ThePricing SurvivalGuideGuide 01The best ways to price your adviceWith Ron Baker

illing versus pricing, which one is best for your firm? Accountants have historically relied on the hourly billing model.

But, as we become more digitally efficient and the cloud integrates into more working practices, time is being saved, so billing by the hour isn’t as lucrative. The pressure is on financial professionals to now prove the value of their services. That’s where value-based pricing comes in.

Ron BakerVeraSage Institute Founder

The best ways to price your advice.

Manage, clarify, and offer your firm the ability to exceed your client’s expectations.

Provide additional services.

Bundle pricing, allowing the customer to focus on the totality of the firm’s value proposition rather than the price of each and every service.

In this guide, we gathered advice and strategies from pricing expert Ron Baker on how to make the move from hourly billing to value-based pricing, so that you can have easier and more fruitful conversations with clients when the time comes to transition. Here are the two ways advisors can approach pricing. First, Ron delves into the value-based pricing model, then explores his eight steps to implementing value based-pricing in your firm.

Walk away from this guide with the know-how and knowledge needed to:

Most firms’ pricing mistakes are the result of under-pricing, not over-pricing. According to a 2003 McKinsey & Company study, 80-90 percent of poor pricing decisions were the result of under-pricing.

This is mostly because pricing authority and decisions are not vested in one area that can focus on increasing this skill over time. Pricing is an art, not a science. This is especially true in a professional firm that has the ability to price one customer at a time at a very low marginal cost.

This is an enormous advantage most other businesses are envious of, as they must set a few prices over thousands or millions of customers.

Yet pricing, like any art, is also a skill—the more you do it, the better you get.

Do these pain points look familiar?

Pricing in a nutshell

Pain point Solution

The transaction risk is always on the client.

Clients don’t have many pricing choices.

You are under-valuing your firm’s services.

Struggle to start the conversation with clients.

Utilize fixed prices for every customer.

Offer three choices and allow the customer to focus on the totality of the firm’s value proposition rather than the price of each and every service.

Better understand the customer’s value drivers by engaging in a value conversation.

Prescription without diagnosis is malpractice. Begin by asking questions.

Pricing is one of the most important, and convincing, forms of communication and positioning for firms.

Let’s Begin

An Incorrect and Correct Theory of Value

Firstthings first:One of the main reasons professionals undervalue their services is because they are operating under the wrong theory of value - the labour theory of value.

In its simplest form it means that the value of an item is determined by the amount of labour used in its production.

This theory would predict that a diamond found in a mine would be of no greater value than a rock found right next to it, since each took an equal amount of “billable hours” to locate. Yet how many rocks do you see in your local jewelry store?

The alternative to an incorrect theory is a correct theory. The subjective theory of value concludes goods and services have no inherent value, they are only valuable to the extent there is a potential buyer desiring them. Value, like beauty, is in the eye of the beholder. Value is a feeling, not a number.

For any transaction to take place, both the buyer and the seller must disagree with respect to the value. Price is how we reconcile disagreements with respect to value. Both the buyer and the seller must profit from the exchange, and receive more value––in their subjective perception––than what they are giving up.

Today, there are thousands of firms that are pricing their services according to the external value created––as perceived and determined by the customer––rather than internal costs incurred in generating those services.

Cost

Your profit

Your customers profit!$40 000

$30 000

$15 000

$5 000

$35 000

$20 000

$25 000

$10 000

$0

Price Value

Transitioning from Hourly Billing to Value-Based Pricing Not all pricers in a firm are created equal, which is why I have been a strong proponent of firms establishing a value council, as well as appointing a Chief Value Officer (CVO), in order to centralize the pricing function and make it a core competency within the organization, more on that below.

If you diagram hourly billing, a form of cost-plus pricing, it would look like this:

Now, look at how Value-Based Pricing inverts the above chain by recognizing the economic fact that it is the customer who is the ultimate arbiter of value:

By first determining value, which establishes the boundaries for a price, the firm can then decide if the costs required to provide the service will return a desirable profit. If the project cannot be done at an adequate profit level, the service should not be performed.

All this analysis has to take place before the work is started. What possible good is it to know your costs to the penny if the customer can’t afford—or does not value your service enough to be willing to pay—your price?

