Burying the Billable Hour:
Implementing Value Pricing in Your
Firm
Presented by
Ronald J. Baker, CPA
LI11
4/3/2017
11:00 AM - 12:30 PM
The handouts and presentations attached are copyright and trademark
protected and provided for individual use only.
Burying the Billable Hour: Implementing
Value Pricing in Your Firm @ronaldbaker
“If we want things to stay as they
are, things will have to change.”
Giuseppe Tomasi di
Lampedusa
Peter Drucker
“Because its purpose is to create a
customer, the business enterprise has
two––and only these two––basic
functions: marketing and innovation.
Marketing and innovation produce
results; all the rest are ‘costs.’”
1
“Disruptive threats come
inherently not from new
technology but from new
business models.”
Andy Grove, Founder,
Intel
What is a Business Model?
How your firm creates value for
customers, and how you capture
that value.
The Firm of the Past
Revenue
=
People
Hours
x
Efficiency
x
Hourly
Rate
We sell time
2
Can You Risk a Business Model Developed in 1919?
Reginald Heber Smith, father of
the billable hour and timesheet,
1919
The Firm of the Future
Profit
=
Intellectual
Capital
x
Effectiveness
x
Value
Price
Our customers buy
outcomes
What are you
really selling?
What are your
customers really
buying?
3
“The customer never buys a product. By definition
the customer buys the satisfaction of a want. He
buys value.”
- Peter Drucker
Value = The maximum
amount a consumer
will pay for an item
Billing takes place after
the work has been
performed.
Pricing takes place before
the work is performed.
4
The First Law of
Pricing: All Value
is Subjective
What is the cost/price of a bottle of water?
What is the value of a bottle of water?
COST vs. VALUE
What is the value of a bottle of water?
5
What is the value of a bottle of water?
What is the value of a bottle of water?
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Value
Price
Cost
6
Cost-Plus Pricing
Service
Cost
Price
Customer Value
Value
Price
Cost
Customer
Service
Value-Based Pricing
Eight Steps to
Implementing Value Pricing
Implementing Value Pricing
Eight Steps at a Glance
1. Conversation with Customer
2. Pricing the customer, not the services (CVO/Value Council)
3. Developing and pricing options
4. Effectively present options to customer
5. Option selected codified into an FPA
6. Proper Project Management
7. Scope creep, utilize Change Orders
8. Conduct Pricing After Action Review
7
Implementing Value Pricing
1. Conversation with customer
Not:
“What do you need?”
But rather:
“What are you trying to accomplish?”
Michael Hammer
“A professional is someone who
is responsible for achieving a
result rather than performing a
task.”
8
Implementing Value Pricing
1. Conversation with customer
Listen > Talk
Opening: “Mr. Customer, we will only undertake this
engagement if we can agree, to our mutual satisfaction, that
the value we are creating is greater than the price we are
charging you. Is that acceptable?”
Step 2: Pricing the
Customer
Model Rule 1.5
❶ Time, labor, novelty, difficulty, skill involved
❷ Precludes other employment
❸ Fee customarily charged locality
❹ Amount involved, results obtained
❺ Time limitations client/circumstances
❻ Nature/length of professional relationship
❼ Experience, reputation, ability of lawyers
❽ Whether fee is fixed or contingent
9
Implementing Value Pricing
3. Developing and Pricing Options
Peter Van Westendorp’s Price Sensitivity
Meter
The Second Law
of Pricing: All
Prices are
Contextual
10
Behavioral Economics
1YrSub
Price
MktShare
Webonly
$59
Printonly
$125
0%
Print&Web
$125
84%
1 Yr Sub
Price
16%
42.8%
Mkt Share
Web only
$59
68%
Print & Web
$125
32%
11
Anchoring
Framing
Choices
Six Ts for creating choices
¢ Timing
¢ Terms
¢ Technology
¢ Talent
¢ Tailoring
¢ Transference
12
Likely Work
Yes
Work
Maybe Work
WHK Work
FORD Framework
Findings. The issues (problems, opportunities, and desired
results) uncovered through a question and answer process.
Options. The different possibilities proposed for solving the
uncovered problems, seeking the opportunities, or achieving
the desired results. “Do nothing,” always an option.
Recommendations. The option (or options) best course of
action for the client. Usually includes a list of advantages and
disadvantages (pros/cons, positives/negatives, strengths/
weaknesses) of each option and a rationale for why the
option(s) was (were) selected.
Decision. One of the various options or a variation of the
options is selected for implementation.
Moores Guarantee
We can’t guarantee outcomes but like price, the
quality of our service is another thing we can
guarantee up front. If you think the quality of our
service didn’t match what was agreed, let us
know and tell us how you think that should be
reflected in the price you pay.
www.moores.com.au/agreed-pricing
13
Implementing Value Pricing
7. Change Orders
Three Factors of Production
Land
Rents
Labor
Wages
Capital
Interest
Where do profits originate?
RISK
14
3 Actuarial Axioms
If what you sell entails risk ≠ Commodity
Skip this step
There’s no such thing as a bad risk, only bad
premiums
There’s no model for pricing risk by the hour
www.journalofaccountancy.com
June, 2009
Pricing on Purpose: How to Implement Value Pricing in Your Firm
November, 2008
The Firm of the Future
April, 2010
Project Management for Accountants, by Ed Kless
Simon Sinek, www.TED.com
“He who has never been to the Great Wall is not a
true man.”
15
Thank You!
VeraSage website/blog
www.verasage.com
(707) 769-0965
www.thesoulofenterprise.com
Fridays, 1pm PT/4pm ET
[email protected]
Twitter @ronaldbaker
16
Your opinion matters!
Please take a moment
now to evaluate this
session.
BURYING THE BILLABLE HOUR:
IMPLEMENTING VALUE PRICING
IN YOUR FIRM
RONALD J. BAKER
FOUNDER
VERASAGE INSTITUTE
Copyright © 2017
Ronald J. Baker
Note: Materials in this manual may not be reproduced
in any form without written permission.
