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In this overview, we’ve summarized the thoughts, tactics, and strategies from the top practitioners and leaders on value pricing.
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Growing Your Firm Master Series Module: Pricing
Introduction to the Pricing Section:
Pricing quickly become one of the most talked about topics across the industry, and with good reason, it is a major factor in determining your profitability!
In this guide, we’ve summarized the thoughts, tactics, and strategies from the top practitioners and leaders on value pricing. As with each summary, be sure to review the implementation worksheet and resource documentation.
With that in mind, let’s dive in.
Part 1: Why Is this Conversation Happening?
Technology Trends:
With new technology helping automate processes, owners are now using tools to help them take on more client work (and remove the repetitive admin work). As such, the industry becomes more efficient, their billable time will go down.
Client Expectations:
Client’s are now focused on value and outcomes, and resist hourly billing. At best, they work with the firm but restrict the activities that firm can take on, for fear they will receive a surprise bill. As other industries move into fixed fee “subscription” based models, clients have begun to expect a similar approach to their professional service providers.
Scalability and Growth:
As firms continue to grow, hourly billing can create a ceiling on profitability. Firms look to fixed or value based pricing as a way to increase profits without increasing overhead.
Foundation of Value:
Hourly billing was introduced in 1919.
Hourly billing business model is:
Revenue = people power (capacity) * efficiency (realization, utilization, billable hours) * hourly rate.
Problem is denominated in time, but not a customer alive that “buys time”
Example:
When we visit a Doctor, we don't go there to “buy an hour”
so what customers are buying is an outcome
Another way to think about, friend or loved on has baby, you want to see the baby, not hear about labor pains.
But in accounting we focus on labor pains in 6 minute contractions and bill for them, but we ignore the baby, which is what the customer focuses on.
Related Interview: Ron Baker on Value Pricing
Foundation of Value:
“Hourly billing doesn’t fit the knowledge economy, but instead factory model” - Ron Baker
Difference Between Time & Value
“What separates a professional from another type of worker? One of the big things is a professional who takes responsibility for delivery an outcome, not a series of tasks. But hourly and timesheet places too much focus on hourly and time instead of outcome.
Anytime you can reduce risk and put on yourself, you’re in a better position.
If it’s hourly, the risk is on the customer… and they feel it! They don’t like the uncertainty of it.
We don't like uncertainty, which is why we liked fixed mortgage, because its certainty. You can charge more for the certainty alone.”
Related Interview: Ron Baker on Value Pricing
The New Business Model
Customer profitability (over lifetime) =
Intellectual Capital (“IC)” of Their Firm X
Effectiveness (not efficient at doing wrong things, but effective, doing the right things)
Then multiple by price (airlines, don’t charge by hour, but collect it before before you fly, and you pay in full… why cant accountant get paid in advance, you can if you price in advance )
The Value Formula:
Customer profitability: IC * effectiveness * price
Intellectual Capital Defined: • Human capital (what “Goes home at night”)
The workers owns the mean of production, but today the knowledge workers own the means of production
• Social capital: Your Customers, alumni, vendors, association, previous workers,
• Structural capital (only thing that firm actually owns) : Stay in firm after people go home, systems, workflows, strategy, information products (courses, webinars, books, etc)
Professional services have few assets, but human capital is the leverage point of the professional firms, and what’s interesting is that human capital is a non rival asset.
Rival asset is like a bottle of water, more I drink of it, less you have
But knowledge is non rival, but if I give you ideas today, you can tweak and make it better, but the source still has it. So now both parties have it, and instead of diminish, it grows.
Billable hour is limited because it is a rival asset and you can only do one thing at a time, which makes it very limited by definition.
Billable hour puts artificial ceiling over the wealth that can be created.
Bill gates has the same amount of time, but never sold time so he never based value or ost on it.
Time is a constraint, so hourly billing limits billing.
Benefits of Fixed of Value Based
Profitability:
By removing the connection between “time” and “price”, you can list fixed or value based prices… typically at a higher average amount than a typical hourly billing.
Positioning
You can focus on the pain your client has, and how your solution solves that problem… instead of talking about hourly rates, you become an advisor that learns about the problems they’re experiencing and how you can help.
Team Management
Team members will no longer have to submit time sheets. Value or fixed fee firms can still track time in order to manage future capacity planning.