What is happening in firms is people are pricing services based on the costs they are incurring without a clue as to the value they are creating. Firms have ample data on their costs, hours, activities, efforts, and other inputs, but a paucity of information on the value they create for their customers.

Costs are only relevant for determining if a service should be provided, and perhaps in what quantities. Costs certainly play no role whatsoever in determining external value to the customer, or setting prices (except as a minimum). Value-Based Pricing inverts what is now an artificial ceiling on firm income imposed by hourly billing into a floor—a price you will never go below.

The Value CouncilIt is past time to change your conversations with customers from hours to value. Do this up front, before you begin any work.

Appoint a CVO and establish a value council in your firm––a group of intellectually curious leaders who will become, over time, experts in creating and capturing value. Your firm will become obsessed with value. Your customers will appreciate it, and they will not bother asking about hours. I guarantee it.

Examples of purpose and strategy statements for the role of the value council and Chief Value Officer are:

• To ensure the firm prices on purpose, according to the value received by the customer, not the costs incurred in performing the work.

• To make pricing for value a core competency within the firm.

• To change the marketing culture within the firm from one that believes “we sell time” to one that comprehends, creates, communicates, convinces, and captures the value of the service we provide to our customers.

The criteria to look for when selecting a CVO and appointing a value council can be summarized with the acronym LACE:

• Leadership skills. Since pricing is a multi-disciplinary function that cuts across the entire firm, pricers need to be respected and have demonstrable leadership skills.

• Attitude. Leaders who believe there is nobility in being paid what the firm is worth, and who have an attitude of abundance and value creation.

• Commitment. A CVO and value council who do not have the support of the managing partner are destined to fail.

• Experimentation. Pricers have to be willing to experiment and cannot be prisoners of the past because “that is the way we have always done it.” Excellence in pricing requires learning from both failures and successes.

The Eight Steps to Pricing with Purpose

Questions to Ask the Customer:

The major benefit of the value conversation is that the focus is on providing the customer exactly what they want and expect.

This is an opportunity for you and the customer to create a shared vision of the future, to analyse where the customer is at this point, and to develop the necessary action plan to move them to where they want to be—providing the highest value of a transformation.

When you provide transformations, the customer is the product.

During the value conversation the customer should talk at least twice as much as the professional. Talkers may dominate a conversation but the listener controls it.

The more you know, the more value drivers you will be able to uncover, and the higher prices you will command.

Avoid the ever-present temptation to provide solutions to the customer’s needs and wants.

That is not the purpose of the conversation at this stage. You are on a value quest with the customer, not in a venue to begin providing solutions. Your role at this point is to ask questions and have the customer formulate—or at least articulate—a vision of the future. Before doctors prescribe, they must diagnose, which is the role you must assume at this stage in the conversation. Ask the questions below.

1

What do you expect from us?

What is your current pain?

What keeps you awake at night?

What gets you out of bed in the morning—your Purpose?

How do you see us helping you address these challenges and opportunities?

The Value Conversation

Step 1:

What growth plans do you have?

If price were not an issue, what role would you want us to play in your business?

Do you expect capital needs? New financing?

Do you anticipate any mergers, purchases, divestitures, recapitaliza-tions, or reorganizations in the near future?

We know you are investing in total quality service, as are we. What are the service standards you would like for us to provide you?

How important is our value guarantee to you?

How important is rapid response on accounting and tax questions? What do you consider rapid response?

Why are you changing firms? What did you not like about your former firm that you do not want us to repeat?

How did you enjoy working with your former firm?

Do you envision any other changes in your needs?

Are you concerned about any of your asset, liability, or income statement accounts to which we should pay particularly close attention?

If we were to attend certain of your internal management meetings as observers, would you be comfortable with that?

How do you suggest we best learn about your business so we can relate your operations to the financial information and so we can be more pro-active in helping you maximize your business success?

May our associates tour your facilities?

What trade journals do you read? What seminars and trade shows do you regularly attend? Would it be possible for us to attend these with you?

What is your budget for this type of service?