The final question needed in order to come to grips with business purpose and
business mission is: “What is value to the customer?” It may be the most
important question. Yet it is the one least often asked. One reason is that
managers are quite sure that they know the answer. Value is what they, in their
business, define as quality. But this is almost always the wrong definition. The
customer never buys a product. By definition the customer buys the satisfaction
of a want. He buys value.
––Peter Drucker, Management: Tasks, Responsibilities, Practices, 1993
A business is defined by the value it creates for its customers. Your price speaks
volumes about your value proposition, more so than any other component of your
firm’s marketing.
Price is also the number one driver of profitability for all businesses. A study by
the consulting firm McKinsey & Company in Cleveland, Ohio compiled data on
over 1,000 companies and found that a 1% increase in price, at constant sales
volume, would produce an average of 11% increase in profitability––far greater
than the impact on profitability of reducing fixed costs by 1% (2.7%); increasing
volume by 1% (3.7%); or reducing variable costs by 1% (7.3%). (See the book
The Price Advantage in the Bibliography).
The pricing revolution in the business world began in the 1980s, with many of the
Fortune 500 companies now employing professional pricers, and organizations
such as the Professional Pricing Society being founded to assist companies in
achieving excellence in pricing for value.
Yet CPA firms seem to believe they are defined by “hourly rates.” We have taken
our collective intelligence, experience, judgment, education, wisdom, knowledge,
and intellectual capital, and commoditized them into a one-dimensional hourly
rate. From a marketing standpoint, this is a mistake. Once you understand that
customers, emphatically, do not buy hours, it becomes self-evident that pricing
by the hour is precisely the wrong measurement to use to ascertain the value
created for the customer.
An Incorrect and Correct Theory of Value
One of the main reasons professionals undervalue their services is because they
are operating under the wrong theory of value––the labor theory of value. In its
simplest form it posits that the value of an item is determined by the amount of
labor used in its production. This theory would predict that a diamond found in a
mine would be of no greater value than a rock found right next to it, since each
took an equal amount of “billable hours” to locate and extract. Yet how many
rocks do you see in your local mall’s jewelry store?
When you go to lunch today, perhaps you will have pizza. Under the labor theory
of value, you must necessarily value the fifteenth slice just as much as you
valued the first, since each took the same amount of “billable hours” to produce.
The alternative to an incorrect theory is a correct theory. The subjective theory
of value concludes goods and services have no inherent value, they are only
valuable to the extent there is a potential buyer desiring them. Value, like beauty,
is in the eye of the beholder. For any transaction to take place, both the buyer
and the seller must profit from the exchange, and receive more value––in their
subjective perception––than what they are giving up.
Today, there are thousands of professional firms that are pricing their services
according to the external value created––as perceived and determined by the
customer––rather than internal costs incurred in generating those services. (For
a summary of the disadvantages of hourly billing versus the advantages of Value
Pricing, see Exhibits 1 and 2).
Changing the pricing culture in your firm will not be easy. It requires constantly
confronting the inherent challenges involved with pricing––all of which take hard
work, commitment, leadership, creativity, innovation, and dedication of resources
to continuing education. But it is worth it, as the McKinsey study proves.
All Change is Linguistic
The word value has a specific meaning in economics: “The maximum amount
that a consumer would be wiling to pay for an item.” Therefore, Value Pricing
can be defined as the maximum amount a given customer is willing to pay for a
particular service, before the work begins. This is not to suggest we can capture
one hundred percent of maximum value, but rather that we have the potential to
access some of it with strategic pricing.
This definition contradicts the popular term value billing. The difference is Value
Pricing is always done prior to the work being started, whereas value billing is
usually marking up––or more frequently, marking down––the invoice to the
customer after the work has been performed.
There is a cardinal rule on behalf of customers in firms that value price: No
surprises. Just as no auto mechanic performs work not pre-authorized by the
customer, these firms only provide services after price, payment terms, and
scope of value and work have been predetermined and agreed to by the
customer.
This creates a much better customer experience, with less write-downs, writeoffs, collection and financing costs, as well as greater customer loyalty, not to
mention superior profitability for the firm.
Transitioning from Hourly Billing to Value Pricing
Not all pricers in a CPA firm are created equal, which is why we have been a
strong proponent of firms establishing a value council, as well as appointing a
Chief Value Officer (CVO), in order to centralize the pricing function and make it
a core competency within the organization. (See Exhibit 3 for the Five Cs of
Value and Exhibit 4 for the value council and CVO purpose and criteria).
Think of the people currently in charge of pricing in your firm. Some are
acceptable––attempting to correlate price with value––but most are mediocre, or,
dare I say it, wimps. Why would we let people price if they are not good at it? We
wouldn’t let people audit if they were not qualified. Pricing is far too important to
the profitability and health of a firm to accept anything less than excellence in this
vitally important skill.
If you diagram hourly billing, a form of cost-plus pricing, it would look like this:
Service → Cost → Price → Value → Customer
Now, look at how Value Pricing inverts the above chain by recognizing the
economic fact that it is the customer who is the ultimate arbiter of value:
Customer → Value → Price → Cost → Service
By first determining value, which establishes the boundaries for a price, the firm
can then decide if the costs required to provide the service will return a desirable
profit. If the project cannot be done at an adequate profit level, the service should
not be performed. All this analysis has to take place before the work is started.
What possible good is it to know your costs to the penny if the customer can’t
afford—or has a different value perception of—your price?
Costs are a fact, but pricing is a policy. What is happening in CPA firms is people
are pricing services based on the costs they are incurring without a clue as to the
value they are creating. Firms have ample data on their costs, hours, activities,
efforts, and other inputs, but a paucity of information on the value they create for
their customers.
