Main Threads Section -
Price on Purpose
We hold these truths to be self-evident, that all men are created equal,…
—Thomas Jefferson, The Declaration of Independence, July 4, 1776
Whenever anyone quoted those immortal words from the Declaration of Independence—all men are created equal—Federalist Fisher Ames, an ardent opponent of Thomas Jefferson and a superb congressional orator, would retort: “And differ greatly in the sequel.”
While Fisher’s admonishment might not be the best way to administer a country’s laws—where all should be treated equally—it is profound when it comes to understanding no two customers are equal. A German Proverb teaches, “He who seeks equality should go to a cemetery.”
Maximum vs. Optimal Capacity
Are you value pricing?
A frequent topic of discussion among groups with whom I talk is whether or not a company is really value pricing. A few months ago, I had an idea to create a quiz that would allow an organization to determine if it was, in fact, truly value pricing.
I jotted down a few questions and submitted them to my VeraSage colleagues asking for refinement and any additional questions. Once we had the list down to a manageable number, I then again called on their brilliant minds to rate the questions using two scales:
1. An importance scale of 1 to 4.
2. A ranking from top to bottom.
Based on this input, I then created a weight system that gave more emphasis to those questions that Team VeraSage felt were of greater importance. The result was the spreadsheet referenced below.
To use it, simply download and answer the questions. Once you have answered them all, hit PageDown (PgDn) and a pithy comment is displayed as the result.
I hope this tool helps to spur some dialogue on the concepts surrounding value pricing. Please post any comments or questions. I will be happy to incorporate any suggested changes into a future version of the tool.
Download the file
You are what you charge for. A business is defined by little else.
We seem to believe that we are defined by our “hourly rates.” It is as if we took our (and our firms’) collective intelligence, experience, judgment, training, wisdom and knowledge, and commoditized them into a one-dimensional hourly rate. From a marketing standpoint, this is a mistake. Once you understand that customers emphatically, do not buy hours, it becomes self-evident that pricing by the hour is precisely the wrong measurement to use to ascertain the value created for the customer.
One of the main reasons professionals undervalue their services is because they are operating under the wrong theory of value. Value, like beauty, is in the eye of the beholder. What counts is what your customer is willing and able to pay for your services. The subjective theory of value explains how transactions occur in the marketplace. No customer buys hours, and time is not money. Hourly billing measures the wrong things.
Customers only buy one thing: expectations. In today’s world, it is not enough to meet the customer’s expectations; you must exceed them. No two customers are alike, nor do customers want to be treated equally; they want to be treated individually. Always ask what the customer expects up front.
Successful professional firms of today are pricing their services according to external value created—as perceived and determined by the customer—rather than internal costs incurred in generating those services.
Changing the pricing culture in your firm will not be easy. It takes work, commitment and a dedication of resources to training, education, and constantly confronting the inherent challenges involved with pricing. But it’s worth it.
It’s time to bury the billable hour.
by Ronald J. Baker
One of the greatest pains to human nature is the pain of a new idea.
–Walter Bagehot
There are two ideas that are killing our profession: Pricing by the hour and maintaining timesheets. They are stifling growth, wealth creation and innovation, inhibiting customer service, destroying morale and the quality of life, not to mention making the accounting profession less attractive to potential students. Even more disturbing, the consultants to the profession––supposedly the “change agents”––are playing a significant role in perpetuating this death spiral.
by Ronald J. Baker, Founder VeraSage Institute
Pricing is the moment of truth––all of marketing comes to focus in the pricing decision.
–Raymond Corey, Industrial Marketing: Cases and Concepts, 1962
In the last article we explained why hourly billing is the incorrect theory of value, and why The Firm of the Future will price its services based upon external value provided, not internal efforts generated. One of the most successful methods adopted to implement Value ricing is the Fixed Price Agreement (FPA). Essentially, this requires meeting with each of your customers to determine the services they need and want over a given time period.
