02 Aug Costs have little (if nothing) to do with Prices.
There is a way of thinking that I have seen in the bookkeeping industry that no two bookkeepers cost structure are the same and thus their prices will not be the same.
What this seems to imply is that the cost structure determines the price of the bookkeeper services.
I want to make the statement that this is simply not correct.
Readers of this blog will know that I have been encouraging bookkeepers global to implement value pricing. In this regard, Price-led costing replaces Hourly Billing.
Therefore the statement should be – Prices set the costs.
Let me explain…..
Have you bought anything this week, this month or even this year because of the cost structure of the provider? NO. You bought those items or services because of the value you perceived you would get, would be greater than the price you paid.
So why would it be any different when it comes to your customer’s view of your services.
The value of any purchase is based on the frame of reference that we are viewing the item. It is why Nepresso Coffee Pods make their comparison with the coffee shop experience instead of instant coffee (which is actually its real competitors). What is the frame of reference that your customers are looking at your service? If your services are identical as the bookkeeping firm down the road then no matter what the cost structure is, the firm that is charging the lowest price wins.
This is why it is so important that you narrow the focus of what you do and be very clear about who you are working for, what pains they are experience and what solutions you provide to that chosen market.
The next aspect of this conversation is that it is nearly impossible to determine the cost before determining the price of the service. (That will grate on some number crunchers reading this). A lot of costs in firms are actually in reality fixed and don’t simply change with the addition of the next customer. A significant portion of the costs are “fixed” even though us accountants called them variable. The classic is wages.
Your services do not magically become more valuable as they move through your workflow process.
The price determines the costs that can be invested to deliver the service at an acceptable profit. This will have the impetus of focusing people on only incurring the costs that will add value to the customer.
As Henry Ford is quoted as saying – “No one knows what a cost ought to be”.
Cost is not the starting point for price. It is the final stage in the process. It is useless to know your costs to the cent, if your customer does not agree with your value proposition.