Costs are only relevant for determining if a service should be provided, and
perhaps in what quantities. Costs certainly play no role whatsoever in
determining external value to the customer, or setting prices (except as a
minimum). Value Pricing reverses what is now an artificial ceiling on firm income,
inverting the ceiling into a floor.
Price Psychology
People tend to buy emotionally and justify intellectually, which makes the study of
behavioral economics and price psychology a worthwhile endeavor. Essentially,
there are two characteristics of price psychology:
1.
Price leverage
2.
Pricing emotions
Price leverage
This is a question of who has the most (or least) price sensitivity at a given point
in time. Before an engagement begins, the CPA possesses the price leverage,
meaning the customer is at their apogee of price insensitivity––because a service
needed is always more valuable than a service delivered. Once you start, or
complete, an engagement, the price leverage shifts to the customer and you are
left trying to recoup any portion of your price the customer is wiling to pay. This is
why accountants around the world do not achieve 100% of their “standard hourly
rates,” as they tend to set prices after the work has been performed—an
inopportune time to learn the customer doesn’t like your price. Wouldn’t you
rather know before you did the work?
Pricing emotions
There are three primary pricing emotions each customer will encounter 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 customer as to the
value you provide. Before the famed consulting firm McKinsey & Company will
begin work for a customer, it claims it has to provide at least three times more in
value than the price it charges. What would happen if CPA firms were to use this
approach? They would have to focus on value before any work was performed.
Sticker shock is a healthy emotion, one that tunes you in to each customer’s
price sensitivity. If you fail to induce sticker shock, you are most likely underpricing your services.
Price anxiety is also known as buyer’s remorse. You can mitigate this emotion by
constantly staying in touch with your customer, assuring them they made the
right decision in hiring your firm by managing and exceeding their expectations,
and offering total quality service. You can also offer a 100% money back value
guarantee, which dramatically lowers buyer’s remorse.
Payment resistance is simply the customer’s unwillingness to pay the invoice.
Who enjoys paying bills? Payment resistance is overcome by involving the
customer in the design, price, scope, and payment terms of your services. Once
people commit to a Fixed Price Agreement, they are more likely to act in
accordance with that commitment. This dramatically lowers accounts receivable,
financing and collection costs, and the bad feelings that result from slow
payment.
The Eight Steps Required for Pricing on Purpose
Step 1: The Value Conversation
Have a value conversation with your customer to determine their needs and
wants in the forthcoming year. Ask them the questions in Exhibit 5. This is your
opportunity to comprehend and communicate the value you can add, establishing
the scope of value and then the scope of the work to be performed. Sometimes a
member from the value council attends this meeting, especially if the partner is
not a member of the council, or is uncomfortable with pricing.
Step 2: Pricing the Customer, not the Services
The information gleaned from Step 1 is then presented to the value council,
where it proceeds to price the customer, not the service. This includes an
assessment of the particular customer’s price sensitivity, which is the number
predictor of ability and willingness to pay.
Step 3: Developing and Pricing Options
The value council than begins constructing three value/price options (or choices),
differentiated on levels of service, access, turnaround time, payment terms, and
other factors. Think of the American Express Green, Gold, and Platinum charge
cards. Each are varied in price based upon the value and services they deliver.
Firms should offer customers choices, not a take-it-or-leave it single price. This
allows the customer to convince themselves of your firm’s value, while revealing
their individual price sensitivity.
The value council then goes through the 20 questions to ask before establishing
a price (Exhibit 6). Based upon the answers, the council then conjectures three
internal prices for each level of service, based upon their assessment of the
customer’s subjective value and price sensitivity.
1) Reservation Price––below this price, the firm would turn down the
work. It must get this price. It will generate a normal profit.
2) Hope For Price––a firm should get this price more often than not. It
will generate a supernormal profit.
3) Pump Fist Price––this is an aspiration price, when the firm is adding
extraordinary value. It will generate a windfall profit.
Many firms use the following nine-box model:
Reservation Hope for
Pump Fist
Platinum
$C
$B
$A
Gold
$M
$N
$L
Green
$Z
$Y
$X
From this brainstorming session, the value council then determines at which
price the three options will be presented (obviously, not all nine prices are
presented to the customer). The upper bound of these prices should be based
upon the value being created, yet all will be lower than that value so as to ensure
the customer also earns a profit.
For example, if you know the customer is highly price sensitive, you may only
present the reservation price for all three options. However, if there are some
services that are adding marginal value, a hope for price may be quoted for the
Gold and Platinum levels. If extraordinary value is being creates, quote the pump
fist price.
This is where the art of pricing comes into play. It requires judgment, but the
more the value council does it, the better they will get, since pricing is also a skill.
Firms that use this model report that it makes them “compete with themselves.”
To receive a pump fist price, the firm must conjure up ways to add extraordinary
value. This is a worthwhile thought experiment, as the focus is on value, not time.
Many people ask how can you ascertain value since it’s subjective and there’s no
formula. The answer is with a deep understanding of your customer’s value
drivers, and price sensitivity, which requires a deep conversation with the
customer. One way to never get to value is to continue to think and price based
upon hours.
Step 4: Presenting Options to the Customer
Present the options to the customer. Sometimes, a member of the value council
would attend this presentation, especially if the partner in charge is not a member
of the council, or is uncomfortable discussing price. Lead with your most
expensive price first, as it acts as an anchor for the other options. This is also
where you handle any pricing objections from the customer. If they question your
price, it’s because they do not see the value.
Step 5: Customer Selection Codified into the Fixed Price Agreement
The option selected by the customer is then codified into a Fixed Price
Agreement (FPA), such as the one in Exhibit 7. The firm can include as much
detail as required as to the scope of work, customer responsibility to provide
information, timelines for delivery of work, etc. Exhibit 8 explains each section of
the FPA and the value pricing principles it incorporates.
Step 6: Proper Project Management
The firm would perform adequate project management on the scope of work,
detailing who will perform the work, timelines for delivery to customer, and other
planning details. For an excellent resource, see “Project Management for
Accountants,” by Ed Kless, from the AICPA’s Journal of Accountancy, March
2010 (http://bit.ly/1Ude4im).