Questions to Ask the Customer:...(continued)

Starting the Value ConversationThis is one of the most effective statements to utilise somewhere near the beginning of the value conversation, regardless of whether you are meeting with a new or old customer:

This establishes the right tone near the beginning of the conversation that your firm cares about value, along with the willingness to demonstrate the economic impact that your services can have for the customer—how it will improve the customer’s life.

It also subtly suggests that you will not enter into relationships that do not add value for both parties—the exact tone you want to set, as both sides to a transaction must profit if it is to be sustainable.

Now that you have learned the value drivers of the customer, it is time to take all of this reconnaissance back to the firm’s value council and let it begin pricing the information, the subject of the next step.

Mr. 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?”

Pricing The CustomerThe information gleaned from Step 1 is then presented to the Value Council, where it then answers the 20 questions to ask before establishing a price. See questions below.

The objective of all of these questions is to determine the price sensitivity of the customer. A more price sensitive customer requires a more competitive price as opposed to one who is higher on the value curve.

Providing options is an optimal strategy to have customers self-identify themselves by offering various value/price choices, which is the next step.

1234

Broadly speaking, there are four types of customers:

Price buyers are simply looking for the lowest price. They are a minority, comprising not more than 5 to 15 percent of professional firm customers. You should only allocate a tiny percentage of your firm’s capacity to such customers.

Value buyers are willing to pay more for value and tend to be loyal to firms they perceive as offering more value for the same dollar, but only after doing extensive research on competing offerings.

Convenience buyers are not very loyal but are more willing to pay a higher price for exactly what they want, when they want it. Time tends to be of the essence. These customers can be converted, over time, into relationship buyers.

Relationship buyers place a high value on the firm’s brand and are willing to pay for perceived value, as well as additional services. They are also more willing to refer business to you.

2Step 2:

What is the customer’s cost of not solving this problem in dollars?

What is the economic benefit to the customer if they solve the problem?

With whom on the organization chart are we dealing?

Who referred this customer to us? Why were we referred in the first place?

Do they have any time sensitive deadlines for the completion of this project? Why do they need to do it now and not in six months?

Who’s paying for the service? Are they spending other people’s money?

Do we have any competitors? If so, who?

What price information do we have about these competitors?

How profitable is the customer’s company? How long have they been in business?

Have they engaged with someone else prior to us to do similar work? Who was the prior firm and why are they changing?

How sophisticated is the customer?

Does the customer add to the firm’s skills or markets?

Do we like this customer?

How do we help reduce the customer’s risk?

At what price would this be so expensive the customer would not consider buying it?

At what price would this be expensive, but the customer would most likely still buy it? (helps you establish your Pump-Fist and Hope-for prices).

At what price does this become inexpensive?

At what price does this become so inexpensive the customer would question its value? (Yes, you can lose business by pricing too low!).

What price would be the most acceptable price to pay?

What costs can we afford to invest in at the target price and still earn an acceptable profit? At what price would we walk away from this customer? What is our absolute minimum price? What price do we desire?

20 Questions the Value Council Should Ask Itself Before Establishing a Price

1

2

3

4

Based upon Step 2, the value council then establishes three internal prices for the customer, which is acceptable to the firm, but lower than the value to the customer. The lowest of these must be at least the firm’s minimum price.

Think of American Express’ Green, Gold, and Platinum cards. Each is varied in price based upon the value and services they offer. Firms should offer customers options, not a take-it-or-leave it single price. This allows the customer to convince themselves of value, while revealing their individual price sensitivity. First, establish the price boundaries the firm is willing to accept to enter into the relationship:

From this brainstorming session, the value council then determines at which price the three options will be presented (obviously, not all nine prices are presented to the customer). The upper bound of these prices should be based upon the value being created, yet all will be lower than that value so as to ensure the customer also earns a profit.

For example, if you know the customer is price sensitive, you may only present the reservation price for all three options. However, if there are some services that are adding marginal value, a hope for price may be quoted for the Gold and Platinum levels. If extraordinary value is being created, quote the pump fist price.

This is where the art of pricing comes into play. It requires judgment, but the more the value council does it, the better they will get, since pricing is also a skill.

Reservation Price––below this price, the firm would turn down the work. It must get this price. It will generate a normal profit.