Client Management
Clients will know exactly how much your service, job, or engagement will cost. No guess work, no uncertainty, and no confusion in terms of payment! In fact, as you’ll see below, you can remove A/R completely.
Innovation on Services
Since a firm focuses on value, if a client has a problem outside your typical package of services (but still falls under your skill set), you can create a new offering to assist that client.
No more Accounts Receivable
Since pricing is 100% transparent through the process, charge the client upfront and get paid (remember, you’ll also offer a service guarantee, so the client has zero risk paying upfront).
Examples of Fixed or Value Driven Pricing
Payment terms
Customers cyclical cashflow, not your internal workflow.
Value is determined outside your firm, not inside.
Ex: Christmas retailers, you know they're broke during Summer, but flushed in Q4/Q1 and let them pay more in heavy seasons and less when they're not, so tax work is done march/april, and billed end of year. And then we can help them budget
Value guarantee
If you’re not satisfied/delight, only pay what you think the value was. Customers love this because customer will pay more to have this unconditional guarantee… amazon, LL Bean, Zappos, Nordstrom, Fedex (overnight or you don’t pay)
Service guarantee: You already offer it, bc if any customer really complained, you'd prob refund it, so why not make it public.
Access Options
in unlimited access “Call me or talk with us, anytime or any topic”
Customers don't like reaching out for hourly prices because they feel like they’re being nickeled and dime, so instead just build it into your pricing. This will lead to more work, and more value work. More high value to get into the strategy rather than get into post transaction. Unlimited access give them an incentive to call you first before talking with other consultants or professional providers. Like a country club access, they know its built into the price and will reach out to you more.
Bundle Options
Customers cyclical cashflow, not your internal workflow.
Value is determined outside your firm, not inside.
Ex: Christmas retailers, you know they're broke during Summer, but flushed in Q4/Q1 and let them pay more in heavy seasons and less when they're not, so tax work is done march/april, and billed end of year. And then we can help them budget .green, gold, and plat.
Advisory Services
If you’re not satisfied/delight, only pay what you think the value was. Customers love this because customer will pay more to have this unconditional guarantee… amazon, LL Bean, Zappos, Nordstrom, Fedex (overnight or you don’t pay)
Service guarantee: You already offer it, bc if any customer really complained, you'd prob refund it, so why not make it public.
rather than looking at revenue… starting as Profitability (not rev-expenses) BUT Profitability (To Your Customers)
Ex: Starbucks, $4.00 latte, you paid because it was worth more than $4.00, otherwise you would have stayed home and make it. It was 40X better than home coffee, so both buyer and seller has to make a profit, and we need to make sure we focus on buyer's profit.
Value Conversations and On boarding
Introduction on Value Conversations:
Value is based on context and what outcome they want.
Customer could care less about your cost, and what do they do with the price? They will try to drive down price while you maximize value.
But guess what, customer wants to maximize value and so does your firm, so guess what..
Value is the ONE area where our interests are aligned.
So this should be the easiest conversation you can have.
For customers, you can customize the price based on the customer interview.
Value determines price, not cost
Goal of conversation is to understand the customer, their problems, and why solution or benefit they’re looking for. Then tie your solution to solve those problems.
Value conversation:
Ask them questions about their life, or business, why did they switch, why now, why us, and what does a successful relationship look like for them?
Really understand the value drivers are for the customers. But you need to do this one customer at a time.
Best, all time opening, with new or current value customers
“Dear Mr/Mrs customer, we will only undertake this engagement if we can agree to our mutual satisfaction that the value we are creating is worth more than the price youre paying us… is that acceptable?” - Ron Baker
That puts both parties on quest to uncover value.
Value questions are about asking questions, and listening.
Jason’s “Genie Question”
Three wishes: If I’m a genie and I can give you three wishes,
What do you want me to create, destroy, blow up, what are the dreams you have?
When a conversation goes here, the client conversation goes to much higher places and sets up a value conversation and thats how they value (and therefore how you can price)
Whimsical questions are valuable because it positions you differently, changes the perspective of the conversation, and opens a value discussion, and you are aligning with them and increase the perception of your firm.
If the on boarding questions are there to make a client think and explore places a typical accounting firm doesn’t explore.
Value conversations happen face to face or on skype or gotomeeting webcam.