Step 7: Scope Creep, Change Requests, and Change Orders
If the firm (or customer) finds scope creep while performing the work, the
discoverer submits a Change request, much like a Purchase Request. It will need
to be approved by the economic buyer, and only then does it become a Change
Order. This may change the quality of the work, the timeline to completion, or the
price, or all of these factors. This policy also applies to any new services the firm
provides within the year not specified in the FPA. Exhibits 9 and 10 contain a
sample Change Request and Change Order, respectively.
Step 8: Pricing After Action Review
Since 1973, the U.S. Army has a policy of doing After Action Reviews (AAR),
which take place after every mission. After assisting many firms in implementing
AARs, we are convinced it is a practice that would have numerous salutary
effects for firms, especially as it relates to the roles of the CVO and value council,
helping them evolve pricing into a core competency. For a sample After Action
Review the pricing council would perform after the engagement has been
completed, see Exhibit 11.
Do not skip any of these steps, all our necessary for developing a core
competency in pricing. If these eight steps are followed on every major
engagement, is there any doubt the firm will begin its journey to pricing on
purpose?
Not Final Thoughts
No firm will ever be paid more than it thinks it is worth. There is nobility in earning
what you are worth. Yet if a firm’s leaders do not think it creates more value for
its customers than is reflected by hourly billing, how can customers be expected
to understand a value proposition beyond hourly rates?
Hourly billing is, to borrow a medical term, an iatrogenic illness––a disease
induced inadvertently by a physician while providing treatment. This model is
perpetuated because it is risk-adverse, loss-adverse, and simplistic, and the
theory supporting it has been taught for multiple generations.
Yet hourly billing is nothing but a tradition, which is nothing more than the
democracy of the dead. We will not be able to adopt Value Pricing if we continue
to denominate everything into hours, thus remaining mired in the mentality that
we sell time. Time is not value; it’s not even a cost. Time is a constraint. The
profession needs to have a “pricing epiphany” similar to the one Ben Cohen and
Jerry Greenfield, founders of Ben & Jerry’s ice cream, had early in their careers
(see Exhibit 12).
It is past time to change your conversations with customers from hours to value.
Do this up front, before you begin any work. Appoint a CVO and establish a value
council in your firm––a group of intellectually curious leaders who will become,
over time, experts in creating and capturing value. Your firm will become
obsessed with value. Your customers will appreciate it, and they will not bother
asking about hours. I guarantee it.
Let us, together, forge a new Declaration of Independence for the CPA
profession, and once and for all, free our profession from the tyranny of time. It is
time to bury the billable hour and price on purpose. Will your firm be among the
pioneers blazing the trail for others?
Exhibit 1: Disadvantages of Hourly Billing
• Hourly billing misaligns the interest of the CPA and the customer––the
customer wants their work done effectively, whereas the CPA firm wants
to log more hours.
• It does not focus on what customers buy. Customers buy value, not hours.
How can we sell something that customers don’t think they are buying?
• It focuses on efforts, inputs, hours, costs, activities, rather than oucomes,
results, transformations, and value.
• It places the transaction risk on the customer.
• It fosters a production mentality, not an entrepreneurial spirit.
• It transmits no useful information as to value, project management, the
effectiveness of CPAs, or the future behavior of customers.
• It encourages the hoarding of hours and decreases delegation, leading to
surgeons piercing ears.
• It penalizes technological advances, lessening a firm’s revenue if it
performs work more effectively and efficiently, as with new technology.
• It commoditizes the firm’s intellectual capital into one inadequate hourly
rate, denying a firm the opportunity to differentiate itself from the
competition.
• It does not take into account the risk the firm is assuming working for
particular customers. Risk cannot be priced by the hour. Actuaries have an
axiom: There is no such thing as bad risks, only bad premiums.
• It places an artificial ceiling on a firm’s net income, since there are only so
many hours in a day––indeed, a lifetime.
• It creates bureaucracy. Time and billing programs consume between 7 to
10 percent of a firm’s gross revenue to maintain. These resources are
better spent pricing on purpose––by establishing a value council,
appointing a CVO, pricing all work upfront, performing adequate project
management, as well as pricing After Action Reviews.
• It does not set prices upfront, violating the laws of economics and
consumer psychology. Customers want to compare value to price before
they buy, not after.
• It diminishes the quality of life. No one became a CPA to bill the most
hours, but rather to help people. Knowledge workers resent having to
account for every six minutes of their day, as if their leaders do not trust
them to do the work and the right thing.
Exhibit 2: Advantages of Value Pricing
• Value Pricing comports with the laws of economics and consumer
psychology, aligning the interests of the firm with those of the customer.
• It manages, clarifies, and offers the firm the ability to exceed the
customer’s expectations.
• It prequalifies the customer to ensure they are a good fit for the firm.
• It provides the opportunity to cross-sell additional services.
• It allows you to gain “ego investment” from the customer.
• It improves communication.
• It projects confidence and experience, as opposed to being unable to
inform the customer upfront of a price as with hourly billing; or offering a
range of prices, which is done more for the benefit of the firm than the
customer.
• It increases a customer’s switching costs, increasing their loyalty and longterm profitability.
• If forces the firm to be effective in project management and getting the
work done within the time promised to the customer.
• It overcomes customer’s pricing emotions and maximizes the firm’s price
leverage.
• It incentivizes the customer to complain––through triggering the value
guarantee––giving the firm a second chance to win back the customer,
and prevent similar problems from happening with other customers in the
future.
• FPA prices can be increased each year, even if there are no changes in
services. It is much easier to increase the price of a customized FPA
rather than increasing your hourly rate by $10 per hour.
• It provides a competitive differentiation for your firm when you offer
customers certainty in price and less risk of dealing with you.
• It specifies conditions for Change Request and Change Orders that are
usually value-added services that can command a premium price.