Pump Fist Price––this is an aspirational price, when the firm is adding extraordinary value. It will generate a windfall profit.

Hope For Price––a firm should get this price more often than not. It will generate a supernormal profit.

Hope For Price––a firm should get this price more often than not. It will generate a supernormal profit.

Many firms use the following nine-box model:

3Reservation Price Hope For Price Pump Fist Price

Platinum $C $B $A

Gold $M $N $L

Green $Z $Y $X

Developing and Pricing OptionsStep 2:

Firms that use this model report that it makes them “compete with itself.” To receive a pump fist price, the firm must conjure up ways to add extraordinary value. This is a worthwhile thought experiment, as the focus is on value, not time.

Many people ask how can you ascertain value since it’s subjective and there’s no formula. The answer is with a deep understanding of your customer’s value drivers, which requires a deep conversation with the customer. One way to never get to value is to continue to think and price based upon hours. See below for an example of options presented to a customer, along with other strategies to help you develop options for any customer.

Just as all customers are not the same and all hours are not the same, all services are not of equal value in the eyes of the customer. Consider the Stan Shih Smile Curve:

The idea is that the lowest value item in the production chain is the manufacturing of the product. Even though the Apple iPhone is assembled overseas, the customer doesn’t really value that fact.

This is why inscribed on the back of every iPhone it reads, “Designed by Apple in California. Assembled in China.” The real value is in the R&D, branding, design, distribution, and after-sale services (Genius Bar, education classes, AppleCare, etc.).

From the left to right side of the Curve, you can see the types of services being offered:

• Diagnose• Prescribe• Create• Execute• Measure

Example of Pricing and Developing Options:

The Stan Shih Smile Curve

Val

ue A

dd

ed

Production Chain

Concept/R&D Sales/After Service

Branding Marketing

Design Distribution

Under this model manufacturing is

the lowest value input

Manufacturing

The Execution is where most firms try to make their profit, while either giving away, manufacturing or not pricing enough, the sides of the Curve. This, in effect, turns the Smile Curve into a Frown Curve. It is the sides of the Curve that contain the value, and can be used to create three options for any customer.

You should complete a Smile Curve for every practice group in your firm: Accounting, Tax, Compliance, Advisory, IT, etc. Put them all together and you will have a global Curve that can be used for the Value Conversation and developing and pricing your options.

4 14

2

5

3

6

7

The Seven Ts of Developing Options Turnaround Time: Guaranteed response time on phone calls and emails, start and completion dates for work, etc.

Talent: Perhaps at the lowest priced option the customer only has access to managers and team members, but not partners.

Technology: What technology stack will be deployed and evaluated going forward. Will education, App analysis, etc. be included?

Transference: Any educational programs or digital libraries you can include in the three options, perhaps charging full price to the lower-priced tiers and including them in the highest-priced tier.

Terms: The cheaper the price the quicker the firm gets paid, even in full. Payment terms are pricing, and it’s important to set expectations upfront.

Tailoring: How will you tailor the delivery of your knowledge? (Face-to-face, present at board meetings, how often, etc.).

Travel: Any travel, or other out-of-pocket expenses, to the extent they are predictable, should be included in your pricing. Don’t focus the customer on things they don’t value, which includes your travel, auto, and other types of overhead expenses.

Effectively Presenting the Options to the Customer

Step 4:

5 The option selected by the customer is then adapted into a Fixed Price Agreement (FPA), such as the one in the sample Fixed Price Agreement. The firm can include as much detail as required as to the scope of work, customer responsibility to provide information, timelines for delivery of work, etc.

Client price choice is adaptedinto a Fixed Price Agreement

Step 5:

Present the options to the customer. Sometimes, a member of the value council would attend this presentation, especially if the partner in charge is not a member of the value council, or is uncomfortable discussing price.

Here are some tips to keep in mind when presenting your options:

Present your most expensive option first.

After stating your price(s), don’t talk.

Use the word “price” instead of “fee.”

Use the word “agreement” instead of “contract.”

Use the word “fair,” as in “Is this a fair price to you?”

Do not qualify your price with statements such as, “Our normal/standard/regular price is…” as it invites negotiation.

