Up until now we’ve been working to understand who your customers are and why they retain you as their accounting services provider. Along the way, we discussed the value they put on your services.
I think it’s about time you tried to figure out what they were truly willing to pay you for the services that they value.
When you segmented your clients by services you offer, and by the channel through which you reached them, you began to create a model for defining your revenue streams.
Each channel, each segment, each service you provide can have it’s own pricing mechanism, and from that, it’s own pricing model and level.Each channel, each segment, each service you provide can have it's own pricing mechanism, and from that, it's own pricing model and level. Click To Tweet
You can have fixed price lists for fixed services, such as writeup, payroll or transaction recording, you can have contingent pricing for non-tax related advisory services, such as time and motion studies and yield management, or you can have value pricing for niche services such as cost segregation studies and loan packaging.
Your choices are limited only by your imagination.
Your revenue streams will generally be composed of two different types, the unitary transaction model, where each transaction is negotiated as a standalone service, with a fixed term based on a named milestone, or they will be subscription based with recurring revenues resulting from an ongoing or open ended service, such as payroll or monthly accounting services.The pricing mechanisms for each revenue stream will also depend upon whether your pricing is fixed or dynamic. Click To Tweet
Today, I want you to take the time to download the Rainmaker’s Revenue Model Matrix and take a few minutes to list the categories of revenue you offer according to their matrix categorization.
Yeah, another two by two matrix that makes it easy to understand what is going on in your practice is not what you were expecting, but, as you keep going, you’ll find that almost everything in your practice can be analyzed in this way. In fact, I think I recently saw a book on that topic, how anything can be analyzed in terms of a two by two matrix. I’ll have to look it up.
Anyhoo, back to the business at hand. Your list can include everything from your monthly accounting and payroll services, to your quarterly and annual tax services, to your software and IT consulting services, and your project services such as loan packaging, cost segregation studies, of annual audits.
If you offer physical products, such as computer or POS systems, make assets available for use, such as online payroll or SAAS (Software As A Service), lease assets or even lease employees, or even if you are licensing branded products, list each revenue model or stream.
Let’s run through the advantages and disadvantages of each type of revenue flow for a moment.
- First, we have unitary types of projects with fixed billing prices and schedules. These are usually project based engagements, with payment on completion.
For a non-subscription practice, client-switching costs play an important role. If it is relatively easy for your client to switch back and forth from your services to you competitors, you will likely have a lower price/revenue multiple as your pricing power will be quite limited.
On the other hand, if it is quite difficult for a client to switch away from your product/service, you are likely to have stronger pricing power, and longer client life, which will inevitably result in better dynamics.
Switching costs can take many forms – technical lock-in, data lock-in, high startup costs with a new vendor, and downstream revenue dependencies are just a few
All things being equal, high switching costs are a positive for price/revenue multiples, and low switching costs are a negative.
- Second, we have subscription based services with fixed billing prices and cycles. These are usually monthly writeup work, data storage, or continued access types of services.
If you value predictability in your cash flow, than retaining customers for long periods of time is obviously a positive. Conversely, if customers are churning away from your company, this is a huge negative.
Churn has a direct and significant impact on your profitability as you will see when we discuss scoring your clients using LSRP.
With subscription models, a low-churn customer is quite valuable. In fact, a practice with low churn rates (5% annually or less) are very likely to have price/revenue multiples in the top decile.
- Third, we have unitary types of projects with dynamic or variable billing. These types of engagements usually involve hourly billing, audit milestones, percentage of completion and similar project based work.
While they have the same risks of churn that single invoice (fixed billing) projects, usage based billing reduces the risk of loss for you, the practitioner by ensuring that a portion of fees are collected before too much work is performed.
- And lastly, we have subscription based engagements with dynamic billing. These are usually transaction based engagements suh as payroll, accounts payable and accounts receivable data management.
The advantage of dynamic billing is that it allows you to collect for “project creep” (those surprises you run into on new engagements). However, because it reduces any incentives for efficiency of operations, it is not popular with clients.
Once you have defined each of your revenue producing services or products, note whether the service or product is priced as a unitary item or a subscription item.
In this list, enter estimates of what you think your clients would really be willing to pay for a product or service (Competition or ‘Reservation’ Pricing), and compare that with what you are currently charging. Competition and Reservation Pricing are terms to describe the buyer price resistance level, the price your client or prospect will be using as a benchmark. I’ll tell you how to break past the resistance barrier later.
Note your current billing terms, and list how clients would prefer to pay versus how you prefer to collect.
Once you have completed this step, you should have a good picture of your practices’ revenue model, and a good tool for understanding how to begin positioning your business and generating revenue.
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Best to you and yours,
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