• It utilizes price bundling allowing the customer to focus on the totality of
the firm’s value proposition rather than the price of each and every
service.
Exhibit 3: The Five Cs of Value
In order for a firm to price on purpose, it must understand the Five Cs of
Value:
1) Comprehend value to customers
2) Create value for customers
3) Communicate the value you create
4) Convince customers they must pay for value
5) Capture value with strategic pricing based on value, not costs and
efforts.
These five components determine the wealth-producing capacity of any firm,
and will drive internal profits in the long run.
Exhibit 4: Value Council and CVO Purpose and Criteria
Examples of purpose and strategy statements for the role of the value
council and Chief Value Officer are:
• To ensure the firm prices on purpose, according to the value received by
the customer, not the costs incurred in performing the work.
• To make pricing for value a core competency within the firm.
• To change the marketing culture within the firm from one that believes “we
sell time” to one that comprehends, creates, communicates, convinces,
and captures the value of the services we provide to our customers. A
transformation to “Our customers buy transformations.”
The criteria to look for when selecting a CVO and appointing a value council
can be summarized with the acronym LACEY:
• Leadership skills. Since pricing is a multi-disciplinary function that cuts
across the entire firm, pricers need to be respected and have
demonstrable leadership skills.
• Attitude. Leaders who believe there is nobility in being paid what the firm
is worth, and who have an attitude of abundance and value creation,
rather than a zero-sum view of the world.
• Commitment. A CVO and value council who do not have the support of the
managing partner are destined to fail.
• Experimentation. Pricers have to be willing to experiment and cannot be
prisoners of the past because “that is the way we have always done it.”
Excellence in pricing requires learning from both failures and successes.
• Youth. Organizations, like people, tend to calcify with age, and youth can
keep the blood pumping at a more vigorous pace. Young professionals are
not as tied to the billable hour as are the older generations.
Exhibit 5: Questions to Ask the Customer
•
What do you expect from us?
•
What is your current pain?
•
What keeps you awake at night?
•
How do you see us helping you address these challenges and
opportunities?
•
What growth plans do you have?
•
If price were not an issue, what role would you want us to play in your
business?
•
Do you expect capital needs? New financing?
•
Do you anticipate any mergers, purchases, divestitures, recapitalizations,
or reorganizations in the near future?
•
We know you are investing in total quality service, as are we. What are the
service standards you would like for us to provide you?
•
How important is our value guarantee to you?
•
How important is rapid response on accounting and tax questions? What
do you consider rapid response?
•
Why are you changing firms? What did you not like about your prior firm
that you do not want us to repeat?
•
How did you enjoy working with your prior firm?
•
Do you envision any other changes in your needs?
•
Are you concerned about any of your asset, liability, or income statement
accounts to which we should pay particularly close attention?
•
If we were to attend certain of your internal management meetings as
observers, would you be comfortable with that?
•
How do you suggest we best learn about your business so we can relate
your operations to the financial information and so we can be more
proactive in helping you maximize your business success?
•
May our associates tour your facilities?
•
What trade journals do you read? What seminars and trade shows do you
regularly attend? Would it be possible for us to attend these with you?
•
What is your budget for this type of service?
Exhibit 6: 20 Questions the Value Council Should Ask Itself Before
Establishing a Price
1. Whatisthecustomer’scostofnotsolvingthisproblemin
dollars?
2. Whatistheeconomicbenefittothecustomeriftheysolvethe
problem?
3. Withwhomontheorganizationchartarewedealing?
4. Whoreferredthiscustomertous?Whywerewereferredin
thefirstplace?
5. Dotheyhaveanytimesensitivedeadlinesforthecompletion
ofthisproject?Whydotheyneedtodoitnowandnotinsix
months?
6. Who’spayingfortheservice?Aretheyspendingother
people’smoney?
7. Dowehaveanycompetitors?Ifso,who?
8. Whatpriceinformationdowehaveaboutthesecompetitors?
9. Howprofitableisthecustomer’scompany?Howlonghave
theybeeninbusiness?
10. Havetheyengagedwithsomeoneelsepriortoustodosimilar
work?Whowasthepriorfirmandwhyaretheychanging?
11. Howsophisticatedisthecustomer?
12. Doesthiscustomeraddtothefirm’sskillsormarkets?
13. Dowelikethiscustomer?
14. Howdowehelpreducethecustomer’srisk?
15. Atwhatpricewouldthisbesoexpensivethecustomerwould
notconsiderbuyingit?
16. Atwhatpricewouldthisbeexpensive,butthecustomer
wouldmostlikelystillbuyit?
17. Atwhatpricedoesthisbecomeinexpensive?
18. Atwhatpricedoesthisbecomesoinexpensivethecustomer
wouldquestionitsvalue?
19. Whatrangeofpriceswouldbethemostacceptablepriceto
pay?(Thisisthebasisforthepricespreadofyouroptions).
20. Whatcostscanweaffordtoinvestinatthetargetpriceand
stillearnanacceptableprofit?Atwhatpricewouldwewalk
away?Whatpricedowedesire?
Exhibit 7: Sample Fixed Price Agreement
November 19, 2016
Dear Customer:
In order to document the understanding between us as to the scope of the
work that ABC, CPAs will perform, we are entering into this Fixed Price
Agreement with XYZ, Inc. To avoid any misunderstandings, this Agreement
defines the services we will perform for you as well as your responsibilities
under this Agreement.
2017 PROFESSIONAL SERVICES
ABC will perform the following services for XYZ during 2017:
• 2016 XYZ S Corporation Tax Returns
• 2016 Financial Statement Review with PBCs to be provided
by XYZ by February 15, 2017
• 2017 Tax Planning
• Unlimited Access in 2017*
TOTAL 2017 PROFESSIONAL SERVICES
$XXX
*Included in the Unlimited Access are the following services to be provided by
ABC to XYZ:
•
Unlimited meetings, to discuss operations of XYZ,
business matters, tax matters, and any other topic at
the discretion of XYZ or its employees and/or agents.
