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PRACTICE MANAGEMENT

Price Psychology

 

By RONALD J. BAKER
JUNE 2009

Editor's note: This is a sidebar to "Pricing on Purpose: How to Implement Value Pricing in Your Firm."

 

People tend to buy emotionally and justify intellectually, which makes the study of price psychology a worthwhile endeavor. Essentially, price psychology has two characteristics:

 

1. Price leverage

2. Pricing emotions

 

PRICE LEVERAGE

Before an engagement begins, the CPA possesses price leverage because he or she has the knowledge and skills to perform the service the client needs. If the service is performed and two to three weeks elapse before the client is billed, the value of that service is greatly diminished and perhaps even forgotten, often leaving the CPA in the position of trying to recoup any portion of the price the client is willing to pay. Accountants who set prices after the work has been performed do not achieve 100% of their “standard hourly rates.”

 

PRICING EMOTIONS

Clients experience three primary pricing emotions at various times throughout the purchasing cycle:

 

1. Price resistance

2. Price anxiety

3. Payment resistance

 

Price resistance is the proverbial “sticker shock”—an initial reaction to your price. The best way to overcome this emotion is by educating your client as to the value you provide. Before the consulting firm McKinsey & Co. begins work for a client, it claims it has to provide at least three times as much value as the price it charges. If CPA firms used this approach, they would have to focus on value before any work was performed. Sticker shock is a healthy emotion that reveals a client’s price sensitivity. Failure to induce sticker shock means you are probably underpricing services.

 

Price anxiety is also known as buyer’s remorse. Mitigate this emotion by staying in constant contact with the client. Assure them that they made the right decision in hiring your firm by managing and exceeding their expectations, and offering total quality service. Offering a 100% money back service guarantee dramatically lowers buyer’s remorse.

 

Payment resistance is the client’s unwillingness to pay the invoice. Overcome payment resistance by involving the customer in the design, price, scope and payment terms of your services. Once committed to a fixed-price agreement, customers are more likely to act in accordance with that commitment. This lowers accounts receivable, financing and collection costs, and negative feelings that result from slow payment.

 

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