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Really? Value Pricing doesn’t make the case for profitability?

Ron Baker - 03/15/2009

The first letter to the editor, in response to the November 2008 article—The Firm of the Future—has now been published in the March 2009 issue of the Journal of Accountancy, along with my reply.

The letter is from Lawrence W. Schwartz, CPA, MBA, CVA, of Fairfax, Virginia. Here’s part of what he writes:

For several years our firm (preceding our combination with another firm) carefully set “fixed” prices based on several factors, among them client hand-holding expectations, transaction volume and complexity, and intellectual capital requirements. Clients continually expected more for less, making scope creep (despite “change orders") a consistent obstacle to the development of client-firm value congruence. This led to the continuation of unprofitable, sometimes unnecessarily risky, client relationships, and often for the wrong reasons. We were, thankfully, profitable but not nearly at levels we could have achieved using more traditional (and, admittedly, more carefully tracked) value and productivity measurements.

Change is good, and looking at things differently is a useful exercise...Unfortunately, the article failed to make the case for profitability.

You can read my reply, but I feel I left off a very important point (isn’t that always the case; you come up with the perfect retort long after your initial response).

Schwartz seems to be arguing that the profitability of Value Pricing has not been proven, based on his firm’s poor track record in implementation (does anyone really, really, believe they were doing Change Orders for all scope creep?).

But his argument belies logic. Hourly billing automatically puts a ceiling on a firm’s profitability, period.

And most firms don’t even reach this artificial ceiling, hence the realization rates of between 65 and 95 percent, depending on the size of firm.

Value Pricing inverts this ceiling into a floor. If done right, it will certainly lead to more profitability.

To argue otherwise displays a misunderstanding of the economics of value and pricing, and of logic itself.

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Comments

Larry Schwartz

Ron, you read my message very defensively.  I have the logic thing down pretty well, thanks.  There are profit opportunities beyond hours times rate.  Value billing and markups for value allow realization in excess of 100% and we do it (and did it) all the time.  Not everyone prays at the altar of hours times rate any more than fixed price billing is a panacea.  What I said was the article didn’t make the case for profitability.  One of the example firms had been doing it for less than a year.  There is no way they have had adequate time to evaluate their outcomes.  It’s a great idea.  The article left us longing for more.  Agree it is not easy to do well.  But disagreeing with you does not mean we just fell off a turnip truck.  The article makes the case for the idea.  It does not make the case for profitabilty.  LWS

Ron Baker

Nice try Larry. But if you don’t think Value Pricing is more profitable, than you are ignoring a ton of empirical evidence, some of which is available on this very Web site.

Pricing is the number one driver of profit in any business, as multiple studies have proven, which is why the Fortune 500 now have professional pricers.

We don’t advocate “value billing” as that is done after the work has been done, whereas value pricing is ALWAYS done up-front.

MAP studies for decades have shown average realization rates of 65-95% of standard rates. If firms really did value price, why are they writing down more than they are writing up?

Find the cause of those write-offs, and you are well on your way to discovering Value Pricing.

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