•
Unlimited phone support for XYZ personnel and/or
independent contractors and agents regarding
accounting assistance, transaction analysis, etc.
Because our Fixed Price Agreement provides ongoing access to the
accounting, tax, and business advice you need on a fixed-price basis, you are
not inhibited from seeking timely advice by the fear of a meter running
endlessly. Our service is built around one price pricing, as opposed to hourly
rates, and offers you access to the accumulated wisdom of the firm through
CPAs with substantial experience, who can help enhance your company’s
future and achieve its business objectives.
While the fixed price entitles your company to unlimited consultation with us, if
your question or issue requires additional research and analysis beyond the
consultation, that work will be subject to an additional price, payment terms,
and scope to be agreed upon before the service is to be performed, and a
Change Order will be issued to document this understanding.
Unanticipated Services
Furthermore, the parties agree that if an unanticipated need arises (such as,
but not limited to, an audit by a taxing agency, a financial statement audit or
compilation required as part of a lender financing agreement, or any other
exogenous service not anticipated in this agreement by the parties) that ABC
hereby agrees to perform this additional work at a mutually agreed upon
price. This service will be invoiced separately to XYZ utilizing a Change
Order.
Value Guarantee
Our work is guaranteed to the complete delight of the customer. If you are not
completely satisfied with the services performed by ABC, we will, at the option
of XYZ, either refund the price, or accept a portion of said price that reflects
XYZ’s level of value received. Upon final payment of your invoice, we will
judge you have been satisfied.
Price Guarantee
Furthermore, if you ever receive an invoice without first authorizing the
service, payment terms, and price, you are not obligated to pay for that
service.
Payment Terms
The following payment terms are hereby agreed to between XYZ and ABC:
• January 31, 2017
$XX
• February 28, 2017
XX
• March 31, 2017
XX
• April 30, 2017
XX
• May 31, 2017
XX
• June 30, 2017
XX
• July 31, 20107
XX
• August 31, 2017
XX
• September 30, 2017
XX
• October 31, 2017
XX
• November 30, 2017
XX
• December 31, 2017
XX
TOTAL 2017 PAYMENTS $XXX
To assure that our arrangement remains responsive to your needs, as well as
fair to both parties, we will meet throughout 2017 and, if necessary, revise or
adjust the scope of the services to be provided and/or the prices to be
charged in light of mutual experience.
Furthermore, it is understood that either party may terminate this Agreement
at any time, for any reason, within 10 days of written notice to the other party.
It is understood that any unpaid services that are outstanding at the date of
termination are to be paid in full within 10 days from the date of termination.
If you agree that the above adequately sets forth XYZ's understanding of our
mutual responsibilities, please authorize this Agreement and return it to our
office. A copy is provided for your records.
We would like to take this opportunity to express our appreciation for the
opportunity to serve you.
Very Truly Yours,
BY: __________________________
Allan Somnolent, Partner, ABC, CPAs
Agreed to and accepted:
BY: __________________________
DATE: ________________
Customer, President, XYZ, Inc.
Exhibit 8: Explaining the Sample FPA
Date of the FPA
The FPA can be either for a calendar or fiscal year, depending on the
customer. You may want to stagger your FPAs so the firm will not be rushed
to draft new FPAs within one particular time of the year. I have seen multiple
year FPAs, as well as Perpetual FPAs that cover all the compliance work for
the customer, leaving a second FPA to outline those services that change
from year-to-year (usually more value-added, noncompliance services).
Professional Services Provided
Obviously, you will describe each service to be provided by your firm, and you
may provide additional scope details to the degree necessary to have no
misunderstandings between you and the customer. This requires professional
judgment. For example, with the audit service in the sample FPA you are
specifying the customer provide PBC schedules by February 15, 2017. If the
customer does not deliver by this date, the scope of the audit changes, and a
Change Request should be issued.
Unlimited Access
This service is included in the bundled price to the customer and will break
down the communication barrier that may arise if you charge for each
meeting and phone call. The more you talk with a customer throughout the
year, the better able you will be to provide additional value, especially before
the customer enters into various transactions.
Do customers abuse this service? Overwhelmingly, the answer is no. Any
customer who enters into an FPA with your firm is usually an “A” or “B”
customer, and a high level of mutual trust, respect, and understanding
already exists. If they do need to call you at home on Saturday evening at
11:00 p.m. it is usually for a very good reason (a death in the family, accident,
etc.), and you want to talk to them. Any additional work that results from these
contacts is priced separately, utilizing a Change Order. Furthermore, if a
customer did contact your firm excessively, you are obviously adding value,
and can readjust your price accordingly for this access. If they are abusive, or
unwilling to pay for your value, you should terminate them.
Unanticipated Services
This clause offers many advantages. By specifying the services that you are
aware of at the time of drafting the FPA, you are leaving many opportunities
for providing additional services, and because customers are paying you for
unlimited access, they are more likely to select you to provide those additional
services, thereby effectively locking out the competition. Another advantage
is, by their nature, Change Orders deal with marginal services that the
customer wants, rather than what the customer needs (because the FPA has
taken care of their basic needs), and can command premium prices.
Value Guarantee
This policy reduces the risk to the customer of working with your firm, as well
as sticker shock and buyer’s remorse. Why should the customer bet on your
firm if you won’t? A service that is guaranteed is worth more than one that is
not, so this clause will allow the firm to command a premium price over the
competition. (For more information on this policy, see the book Extraordinary
Guarantees in the Other Resources section).
Price Guarantee
This clause ensures that your firm sets the price when you have the leverage,
which is before the engagement begins. No customer signed FPA or Change
Order, no work will be performed––period! This will inculcate the “No
surprises” culture within your firm, something customers will value highly,
providing an excellent competitive differentiation, and another opportunity for
premium pricing.
