by the hour. They deliver regardless of whether or not they’ve operated efficiently or inefficiently. And in all fairness to law firms, it’s complicated for a client to understand the potential scope of an engagement or predict what may or may not unfold in a legal case because of the amount of factors outside of their control.

But on the other hand, it’s very hard as a client to walk into a relationship where somebody says, ‘I know where you want to go, there’s a lot of moving parts to get you there so I can’t tell you what it’s going to cost, but whatever it does cost, I need you to make sure you commit to paying me for that.’ If you were a consumer buying a product instead of a service, how would you react to someone saying to you, ‘I could sell you this ball, but I’m going to have to let you know later how much it’s going to cost.’ But it’s still a ball at the end of the day. The service that I’m being delivered can more or less be defined. And to the extent that it can be defined, I’d recommend being as upfront as you can with your pricing, or you should expect a lot more or pushback from a client.

Rodney Davis, CA, CPA is a partner and practice leader at GreySuits Advisors Inc. He has been working with private and public organizations since 1990 in change management.

Video clip of interview available (full rights granted for any news media platform):
Link to Rodney Davis photo and assets: {shorturl.at/kFHTV}

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