Remember to negotiate value, not price.

Place a timeline on proposals; no price should last forever.

Real bargaining takes place between equals—you’re an equal to your customer, not a supplicant.

There are a finite number of price objections—you should have answers for all of them.

Example: Fixed Price Agreement

6 The firm would perform project management on the scope of work, detailing who will perform the work, timelines for delivery to customers, and other planning details.Project management is all about projecting capacity into the future, which is why timesheets are not project management. After all, by the time you see something on a timesheet, it is no longer manageable—it is the equivalent of timing your cookies with your smoke alarm. Track turnaround time instead, to ensure work flows through the firm smoothly; and when it doesn’t, you can identify bottlenecks in real time rather than after the fact.

7 If the firm finds scope creep while performing the work, the customer is informed, given the option of how to proceed, and a Change Order will be issued if the firm is to perform any additional work. This policy also applies to any new services the firm provides within the year not specified in the FPA. See a sample Change Order below.One of the best questions you can ask when confronted with scope creep—especially when it is requested by the customer—is this: What is the business purpose for this change? This is another way of asking what is the value, and can be incredibly useful when pricing Change Orders.

Proper Project Management

Scope Creep and Change Orders

Step 6:

Step 7:

Example: Change Order

8 Since 1973, the U.S. Army has a policy of doing After Action Reviews (AAR), which take place after every mission. After assisting many firms in implementing AARs, I am convinced it is a practice that would have numerous positive effects for firms, especially as it relates to the roles of the CVO and value council, helping them evolve pricing into a core competency.

See below for a sample After Action Review the value council would perform after the engagement has been completed.

Did we add value for this customer?

How could we have added more value?

Did we capture value?

ld we could have captured more value through a higher price?

If we were doing this type of FPA again how would we do it?

What are the implications for product/service design?

Should we communicate the lessons on this FPA to our colleagues, and how?

How could we have enhanced our customer’s perception of value?

What did we teach this customer?

What other needs does this customer have and are we addressing them?

Did this FPA enhance our relationship with this customer?

What impact has this FPA had on developing our customer’s trust in us?

How would you rate our customer’s price sensitivity before and after this job?

How has this FPA advanced us?

Did we have the right team on this FPA?

How high were the costs to serve?

What could we do better next time?

Do we need to update our customer complaint register?

How could we thank this customer for their business?

After Action Review: To be completed by the value council /CVO after each major engagement

Conducting a PricingAfter Action Review

Step 8:

Your value as a firm needs accurate data to back it up.That’s what technology like Receipt Bank and Xavier can provide.

Use technology to boost your value

Data-Driven Pricing in your Hands

Tracking clientefficiency

Use accounting data-powerhouse Xavier to clean up, track and report on your client’s data in Xero, using a practice-wide dashboard.

Use Xavier’s GoProposal integration to inform your price and carry out accurate pricing reviews - every time.

Have client transaction volumes, revenue and bookkeeping quality ready to discuss for your next few review meetings.

Use Receipt Bank Optimize to instantly identify which clients could be costing more to service.

Plan and allocate resources and team members to see how much time they still need to dedicate to each of their clients.

Use the submission delay day metric in Client View to check client efficiency. If inefficient, they may be costing you more time playing catch-up.

Identify problem areas in your process that could be costing time or money. If a firm still relies on non-digital submission methods, you could have a conversation with them about pricing.

Use ‘Auto-publish’ and submission methods to offer more real-time advisory services.

Book a consultation today

www.receiptbank.com/consultaion

Receipt Bank can help your practice become more productive. Speak with one of our product experts today.

The Past Does Not Equal the Future

Looking aheadAs science fiction writer William Gibson once wrote: “The future is already here. It’s just not evenly distributed yet.” The value pricing tsunami washing over the profession is beginning to shift the ground beneath the old business model of “we sell time.” Skeptics will call for an incremental approach in order to maintain the status quo. But how do you make incremental changes to an existing business model that is already dying?

There is no limit to what you can achieve, as long as you do not lose faith in yourself. It is the difference between remaining a firm of the past, or, like a chrysalis, emerging as a firm of the future.

The choice is yours.