Payment Terms
The sample FPA shows 12 payments, but this clause can be designed for
quarterly payments, semiannual payments, or with a deposit made upon
signing the FPA. For personal tax returns, many firms require payment
upfront or upon delivery at the latest.
One value-added idea for business customers is to offer the customer the
ability to structure the payment terms around their cyclical cash flow rather
than the firm’s workflow (who knows this cash cycle better than their CPA?).
Since the customer has input into these terms, it will negate payment
resistance.
Revisions to the FPA
This is a good clause to add, especially for new customers, since it reduces
the risk the customer is taking in dealing with your firm. It also ensures the
firm will remain in communication with the customer and continuously solicit
feedback on their level of satisfaction.
Termination Clause
This clause also removes risk from the customer, lowering buyer’s remorse.
By utilizing bundling and offering just one price for all the services in the FPA,
the question arises about what to do if the customer terminates the
relationship before all the services are performed. In that case, you will simply
have to agree upon the value compared to the payments made, and one
party will owe the other. The customer already has the option of paying
whatever they believed the value to be due to the Value Guarantee, so don’t
let this detail prevent you from bundling your services into one price.
The Words You Should Use
The words fixed price is a better word than fee, since it conjures up no
negative feelings, as is invoice rather than bill. The word agreement is
preferable to the word contract, which conjures up images of disputes, lack of
trust, courts, and lawsuits, while agreement has a much more positive
connotation to the customer. The word authorize is preferable to sign for the
same reasons, and puts the customer in control.
Exhibit 9: Sample Change Request
ChangeRequest
Projectname
Changenumber
Projectmanager
Requestorname
Requesteddate
Decisiondate
Descriptionofchange
Clickhereanddescribetheproposedchangetothescope.
Businessreasonforchange
Clickhereanddescribethebusinessreason(indollarswhereatallpossible)forthe
change.
Tobecompletedbytheprojectmanager:
Impactonscope
Clickhereanddescribetheimpactonthescopeoftheproject.
Impactonresources
Clickhereandentertheimpactontheresources(includingcosts)oftheproject.
Impactontime
Clickhereandentertheimpacttothetimelineoftheproject.
Impactonquality
Clickhereandentertheimpactonthequalityoftheproject.
Tobecompletedbytheexecutivesponsor:
Rejectedforreason
Clickhereandenterthereasonsthischangewasrejected.
Approved
Ihaveexaminedthischangerequest,agreewith,understanditscontents,and
officiallyauthorizethechange.
AuthorizedRepresentativeof
VeraSageInstitute
ProjectManager
Date
Date
Exhibit 10: Sample Change Order
Customer:
Date:
Project Description and scope of services [and estimated completion date, if
appropriate]:
________________________________________________________
__________________________________________________________
Price: $_____________
We believe it is our responsibility to exceed your expectations. This Change
Order is being prepared because the above project was not anticipated in
our original Fixed Price Agreement, dated xx/xx/xx. The price for the above
project has been mutually agreed upon by XYZ, and ABC, CPAs. It is our
goal to ensure that XYZ is never surprised by the price for any ABC service,
and therefore we have adopted the Change Order Policy. The price above is
due and payable upon completion of the project described [or, payable up
front, if agreed upon, or in installments, etc., whatever you and the customer
agree to].
If you agree with the above project description and the price, please
authorize and date the Change Order below. A copy is enclosed for your
records. Thank you for letting us serve you.
Sincerely,
Allan Somnolent, Partner, ABC, CPAs
Agreed to and accepted:
BY: ________________________
Customer, President, XYZ
Date: _________________________
Exhibit 11: Pricing After Action Review: To be completed by the value
council/CVO after each major engagement
Did we add value for this
customer?
How could we have added more
value?
Did we capture value?
Could we have captured more
value through a higher price?
If we were doing this type of
FPA again how would we do it?
What are the implications for
product/service design?
Should we communicate the
lessons on this FPA to our
colleagues and how?
How could we have enhanced our
customer’s perception of value?
What did we teach this
customer?
What other needs does this
customer have and are we
addressing them?
Did this FPA enhance our
relationship with this customer?
What impact has this FPA had
on developing our customer’s
trust in us?
How would you rate our
customer’s price sensitivity
before and after this job?
How has this FPA advanced us?
Did we have the right team on
this FPA?
How high were the costs to
serve?
What could we do better next
time?
Do we need to update our
customer complaint register?
How could we thank this
customer for their business?
Exhibit 12: A Lesson in Value Pricing Ice Cream––From an Accountant!
The history of business is the history of epiphanies, and sometimes the fog
clears up and the right path is seen. This certainly happened––with respect
to pricing––for Ben Cohen and Jerry Greenfield, founders of Ben & Jerry’s
ice cream. In an essay written in 1997––before they sold the business on
August 3, 2000 to Unilever, the British-Dutch food company––“Bagels, Ice
Cream, or…Pizza?,” they explain what they term was their “famous pricing
epiphany”:
Each year we would break even and say we needed only to do a little
more business to make a profit. Then the next year we’d do a lot more
business and still only break even. One day we were talking to Ben’s dad,
who was an accountant. He said, “Since you’re gonna make such a highquality product instead of pumping it full of air, why don’t you raise your
prices?”
At the time we were charging fifty-two cents a cone. Coming out of the
sixties, our reason for going into business was that ours was going to be
“ice cream for the people.”
Ben said, “But, Dad, the reason we’re not making money is because we’re
not doing the job right. We’re overscooping. We’re wasting ice cream. Our
labor costs are too high––we’re not doing a good job of scheduling our
employees. We’re not running our business efficiently. Why should the
customer have to pay for our mistakes? That’s why everything costs twice
as much as it should.”
And Mr. Cohen said, “You guys have to understand––that’s human.
That’s as good as people do. You can’t price for doing everything exactly
right. Raise your prices.”
Eventually we said, either we’re going to raise our prices or we’re going to
go out of business. And then where will the people’s ice cream be?