It is important to keep in mind any FPA drafted between your firm and a customer is the result of a conversation. This is your chance to provide the customer with a customized list of services to meet their specific needs and wants, to offer a fixed price for those services, pecify the payment terms, the scope of services to be provided, and any other level of agreement reached. Thus, no two FPAs should look alike––they should be as unique and individual as your customers. The more customized it is, the higher will be its perceived value.
by Ronald J. Baker, Founder VeraSage Institute
We arrive, therefore, at this conclusion. A commodity has a value, because it is a crystallisation of social labour. The greatness of its value, or its relative value, depends upon the greater or less amount of that social substance contained in it; that is to say, on the relative mass of labour necessary for its production. The relative values of commodities are, therefore, determined by the respective quantities or amounts of labour, worked up, realised, fixed in them. The correlative quantities of commodities which can be produced in the same time of labour are equal. Or the value of one commodity is to the value of another commodity as the quantity of labour fixed in the one is to the quantity of labour fixed in the other
–Karl Marx, Value, Price and Profit, 1865
Workers of the world...forgive me
Karl Marx
–Graffiti on a statute, Moscow 1991
The only place where Marxism has not been discredited––outside of American niversities––is the professional service firm
–Ronald J. Baker
Ideas have consequences. Indeed, man is ruled by little else. Some individuals recently celebrated the 150th anniversary of an idea that changed the history of civilization––and affected the lives of billions of people––in the nineteenth and twentieth centuries. For decades, it was the leading intellectual paradigm on several continents and commanded an enormous amount of
influence on the destiny of nations. The Communist Manifesto, the famous revolutionary treatise, published in 1848, by Karl Marx and Frederick Engels, still wields considerable power over the world’s political systems, American universities, and yes, even professional’s pricing strategies.
By Ronald J. Baker
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.
––Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
Despite present-day management gurus who claim to have discovered the concept of core competency, in reality it is a very old principle. Adam Smith’s famous example illustrated how a pin factory could produce up to forty-eight thousand pins in a day if it divided and specialized the labor in such a way as to assign a particular task to each worker, whereas perhaps not one pin a day could be manufactured if each person made a whole one on their own.
Smith demonstrated that the division and specialization of labor was a central cause of the wealth of nations; it is also the central cause of the success of a business. Not everyone can be good at everything.
Despite this knowledge, many CPA firm partners behave as if the firm is a household, where all of the chores have to be divided equally. Take a prime example: Pricing. It seems just because you are a partner you are responsible for pricing your engagements.
by Ronald J. Baker, Founder VeraSage Institute
Change Orders: What a Concept!
Why is it that the majority of auto mechanics are sued over quality issues, not the length of time it took to complete the job; yet customers of attorneys dispute the length of time it took to perform a given job, but rarely the quality of the work? This is an interesting question to ponder, and the answer has to do with up-front pricing and Change Orders.
All of us have, at one time or another, taken our cars to a mechanic, say for a tune-up. What happens? Do you hand your mechanic a blank check and instruct him to fill it out when the job is done?Hardly. You get an up-front quote on the price of the job. Let’s assume you return to your office, and two hours later the mechanic calls and informs you during the course of the tune-up he noticed a fuel injection problem that needs immediate fixing. Once again, he quotes you a price (at your insistence), and allows you to make the decision whether or not he should continue with the additional work.
Who’s in Charge of Value in Your Firm?
by Ron Baker, Founder VeraSage Institute
The final question needed in order to come to grips with business purpose and business mission is: “What is value to the customer?” It may be the most important question. Yet it is the one least often asked. One reason is that managers are quite sure that they know the answer. Value is what they, in their business, define as quality. But this is almost always the wrong definition. The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.
––Peter Drucker, Management: Tasks, Responsibilities, Practices, 1993
My VeraSage Institute colleagues and I have had the privilege of posing this question–– Who’s in charge of value in your firm?––to thousands of accountants around the world.
We are usually met with a momentary staring ovation, and then someone will inevitably shout out, “Everyone!”
