Main Threads Section -
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
by Ron Baker
The present accounting model is over 500-years old and it is in bad shape. The traditional Generally Accepted Accounting Principles (GAAP) financial statements are based upon a liquidation value of a business, essentially historical cost assets less liabilities—an heroic attempt to assign static value to a dynamic concern.
The balance sheet dates from 1868, while the income statement from before World War II. The P&L statement was set up to account for the most important cost in an industrial society: cost of goods sold. But in an knowledge economy, cost of goods sold&mdashor cost of revenue—is less meaningful, with Microsoft averaging 14 percent of sales, Coca-Cola roughly 30 percent, and Revlon 34 percent.
by Ron Baker
On February 8, 2006, The Free Enterprise Fund and the Competitive Enterprise Institute (www.cei.org) launched a Constitutional legal challenge to the Public Accounting Oversight Board (PCAOB) created by Congress as part of the Sarbanes-Oxley Act of 2002 (SOX).
A recent University of Rochester study concluded that the total effect of SOX has reduced the stock value of American companies by a staggering $1.4 trillion dollars. The regulatory burden of this legislation absolutely outweighs its benefits.
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.
Had retailing been organized like the professions, supermarkets with lower costs and prices and a wider range of goods and services could never have emerged. Indeed, had the professions been dominant through manufacture and trade over the past two centuries, we would never have got to the horse-and-buggy stage, let alone beyond it.
––D. S. Lees, Economic Consequences of the Professions, 1966
Customers are best served when they have many competitive alternatives, and they are suspicious of self-serving monopolies. Of course, as sellers we all want to be monopolies, with little competition, the ability to charge high prices, bar entry to potential competitors, and be able to rest on our past successes and not have to perform the difficult job of constant innovation and experimentation where success is measured by the external customer, not internal industry standards, or ineffective government regulations.
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 Ron Baker, Founder of VeraSage Institute
Almost everything that is great has been done by youth.
––Benjamin Disraeli
It’s an age-old question: Can you teach an old dog a new trick? We’ve all heard, ad nauseam, how CPAs despise change. How many CPAs does it take to change a light bulb? Ten. One to change it and nine to talk about how great the old one was.
