A growing number of industry pricing experts are urging CPA firms to jettison the long-standing practice of hourly billing and replace it with a fixed-pricing model, or even the more optimal model of "value pricing." Few public accounting topics spark as much controversy as this one.
To give members additional insight into this topic, the JofA sat down for a Q&A session with author and consultant Ron Baker, an unabashed value-pricing champion. This conversation provided an in-depth look at how firms can present value-pricing options to clients.
One of the hallmarks of value pricing is that firms can offer different pricing options to customers. But how should firms present those options to customers?
Baker: I like handing the client a piece of paper. And if you put the pricing options in a columnar format from left to right, I suggest you start with your most expensive option on the left-hand side and move down to your cheapest on the far right. And that's to take advantage of the anchoring effect, the fact that your top price makes the cheaper prices look palatable. And putting it in columnar format also is taking advantage of the framing effect: They are comparing you against you.
Ideally, I really like presenting this in person because you get to read body language. So that gives you clues on what resonates with customers, what they might not like, what they might have questions about, what might not be clear. This will help you revise your options going forward so they become clear and you get better at communicating the value you are providing.
If you can't have an in-person conversation, the second best way is on the phone. Don't just send a proposal in via email. Then you're just stuck, wondering if they have seen the proposal. Instead, get the person on the phone first and then email them the proposal and actually sit there on the phone while they read it. You will learn quite a lot. They will have immediate questions. You'll probably have a more candid conversation with them.
It's difficult; none of us like to do it. But it is very, very effective.
How long should the proposal be?
Baker: I would say this is an aspirational goal: Keep your proposal to one page because that really makes you focus on the benefits to the customers. If it has to be a multiple-page proposal, put the prices on the first page. No matter how big your proposal is, people turn to the price page first. So you might as well lead with your price.
Do you have any other suggestions for presenting your price to customers?
Baker: Don't use the word "fee." Fee is a terrible word. It conjures up all sorts of negative things. Nobody likes to pay fees. Instead, use the word "price" in all of your proposals. Ideally, use "fixed price." "Price" is a benign word; it's a neutral word. None of us have any problem saying, "What's the price?" So it's got no baggage.
Also, I would use the word "agreement," not contract. "Contract" conjures up images of lawyers and courts and all sorts of things.
Another tip: Don't qualify your price. Don't say "our normal price, our standard price, our regular price." Because all that does is invite negotiation. And remember, if you do negotiate, then you're negotiating based on value, not price. So if you're giving up price, the customer must give up value [such as by paying upfront or giving the CPA more time to complete the project]. You can't make a unilateral concession.
I would also suggest that firms place a time limit on their prices. No price should last forever. Things change; capacity in your firm may change. So we like to see proposals that have some type of expiration date. That's not a tactic to get a client to make a decision sooner—like "this price is only good for today." Maybe you keep the price open for three weeks or maybe a month or something like that. But I would not let a price last forever. Because if the client comes back in a year and expects that service, things might have changed in your firm dramatically, and you don't have the capacity. And you would have never given that price at that point.
Also, remember that there are a finite number of price objections. So you should have answers to all of them. And remember that real bargaining, real negotiation takes place between equals. You are an equal to your client; you're not a supplicant. And you can only negotiate with an equal, so you've got to be willing to stand your ground. And I think offering options really helps with the psychology behind that. It really does help you stand your ground.
You suggest that firms use a fixed-price agreement (FPA). What should be included in the FPA, and does that replace the firm's legal engagement agreement?
Baker: The fixed-price agreement does not replace the engagement agreement that you have and probably have to have because of your malpractice carrier. A lot of insurance companies have a big say in how those engagement letters are written. The only thing that has to be modified in the legal engagement agreement is where it talks about price. All you have to say is the price for this engagement is stipulated in our fixed-price agreement dated such and such.
The fixed-price agreement is a very simple document, usually about two pages, that lays out the scope of work.
It's also got an unanticipated services clause in it that basically triggers a change request or a change order. So if something comes up during the year that's not in this fixed-price agreement—like an IRS audit, for instance—then the clause triggers a change request.
I recommend that the fixed-price agreement also have a service guarantee clause that basically says, "Mr. or Mrs. Customer, if you're not satisfied for whatever reason, only pay for the value that you have received." That's another very important way to overcome pricing objections from clients, because a service that's guaranteed is worth more than a service that's not.
The fixed-price agreement also lays out the payment terms. So it answers payment questions like these: Are payments monthly? Are they quarterly? Is there a deposit required upfront? Is it going to be authorized on a credit card or an electronic funds transfer? All of those things are spelled out in the payment terms.
And then there are a couple of clauses that state that the agreement can be revised in 30 days or 60 days or whatever. It basically says that if things change based upon our mutual experience, we can revise this, we can revisit the price, we can revisit the terms, the scope of work based upon what's happening. That's a pretty important clause, particularly for a brand-new client you might not know a lot about.
There's also a termination clause that says basically this is an at-will agreement and either party can terminate it. Now, obviously, there are professional obligations on the CPA. You can't just terminate somebody on April 14 and tell them they're on their own for their tax work. But it is an at-will agreement, so either party can leave it at any time.
About the author
Chris Baysden is the senior manager, newsletters, for the JofA. To comment on this article or to suggest an idea for another article, contact him at firstname.lastname@example.org or 919-402-4077.
- "Q&A: How to Present Your Prices to Customers," July 30, 2015
- "Q&A: To Boost Revenue, Try Offering These Pricing Options," June 22, 2015
- "Q&A: How to Determine a Client's Price Sensitivity," May 4, 2015
- "Q&A: What You Need to Ask Clients Before Setting a Price," April 27, 2015
- "Q&A: How Can Firms Implement Value Pricing?" March 18, 2015
- "Q&A: Should You Dump the Billable Hour?" Feb. 10, 2015
- "Time's Up: The Benefits and Challenges of Moving Away From the Billable Hour," Aug. 2014, page 28
- "Pricing on Purpose: How to Implement Value Pricing in Your Firm," June 2009, page 62
- 10 Steps to a Digital Practice in the Cloud: New Levels of CPA Firm Workflow Efficiency, Second Edition (#PTX1401P, paperback; #PTX1401E, ebook)
- 2015 Valuation Handbook—Guide to Cost of Capital (#PBV1502P, hardcover; #PBV1502PDF, quarterly PDF updates)
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- Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses, Fourth Edition (#PBV1201P, hardcover)
- Introduction to Business Valuation (#745786, text; #164610, one-year online access)
- Understanding Business Valuation (#732886001, text)
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