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, we 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 fifth in the series, focuses on how firms can offer different pricing options to customers. Previous installments of the series can be found below:
Click here to read Part 1: Should you dump the billable hour?
Click here to read Part 2: How can firms implement value pricing?
Click here to read Part 3: What you need to ask clients before setting a price
Click here to read Part 4: How to determine a client’s price sensitivity
Why does value pricing include different pricing options?
Baker: There are lots of reasons behind it from a research standpoint, but the big one is consumers love choice.
What we’re willing to pay for something is insanely dependent upon what we compare it to. So if I say, “Would you like to buy my unicorn?” you have no idea what to pay because you’ve probably never bought a unicorn before. Offering three choices to the customer puts your product in context. It’s why most businesses offer three of everything: small, medium, large. This is a well-known strategy because it comports with how consumers make choices and buy things.
How many options should CPAs offer clients? Is three the best number?
Baker: Yes. It seems to be the optimal number of options. Two is not enough, and I can give you a specific example why. When you put two options in front of consumers, normally they pick the lower-priced one. When you put three options in front of them, the majority of time they’ll pick the one in the middle. And it’s because of a mental shortcut that we all use. It’s a bias kind of built into our brain when we look at three of anything. You have to do at least three, and now once you get more sophisticated then we’ve seen some firms do four options and sometimes even five, but that’s very advanced. You can actually paralyze a customer by giving them too many choices.
So would a lower price option mean that a CPA would produce a lower-quality work product?
Baker: No, not at all. Think about an airline. An airline offers first class, business class, coach, but they have to land that plane safely for everybody. As a CPA, you differentiate based on the service options that you’re providing the client, things like turnaround time, payment terms, and how you are going to deliver your knowledge to your client.
Can you talk a little bit more about some of the service options CPAs can offer?
Baker: We have a model called “the six T’s” for helping firms do this. One way to do it—and a very popular way—is timing. How fast will the work be turned around to the customer?
So the theory here is like FedEx. You can send something FedEx same day, which is very expensive. But they can also give it to you overnight in the morning, overnight in the afternoon. They can do it second day, third day, and they can even go ground, where it’s even cheaper. So consumers are used to paying for a certain turnaround time. The lower the price, the longer the customer has to wait for their report or for the product or whatever it might be. So that’s a very popular one, and it’s the easiest one to implement.
Another one is payment terms. If I go online and book a hotel room and I get the cheapest rate, I may have to prepay for that room, but if I pay a higher rate I may be able to cancel up to the day of check-in time. So the cheaper the price, the faster the firm gets paid, the higher the price, maybe the more payment terms. Maybe they do monthly for six months or even a year. I think there’s a lot of creative things you can do with this as well because if you have business customers, which a lot of CPAs do, you can structure their payment terms around their cash flow. Not around the CPA firm’s work flow, like doing all the work in tax season or something, but around the customer’s cash flow, which most small businesses love because cash flow is a big deal.
A third one is technology. What type of technology are you going to make available? Maybe at a lower-priced option level they wouldn’t have a portal, for instance, and so you wouldn’t put them in the cloud. Or at the higher-priced option you could integrate various apps that offer dashboards and other types of real-time information and analytics. So the technology might be different.
The fourth “T” is talent. Who does a client have access to? We’ve seen some firms differentiate options based upon if you have access to the partner. At the lowest-priced option, you may only get to deal with the supervising senior or a manager. It’s not as popular in the accounting world as it is, say, in the advertising agency world, but we still do see it. This is where outsourcing could be included as well. If you outsource, you might offer the customer a lower price. So we’ve seen that used as a differentiator.
Another “T” is tailoring. How are you going to tailor your work specifically to this customer? How are you going to present the product—for example, as, say, financial statements? Are you going to present them to a board of directors? If so, how often? There’s lots of things firms can do there to differentiate.
And then the last “T” is transference, which is education. A lot of firms these days are offering webinars or even seminars as a marketing vehicle or maybe just as an educational class for their customers. At the lower-price option you might charge full price to attend those. But if they choose a more expensive option, the client may get 50% off to attend these seminars—or they may get to attend those events for free at the highest price.
All these options give people a choice and allow clients to make the value/price trade-off that they’re most comfortable with.
So when you talk about having three options—a platinum, gold, and a green card level, as you sometimes like to call it—do you have any suggestions as to how much more one option should cost than the other?
Baker: It has to be customized for each client—kind of like eyeglass prescriptions. It has to be custom tailored because we’re talking about pricing a client, not pricing for services. But I will say this: As a general rule, the gap between the green and the gold card is usually more than the gap between the gold and the platinum card.
So let’s say the green card was $10,000, and let’s say the gold card was $15,000. The platinum card may be $17,500. So the gap between the first two is $5,000, but the gap between the middle and the top is only $2,500. The logic here is that makes it easier for the customer to trade up if the gap is smaller between the middle and the top and because the default is almost always going to be the one in the middle.
And what that means is that because options such as timing and payment terms aren’t really adding to a firm’s cost, then the difference in the price drops right to the bottom line. So if a customer moves from a green to a gold or a gold to platinum, that marginal revenue is all profit for the most part and that’s why options are so powerful.
What has been the experience of firms that have switched to offering options?
Baker: The experience has been overwhelmingly positive for almost every firm that I know of that has done this. They just absolutely rave about it because their customers rave about it. First off, customers love choice. Second off, it allows the firm to be creative in how they sell and how they price.
It also does something very powerfully psychologically. When a customer is looking at three choices, you’re actually changing your question from, “Should I work with this firm,” to “How should I work with this firm,” because you’ve put three choices in front of them.
Also, your platinum card becomes an anchoring item. Even if you don’t sell it, it’s kind of like how in a high-end restaurant you may see a $20,000 wine on the wine list. It might not even be in the cellar, but it’s going to make the $800 bottle of wine more palpable and you’ll probably end up buying a higher-priced wine. This is well-known in the restaurant industry.
By the way, firms should present the top price item first; we mostly see these in column form going from left to right, highest to least expensive. That’s your anchoring item and that’s probably going to pull customers to spend more or at least trade up.
Another effect on top of anchoring that we see from behavioral economics with offering options is known as the framing effect. What a consumer compares something to determines what they’re willing to pay for it.
Think about Red Bull. When it came out, Red Bull didn’t put itself in a Coke- or Pepsi-sized can because if they did our brain would say, “Well, that’s a soft drink. Why would I spend $2.50 on a Red Bull?” They put themselves in a tall, skinny can so your brain says, “Oh, that’s a different category of drink. That’s an energy drink. It’s concentrated. It’s worth more.” In other words, they didn’t want you to compare them to a Coke or Pepsi. And so by offering options you’re actually having the customer compare you to you. It’s almost like competing against yourself in some ways. It’s a fascinating effect that is very, very powerful. And those are some of the behavioral economic reasons and the consumer’s psychological reasons for wanting to offer options.
—Chris Baysden (firstname.lastname@example.org) is the senior manager, newsletters for the AICPA.