A growing number of industry pricing experts are urging CPA firms to jettison the venerable billable hour 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. Many firms have adopted value pricing in recent years, but others have been reluctant to do so.
To give our members additional insight into this important topic, the JofA sat down for a series of Q&A sessions with author and consultant Ron Baker, an unabashed value-pricing champion. These conversations give readers an in-depth look at the reasons a firm should consider switching to value pricing, and the nuts and bolts of how a switch might work. The following Q&A session, the third in the series, focuses on the conversations that firms must have with their clients to set a price before the engagement begins. Click here to read Part 1 of the series or click here to read Part 2.
What kinds of conversations do firms need to have when they think about implementing value pricing?
Baker: Having this value conversation is absolutely
critical. If you skip this step, it would be similar to a contractor
attempting to build your dream house without any architectural plans.
It allows the firm to understand what we call the five Cs of value.
That is, it gives you a chance to (first C) comprehend the real value
drivers of the customer, and then it gives you the chance to (second
C) create that value for the customer, and this is also the chance to
(third C) communicate a firm’s value to the customer. It also (fourth
C) convinces the customer that they must pay for that value. Then it
allows firms to deploy the most optimal pricing strategy to (fifth C)
capture a fair portion of the value that you’re creating.
Here’s one of the best opening statements to start the value conversation: “Mr. and Mrs. 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?”
And you’ll find that most customers will find that very acceptable. Especially if they’re a CFO or a controller in a company, understanding the value that your firm can bring is going to make it easier for them to justify the price they’re paying you to their boss or their CEO. By the way, that opening statement was shamelessly stolen from McKinsey & Co., one of the most successful professional firms.
This is a conversation you probably wouldn’t have if you’re billing by the hour. How does having this conversation help CPA firms?
Baker: I think a lot of firms get in trouble because they
don’t set the expectations in the customer’s mind. They don’t have a
clear understanding of what the customer values. They just tend to
dive into the work. This requires you to step back and really get a
handle on what it is that the customer is trying to achieve, because
the ultimate purpose here is to understand if your firm can even add
value to this customer more than the price they’re paying you.
Because, if you can’t, you’re probably not the right firm.
So it’s also a customer selection issue. What if the customer has unreasonable expectations? You’re going to find these things out in a really good value conversation because, if the person has unreasonable expectations, I don’t care how technically competent your work is, they’re not going to be happy. It’s far better for the firm to know that before they do any work rather than after they’ve done the work. So you’re exactly right. Under hourly billing, this conversation usually does not happen or is given short shrift, and we just don’t pay enough attention to it. Here it’s the most important component of the process.
What questions should CPAs be asking during the conversation?
Baker: Now, obviously firms should adapt these to the
client’s situation, the client’s culture, the firm’s culture, and the
type of work they’re doing. Ask things like, “What do you expect from
us? How do you define a successful relationship with your CPA?” I want
to know how they’re going to grade me. Just like when you’re a
student, you want to know how the professor is going to grade you, you
want to know how the customer is going to grade you. How are they
going to know that they made the right choice in hiring you six months
or a year from now?
Ask things like, “What is your current pain?” A lot of times customers are coming to CPAs because they have some type of pain, like a tax problem or some pressing need. But also I think CPAs enable customers to pursue opportunity. We should spend some time talking to them about opportunities that we can help them pursue. Ask them what growth plans they have. Ask them, “If price wasn’t an issue, what role would you want us to play in your business?”
Ask why they are changing from their current CPAs. And then also ask them what they liked about working with their prior firm. And, of course, you try to improve on those service aspects. ( Editor’s note: For more questions, see Exhibit 2 in this story.)
You’re also tapping into the client’s imagination and creativity about what they want to create in the future. We can help our clients create the future. Whether it’s get their kid in college or retire earlier or grow the value of their business—whatever it might be—we can help that. That’s a personal transformation, and that’s very valuable.
Who needs to be involved in these conversations, both internal and external?
Baker: Let me deal with the internal side first because one of the steps we’ll talk about is having a value council, and we’re big believers in a firm establishing a value council and even appointing a chief value officer. This is going to be a team of people who price engagements for the firm.
I believe the relationship partner needs to be the main person in this conversation. But let’s say for some reason that that relationship partner is not doing the pricing. Maybe they’re not good at it. Maybe they don’t like to do pricing. Then I would suggest somebody from the value council also be in this meeting because I think team selling is more effective anyway. One person is going to hear things the other person doesn’t. One will pick up on body language, and you’ll get all sorts of information if there are two people out there talking to the customer.
So I would say the partner who has the relationship with the
customer and somebody from the value council if that partner is not a
member of the value council or is not involved in the pricing. That’s
who should be involved from the firm’s side.
From the customer side, this is a very interesting topic. We usually love to say that you only want to be dealing with the economic buyer. If you can’t get in front of the economic buyer, the person that can literally shake your hand and start the engagement that day or the person who signs your check, the ultimate decision-maker, if you’re not talking to that person, … you could just be wasting your time.
How do you determine if you’re talking to a decision-maker?
Baker: You just ask the person you’re talking to, “Are you able to authorize us to begin work? And if not, who else do you have to talk to?”
When do these conversations take place? And how many of them do you need?
Baker: You can’t do this once the work has begun. It’s
got to take place upfront. And, of course, one of the reasons for that
is we want to get a sense of the value before we do the work because
what if the client doesn’t like our price and we’ve already done a
bunch of work?
You want to have this conversation upfront, and you want to spend as much time as necessary. I’ve seen value conversations go two or three meetings. It’s pretty rare that you have over three meetings to discuss this, although it does happen sometimes. There’s no need to rush this unless there’s just some incredibly urgent pressing matter.
In fact, if anything, I want to slow it down. I want you to spend more time on diagnostics. I think the army has a great thought here: Time in reconnaissance is never wasted. So spend as much time as you need. I can’t think of a better reason or a more exciting reason to sit down and talk with a customer or a potential customer than talking about how you can add value to their life or their business.
You recommend pricing the customer, not the services. Can you explain what you mean by that?
Baker: I know this sounds like a really counterintuitive point, but members of the profession need to get over the idea that they’re pricing audits or reviews or tax work or advisory services. They need to start thinking about pricing the customer. This is where pricing in general worldwide in companies is moving to. The reason for that is because value is subjective.
If I’m in the desert and I’m dehydrated and I’m about to die because
I haven’t had water in a few days, then a bottled water is going to be
worth a lot to me—almost infinite value because it’s going to save my
life. If I’m at home washing the dog or the dishes with the same
quantity of water, it’s going to be worth a lot less. If I flooded my
basement with water, now it’s got a negative value, and I have to pay
somebody to pump it out of my basement.
But notice we didn't change the product. It’s still H2O, but it went from almost infinite value to negative value and probably everywhere in between depending on what you were doing, what job you were trying to perform, and what context you were in. That’s why we need to price the customer and not the water because, if you priced the customer, then you’d know exactly where they are. I’m not using this example because I take advantage of them if they’re the guy in the desert. That’s not the point. It’s just to illustrate that value can’t be explained by cost.
—Chris Baysden ( firstname.lastname@example.org ) is the senior manager, newsletters at the AICPA.