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 AICPA 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 fourth in the series, focuses on how to determine a client’s price sensitivity before an engagement even begins. 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
How do you use the information from your conversations with customers to arrive at a price for an engagement?
Baker: You take that information that you gleaned from the value conversation and bring it back to the value council, and then that value council is going to be the one to assess the situation, assess what the customer is trying to achieve, turn it into a scope of work, and put pricing around it.
Some of the questions that we like to see the value council ask themselves before they establish the price include the following: What is the customer’s cost of not solving this problem? What is the economic benefit to the customer if they solve this problem or pursue this opportunity? How do we help this customer; how will we help this customer grow their business? How do we help the customer achieve their preferred vision of the future? How do we remove surprises for the customer? And if the service entails risk, what is the worst thing that can happen if this project were to fail? You always want to take a look at trying to eliminate or mitigate the risk to the customer.
Who on the organizational chart are we dealing with? If you’re dealing with the CEO, they’re probably less price-sensitive than if you’re dealing with the controller. Who referred this customer to us? If it’s a warm referral, they’re probably going to be less price-sensitive than somebody who just found you on Google, because somebody’s already bragged about you. In that case, there’s usually less price sensitivity—meaning you can charge a higher price.
Are there any serious competitors? Is the customer talking to other firms? Who are those firms? What do we know about those firms? Are they cheaper? Are they more expensive? Has the customer engaged with another firm to do similar work in the past? Why did they leave that firm? They may not be a good customer. They may be one of those customers that changes firms every year, which is usually a big red flag. (Editor’s note: For more questions to ask, see Exhibit 3 in this story.)
What you’re really trying to do is ascertain the customer’s price sensitivity. If they’re price-sensitive, they’re probably going to only go with your lower-price options. If they’re not as price-sensitive, they may pick the gold card or a platinum card option.
When clients hear you talk about this, they may say, “Wait a minute, they’re just trying to gouge me.” What’s your response to that?
Baker: We are not talking about gouging the customer or taking advantage of the customer, because one of the things that we’re very strong advocates of is that all firms put in a value guarantee to all of their fixed-price agreements, which basically says, Mr. and Mrs. Customer, if you’re not satisfied for whatever reason, only pay for the value that you think you received. If that’s zero, that’s zero. Now to me, that’s the antithesis of being unethical.
Plus, keep in mind that we’re presenting these options to the customer before we do the work. The customer is voluntarily entering into this transaction. If they think any of our options are gouging them, they’re not going to buy from us, and they’re going to go somewhere else. I actually think there are more ethical issues when you bill in arrears under hourly billing.
Pricing upfront basically says, look, I know what I’m getting into. This is the price. If I don’t like it, I don’t have to buy. But if I willingly sign up and the firm does a good job and it meets all of its obligations, then I’m probably going to be more than satisfied. A firm should be able to command the higher price for that because it’s more value to give customers certainty. It’s very much like the mortgage market. We all pay more for a fixed-rate mortgage than a variable-rate mortgage. It’s the same thing here.
If you give your customer certainty in price and you mitigate their risk of hiring you by offering a value guarantee, then your value compared to your nearest competitor is going to be greater. All things equal, a service that’s guaranteed is going to be worth more than a service that’s not.
You’re also going to give them different pricing options, correct? The price could differ based on any number of factors, including turnaround time, payment terms, and the ways in which you transfer your knowledge to the client (in-person meetings, reports, etc.)?
Baker: Absolutely correct. You’re allowing the customer the freedom to make the value-price trade-offs that are important to them. It’s actually giving the customer more choice and more control, which leads to greater satisfaction with the firm’s service and value proposition.
Projects can take about the same amount of time but have vastly different value propositions for customers. Value pricing helps address that issue, right?
Baker: Yes, that is correct. This is why measuring time is such a bad barometer of trying to measure value. It is literally like plunging a ruler into an oven. You are using the wrong “yardstick.” If you worked two hours for a corporation and saved it millions upon millions of dollars … that should command a higher price than if you spent the same two hours doing Ma and Pa’s tax return.
There are other reasons for that, too, like risk, for instance. You’ve got to take risk into account when serving clients. That needs to be built into your price. You can’t price risk by the hour.
Will CPAs who use value pricing receive complaints from customers who talk among themselves and find out there are different prices for their engagements?
Baker: First off, nobody has the exact same amount of work. Second off, you can’t discuss confidential information with one client about another client. So that’s one way to close it off to say, “You can make comparisons all you want if you have friends that also use our firm, but we can’t talk about it, and every price is different.” And if you give customers options, then you’re building very clear fences around your different levels of service based on turnaround time or payment terms or other things. Therefore, customers are going to perceive that as fair.
If I step on an airplane and I paid for a coach ticket, I’m going to walk through first class, I’m going to walk through business class. Those people have already sat down. They’re sipping their champagne. I know they get a higher level of service, and that’s OK by me because I didn’t pay for that. I paid for a cheaper seat in the back. As long as customers are given options, they are going to know that these prices are fair because there are different levels of service that you’re providing and no two customers are exactly alike.
Chris Baysden (firstname.lastname@example.org) is the senior manager, newsletters at the AICPA.