They’ll have to get their ice cream from somebody else. So we raised the
prices. (Quoted in The Book of Entrepreneurs’ Wisdom, page 462-63; see
Other Resources).
Excellent advice from an accountant. Physician, heal thyself.
Bibliography
Peter Drucker: Shaping the Managerial Mind, John E. Flaherty, Jossey-Bass,
1999.
The Price Advantage. Michael V. Marn, Eric V. Roegner, and Craig C. Zawada,
John Wiley & Sons, Inc., 2004.
The Strategy and Tactics of Pricing: A Guide to Growing More Profitably, 4th ed.,
Thomas T. Nagle and John E. Hogan, Prentice-Hall, 2006.
Extraordinary Guarantees: Achieving Breakthrough Gains in Quality and
Customer Satisfaction, Christopher W. Hart, Spire Group, 1998.
The Book of Entrepreneurs’ Wisdom: Classic Writings by Legendary
Entrepreneurs, Peter Krass, ed., John Wiley & Sons, Inc., 1999.
Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table, Reed K.
Holden and Mark R. Burton, John Wiley & Sons, Inc., 2008.
Revenue Management: Hard-Core Tactics for Market Domination, Robert G.
Cross, Broadway Books, 1997.
Value-Based Fees: How to Charge––and Get––What You’re Worth, Alan Weiss,
Jossey-Bass/Pfeiffer, 2002.
The Firm of the Future: A Guide for Accountants, Lawyers, and Other
Professional Services, Ronald J. Baker and Paul Dunn, John Wiley & Sons, Inc.,
2003.
Pricing on Purpose: Creating and Capturing Value, Ronald J. Baker, John Wiley
& Sons, Inc., 2006.
Measure What Matters to Customers: Using Key Predictive Indicators, Ronald J.
Baker, John Wiley & Sons, Inc., 2006.
Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth, Ronald
J. Baker, John Wiley & Sons, Inc., 2007.
Implementing Value Pricing: A Radical Business Model for Professional Firms.
Ronald J. Baker, John Wiley & Sons, Inc., 2011.
The Soul of Enterprise: Dialogues on Business in the Knowledge Economy.
Ronald J. Baker and Ed Kless, VeraSage Press, 2015.
Burying the Billable Hour, Ronald J. Baker, The Association of Chartered
Certified Accountants, 2001. Visit www.verasage.com to download free copy in
pdf.
Trashing the Timesheet, Ronald J. Baker, The Association of Chartered Certified
Accountants, 2003. Visit www.verasage.com to download a free copy in pdf.
You Are Your Customer List, Ronald J Baker, The Association of Chartered
Certified Accountants, 2004. Visit www.verasage.com to download a free copy in
pdf.
Other Resources
www.verasage.com
Visit the “Trailblazers” sections for more case studies of firms that have made the
transition to Value Pricing. A host of other resources can be found throughout the
site.
www.thesoulofenterprise.com, Hosts Ron Baker and Ed Kless, radio show on
www.VoiceAmerica.com, The Soul of Enterprise: Business in the Knowledge
Economy. This show runs live every Friday at 1pm PT, and is archived on
iTunes, Stitcher, voiceamerica.com, and at www.thesoulofenterprise.com.
Professional Pricing Society’s Web site: http://www.pricingsociety.com/
Blog: http://professionalpricingsociety.blogspot.com/
Ronald J. Baker
Profile and Contact Information
Ronald J. Baker started his CPA career in 1984 with KPMG’s Private Business
Advisory Services in San Francisco. Today, he is the founder of VeraSage
Institute—the leading think tank dedicated to educating professionals
internationally—and a radio talk-show host on the www.VoiceAmerica.com show:
The Soul of Enterprise: Business in the Knowledge Economy.
As a frequent speaker, writer, and educator, his work takes him around the world.
He has been an instructor with the California CPA Education Foundation since
1995 and has authored fifteen courses for them, including: You Are What You
Charge For: Success in Today’s Emerging Experience Economy (with Daniel
Morris); Alternatives to the Federal Income Tax; Trashing the Timesheet: A
Declaration of Independence; Everyday Economics; Everyday Ethics: Doing Well
by Doing Good; and The Best Business Books You Should Read.
He is the author of seven books, including: Professional’s Guide to Value Pricing;
The Firm of the Future: A Guide for Accountants, Lawyers, and Other
Professional Services, co-authored with Paul Dunn; Pricing on Purpose: Creating
and Capturing Value; Measure What Matters to Customers: Using Key Predictive
Indicators; Mind Over Matter: Why Intellectual Capital is the Chief Source of
Wealth; Implementing Value Pricing: A Radical Business Model for Professional
Firms; and his latest book The Soul of Enterprise: Dialogues on Business in the
Knowledge Economy, co-authored with Ed Kless.
Ron has toured the world, spreading his value-pricing message to over 150,000
professionals. He has been appointed to the American Institute of Certified Public
Accountant’s Group of One Hundred, a think tank of leaders to address the future
of the profession; named on Accounting Today’s 2001, 2002, 2003, 2004, 2005,
2006, 2007, 2011, 2012, 2013, 2014, 2015, and 2016 Top 100 Most Influential
People in the profession; voted number three, six, and nine, of the Top ten Most
Influential People in the profession in 2012, 2013, 2014, 2015, and 2016;
selected as one of LinkedIn’s Influencer Bloggers; and received the 2003 Award
for Instructor Excellence from the California CPA Education Foundation. He
graduated in 1984 from San Francisco State University, with a Bachelor of
Science in accounting and a minor in economics. He is a graduate of Disney
University and Cato University, and is a faculty member of the Professional
Pricing Society. He presently resides in Petaluma, California.
To contact Ron Baker:
VeraSage Institute
E-mail: [email protected]
Website/Blog: www.verasage.com and www.thesoulofenterprise.com
Follow on LinkedIn: http://linkd.in/SAG3IF
Twitter @ronaldbaker