ICAEW.com works better with JavaScript enabled.

Pricing on purpose: how to implement value pricing in your firm, part III

Third of a series of three articles by Ronald J. Baker on how to implement value pricing in accountancy firms.

The eight steps required for pricing on purpose

Step 1

Have a conversation with your customer to determine their needs and wants in the forthcoming year. Ask them questions. This is your opportunity to comprehend and communicate the value you can add, establishing the scope of value and then the scope of the work to be performed. Sometimes a member from the value council attends this meeting, especially if the partner is not a member of the council, or is uncomfortable with pricing.

Step 2

The information gleaned from Step 1 is then presented to the value council, where three options, at three levels of service, are established. Think of American Express’ Green, Gold, and Platinum cards. Each are varied in price based upon the value and services they deliver. Firms should offer customers options, not a take-it-or-leave it single price. This allows the customer to convince herself of value, while revealing her individual price sensitivity. It also changes the mindset of the customer from 'Should I work with this firm?,' to 'How should I work with this firm?' This is a powerful change in attitude that differentiates your firm from the competition.

Step 3

The value council then goes through the 20 questions to ask itself before establishing a price. Based upon the answers, the council then conjectures three internal prices for each level of service, based upon their assessment of the customer’s subjective value and price sensitivity.

  1. Reservation Price - below this price, the firm would turn down the work. It must get this price. It will generate a normal profit.
  2. Hope For Price - a firm should get this price more often than not. It will generate a supernormal profit.
  3. Pump Fist Price - this is an aspiration price, when the firm is adding extraordinary value. It will generate a windfall profiit.

Many firms use the following nine-box model:

  Reservation Hope for  Pump fist 
 Platinum  $C
 $B
 $A
 Gold  $M
 $N
 $L
 Green  $Z
 $Y
 $X

From this brainstorming session, the pricing 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 highly price sensitive, you may only present the reservation price for all three options. However, if there are some services that are adding high 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, and the more the value council does it, the better they will get, since pricing is also a skill.

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.

Step 4

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 council, or is uncomfortable discussing price.

Step 5

The option selected by the customer is then codified into a Fixed Price Agreement (FPA), such as the one given 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. The explanatory notes explain each section of the FPA and the pricing principles it incorporates.

Step 6

The firm would perform adequate project management on the scope of work, detailing who will perform the work, timelines for delivery to customer, and other planning details. See 'Project Management for Accountants', by Ed Kless, published by the Journal of Accountancy.

Step 7

If the firm discovers 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).

Step 8

Since 1973, the US 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 salutary 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 a sample of an After Action Review that the value council would perform after the value priced engagement has been completed.

Do not skip any of these steps, all our necessary for developing a core competency in pricing. If these eight steps are followed on every major engagement, is there any doubt the firm will begin its journey to pricing on purpose?

Not final thoughts

No firm will ever be paid more than it thinks it is worth. There is nobility in earning what you are worth. Yet if a firm’s leaders do not think it creates more value for its customers than is reflected by hourly billing, how can customers be expected to understand a value proposition beyond hourly rates?

Hourly billing is, to borrow a medical term, an iatrogenic illness––a disease induced inadvertently by a physician while providing treatment. This model is perpetuated because it is loss-adverse and simplistic, and the theory supporting it has been taught for multiple generations.

Yet hourly billing is nothing but a tradition, which is nothing more than the democracy of the dead. We will not be able to adopt Value Pricing if we continue to denominate everything into hours, thus remaining mired in the mentality that accountants sell time.

It 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.

Let us, together, forge a new Declaration of Independence, and once and for all, free our profession from the tyranny of time. It is time to bury the billable hour and price on purpose. Will your firm be among the pioneers blazing the trail for others?

See Part I for a general introduction to value pricing including a summary of the disadvantages of hourly billing versus the advantages of value pricing.

Part II explains how to transition from hourly billing to value pricing

About the author

Ronald J. Baker is a radio talk-show host on the VoiceAmerica show: The Soul of Enterprise: Business in the Knowledge Economy. He is the best-selling author of seven books, including: Implementing Value Pricing: A Radical Business Model for Professional Firms (John Wiley & Sons, Inc.); and The Soul of Enterprise: Dialogues on Business in the Knowledge Economy. You can reach him at +1 707 769 0965, or e-mail at Ron@verasage.com. He Blogs at VeraSage, on LinkedIn as one of its Influencers, and on Twitter @ronaldbaker

Further resources

Online articles

The library provides access to a range of articles in full text from leading business, finance and management journals. Access to articles is provided to logged-in ICAEW members, ACA students and other entitled users subject to suppliers' terms of use.

Articles and books in the Library collection

To find out how you can borrow books from the Library please see our guide to book loans. You can obtain copies of articles or extracts of books and reports by post, fax or email through our document supply service.

ICAEW initiatives

Tomorrow’s Practice is a research project designed to understand the forces that are shaping accountancy practices. View the findings of the research and thoughts regarding the future.

ICAEW accepts no responsibility for the content on any site to which a hypertext link from this site exists. The links are provided ‘as is’ with no warranty, express or implied, for the information provided within them. Please see the full copyright and disclaimer notice.