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How do you determine the value of the services you offer? What’s the difference for you and your clients when you base your pricing on hourly billing versus value pricing?
I recently had a conversation with Ron Baker, known in accounting circles as “The Godfather of Value Pricing,” to discuss some reasons so many accounting firms are still stuck in the hourly pricing model. We discussed how to shift your ideas about billing, how to show existing clients the value of switching models, and practices companies can implement to ensure they’re continuing to provide excellent value for their clients.
Ron is an economist who has spent the last few decades studying pricing models and the theories behind them. He began implementing the value pricing model in the 1980s and has written several books teaching thousands of professionals how to implement value pricing in their own businesses.
My firm has used value pricing since 2016, but sometimes the business owners we coach are hesitant to embrace the model. Many of us have been trained to think that the more time we spend on something, the more valuable it is. These principles lead businesses to charge based on hourly billing or fixed pricing, disregarding the unseen benefits that value pricing and good working relationships can offer both to clients and business owners.
“Value is completely subjective,” Ron explains. He gives the example of water: A man in the desert, who hasn’t seen a drop of water for days, would give everything he had for a drink of water. The cup of water is the difference between life and death, and its value is immeasurable. The same man, in the comfort of his own home, wouldn’t be willing to give much of anything at all for that same cup of water - why would he, when he can freely access all the water he needs? Water in the man’s basement would have negative value, costing him money and resources to get rid of the water and fix the damage.
In these examples, the water itself stays the same, but it has different values in each situation.
Ron explains, “Value is determined by the subjective desires of the customer who buys the product or service, what they’re going to do with it, and the outcome it is going to create for them.”
Mindset Shifting Into Value Pricing
Ron discovered the importance of value pricing by studying some surprising companies - Disney, American Express, and Nordstrom, just to name a few. He realized these companies had one thing in common: a commitment to excellent customer service.
“You can’t have a great customer experience and be a service leader if you’re billing by the hour - it’s a crappy customer experience,” he explains.
If you’re not pricing based on time, there’s no need to monitor the time spent on projects. Rather than focusing on the end goal of completing the project efficiently, you can focus on your relationship with your client.
By getting rid of hourly pricing, Ron also got rid of timesheets, billing, project management, and tracking the efficiency of individual team members.
Instead of timesheets, he focuses on these key items:
- Turn around times
- High satisfaction days - those days when team members have the feeling of “Yes! This is what I was born to do!” are a good barometer of company morale
- Value gap - the revenue of value pricing versus if the client individually purchased everything they needed from you
- Net Promoter Score (NPS) - these measures how companies are perceived by their customers
Next, we shifted into talking about how to explain value pricing to clients, and here’s where things got a little heated between Ron and me!
Explaining the Benefits of Value Pricing to Clients
For a client who is used to paying by the hour or per project, shifting to value pricing might pose some challenges.
I like to explain value pricing using what I call the ROI method because I think it’s the easiest way to visualize value pricing.
Here’s an example of what I’m talking about. Let’s say my service costs $20,000 per year, but I can save the client $100,000 in taxes. This results in $80,000 in savings for the client and shows them immediately, using dollars and cents, how they can individually benefit from value pricing.
Ron pointed out, though, that it’s not just about dollars and cents.
“We don’t as a profession just solve problems...We help people achieve their dreams. If all you’re doing for a client is solving problems, you’re dealing with yesterday...I’d much rather pursue opportunities. We provide transformations. We guide customers from where they are, to where they want to be. We’re not selling products, we’re selling that transformation, and that’s incredibly valuable and goes far beyond tax savings.”
I absolutely agree with everything Ron says here; there’s nothing more incredible than helping clients reach their dreams and their full potential. However, I do think it can be difficult to quantify those benefits for a client in terms that make sense, especially if they’re unfamiliar with the advantages of value pricing. That’s why I still lean towards the dollars-and-cents examples to give clients a real-life visual to show them the value, especially when I’m first bringing them on board with this pricing model.
How To Shift Your Client Base to Value Pricing
Hopefully by now you’re convinced that value pricing is the right model for you and for your clients. But if you’ve always billed hourly or by project, how do you shift your practice over to a new model?
Ron points out, “Talk about why you’re doing it, which is for them.” No matter how you handle it, you might lose some clients in this process. Clients might not understand the value you provide with value pricing, and that’s okay.
I think it’s easiest to begin shifting to value pricing with existing customers, moving them over one at a time. Your existing customers already know and love you, so they might be more open to value pricing. Ron shifted both existing and new clients into value pricing simultaneously, and I can see the wisdom in that as well.
Whichever way you decide to make the switch, Ron points out the importance of creating a seamless process for the client. “You never want to surprise them with an invoice from your firm.”
Practices to Nurture Your Relationship With Value Priced Clients
Part of the beauty of value pricing is the ability to focus on building a relationship rather than checking the boxes and moving on to the next item. Continuing to nurture and build those client relationships is an imperative part of ensuring the continued growth of both the relationship and the client.
Ron has some insights into how value-priced firms can support their client relationships and ensure continued growth. He utilizes a process called “After Action Reviews” consisting of these four questions:
- What were the objectives?
- What actually happened?
- What was the gap between the objectives and what actually happened, and why did that gap happen? What were the positives that happened as a result of that gap, and what were the negatives?
- How can we do it better next time?
This process was stolen (his words, not mine!) from the United States Army. This process isn’t a blame game, but an incredible learning tool to help you make better decisions in the future. For knowledge-based organizations, this is a great way to capture intellectual capital. It also provides a safe environment for people to admit (and learn from) their mistakes, because what matters is growing and strengthening the relationship with the client.
The true tragedy is that in an hourly billing model, the time it takes to perform an After Action Review is simply too costly because you can’t bill the client for it.
Ron and I both believe that value pricing is the model of the future for accounting firms. With a focus on building relationships, valuing your time, and providing an excellent customer experience, value pricing provides incredible benefits to both business owners and their clients.
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