The Thomson Reuters Institute (TRI) continues its interview with Ron Baker, founder of the VeraSage Institute, a think tank that advocates value pricing and, not incidentally, the death of the billable hour in professional services. (You can see the first part of this 3-part interview here.)
TRI: How does an accounting firm adopt value-based pricing?
Ron Baker: It’s a gradual process. It’s incremental, and it’s done one customer at a time because it requires such customization. True value pricing prices the customer, not the services.
So, we’re not talking about menu pricing where we pull up to McDonald’s and everyone is looking at the same menu with the same prices. Under true value pricing, your menu might look completely different, based upon your family’s preferences, your desires, and all sorts of things. That has to be done one customer at a time.
TRI: Where do you start?
Ron Baker: Some firms start with existing customers and others start with new customers because they feel there’s less risk there. But once they figure out that customers really like this, whether they’re new or old, why should that matter? The customers love certainty in price.
TRI: How long does it typically take to roll out?
Ron Baker: I’ve seen smaller firms adopt this within three months. I’ve seen larger firms take two or three years to get the overwhelming majority of their revenue under the aegis of value pricing. The adoption cycle can be different, depending on the size of the firm, the nature of the work, how many customers you have, all of that.
TRI: When a firm sets its fees in advance based on the value to be delivered, what’s the basis for that pricing calculation?
Ron Baker: There’s a lot of confusion out there. People say, ‘Oh, sure, we’re value pricing’ when they really have fixed pricing, which is just an hourly rate estimate.
Value pricing really starts with value. Ultimately, in the economy, all prices are set not by cost-plus-profit but by value. Because if prices were simply set by cost-plus-profit, no business would ever go bankrupt — after all, it doesn’t take a rocket scientist to put a price above a cost. Businesses go bankrupt all the time, however, and that’s because they don’t produce things people want. They don’t produce value.
Ultimately, prices are set by value — that’s the upper boundary. It’s not what your competitors are charging. For example, Apple doesn’t care what its competitors are charging, because they all charge a lot less than Apple does. But Apple tries to find ways to add more value.
TRI: How does an accounting firm do that?
Ron Baker: The first thing that has to happen in a professional service firm to do value pricing is… a value conversation with the customer. In that conversation you’re asking, ‘What is the customer trying to achieve? What’s the end objective?’ You’re trying to look for that transformation. I call it a transformation because, ultimately, the highest point of value is taking a customer from where they are to where they want to be. And if you do that transformation, then you realize that the customer is the product.
It’s not all the services that you’re doing — it’s not the tax returns and it’s not the financials. It’s that transformation — moving clients from where they are to where they want to be.
TRI: What are the steps a firm needs to take to adopt this approach?
Ron Baker: If you think about CPA firms, they’ve been doing this for as long as they’ve existed. We help our customers grow their businesses, make them more valuable, and sell them; we also help customers expand their existing businesses and buy new ones; and we help customers get their kids into college and plan their legacy for after they’re gone.
These are personal transformations that are literally touching the soul of the customer. They’re not commodities, they’re the exact opposite. But we don’t use that language, and that’s a big mistake. Indeed, one of my criticisms of the profession is we spend so much time talking about solving problems, which is great and a part of what we do as professionals. But we do much more than that — we help people pursue opportunities and possibilities and that are really valuable. But we don’t have a really good vocabulary to communicate that.
For example, let’s say I’m in the market for a landscaper. One charges by the hour, one gives me a fixed price, and one says, ‘You mentioned that you were interested in selling the house in a year or two. Well, our top package will give you the best curbside appeal.’
The first landscaper, charging me by the hour, is pricing based on inputs. The middle landscaper, offering me a fixed price to do my yard work, is pricing based on outputs. That third landscaper is pricing me based on the transformation. Not only can he command the higher price than the other landscapers, I will gladly pay it because he showed me the value. Ultimately, I will be a happier customer.
Every customer has [a desired outcome], and we need to find out what that is. And you can do that through the value conversation. Once you do that, the price becomes pretty easy to set because it’s weighed against the value and not around trying to estimate hours.
TRI: Operationally and culturally, what is needed for this to work in a firm?
Ron Baker: The partners commitment… is absolutely essential. Once the partnership is committed to it, they set goals, and if they’re serious about that commitment and there’s somebody leading the charge, they can usually make that transition.
I’m a big believer that there needs to be a pricing group inside tax & accounting firms. I’m even a big believer there needs to be a chief value officer who can really champion and lead the change; provide education; share successes; provide white glove service to partners who need help, are nervous, or have questions; and just be there to beat the drums… about how this leads to happier customers.
You can read the first part of this 3-part interview here.