It’s all the rage these days on accounting blogs – value-based pricing. You’ll see it everywhere, hip accountants (Who’s a hipper accountant than one who blogs? One who blogs about value pricing!) posting missives decrying the historical basis of hourly billing and extolling the virtues of pricing based on value.
What value pricing means to them, is that we should charge for our services based on a basically intuitive notion of the “value” we’ve provided. Sometimes that value is quantifiable, when you identify cost savings the client would not have come up with on their own. (These poor clients, they’re a hapless bunch to the value pricing gang.)
But most of the time it’s like pulling a number out of thin air. What’s the value of creditor-proofing? Is the value the money you save the company that would’ve gone to the creditors? How about due diligence? Surely a percentage of the sale price is the value of that!
You see, value is in the eye of the beholder. Clients will have a different value attached to the services provided than the provider does – it’s inevitable. How about advising a client against a tax plan that could potentially draw the attention of the CRA? (Aside: CRA is the Canada Revenue Agency, our IRS.) If advice is heeded and the attention diverted, where is the value? The amount the client would’ve had to pay after a tax audit?
In most cases (possibly not with the Big Four, I’ll have to consult with my friends one that one) there’s already value pricing in effect. It’s called the “fee quote.” Many of our clients – actually most – request and get from us a quote at the start of whatever work we’re doing for them, typically audits, of how much the bill is going to be. In this way, the “value” of the service to be provided is agreed upon. Isn’t this a better way to do things than generating a figure to represent the value created at the end of the job?
If the job turns out to be more difficult than forecasted, we’ll usually sit down with the client and explain what sort of extra work we’re having to do and why we need to do it. We provide an itemized list of the extra work and the extra time it required. Right the value pricing gang is choking on the bit: “Extra time? Value isn’t based on time! The billable hour is evil!”
Any way you swing it, the fee quote is the type of value pricing that both clients and professional service providers prefer, because it sets expectations at the beginning of the work and it doesn’t expose those despicable timesheets to the client. And timesheets are still very useful in determining the cost to the firm of an audit.
Neil,
Interesting rant against Value Pricing. Yet your conclusion of offering a fixed price, in advance of doing the work, is exactly what we are advocating.
You say the “fee quote” is standard practice, but that’s false. This profession still predominatly bills in arrears, based on billable hours. Why do you think we write down and write off more than we write up?
Time does not equate to value, so if you are already doing value pricing, why are you keeping a timesheet? They are not needed to evaluate costs, there are many other ways to do that.
I’ve destroyed all of the arguments in my work, and the empirical evidence from firms around the world is in. The Professional Knowledge Firm of the Future will not price based on time, nor will they track time. They will utilize Key Predictive Indicators to measure success the same the customer does. Do you think the customer cares how long an audit takes? Do you care how long it took Toyota to build your car?
You should check out http://www.verasage.com, and learn about firms who don’t price by the hour, or keep timesheets. It’s not a theory, and it’s not a fad. It’s economic reality.
Sincerely,
Ron Baker, Founder
VeraSage Institute
http://www.verasage.com
Value is hard to quantify. Hard for us to quantify, impossible for the client to quantify most of the time. All I’m saying is, we’ve got this method of quanitifying the work we’ve done – what’s wrong with at least having a method for ballparking value? I guess I’m still skeptical because all I’ve read on your blog is marketing. You haven’t explained how to transition to value pricing.
Say I have an audit that cost the client $200,000 last year based on the hours we billed. How do I find out what that audit is worth based on value pricing? Do we start at $200K and make adjustments? Do we start at zero?
In theory the idea is great. It can’t miss. It’s what clients want – I freely admit that much! Except when the client asks how you came up with fee this year and you tell them it was what you magically determined the value of your services to be. Will it be what client’s want if they have even less to judge the merit of your fees than before?
Neil,
Of course value is hard to quantify, because it’s subjective. I know how you don’t do it: count up the hours you spend. It doesn’t represent value at all, nor does it approximate value.
If you don’t have a conversation with your customers up-front to determine how you are adding value, then you’re not going to be able to Value Price.
Providing your customer with a price up-front, rather than in arrears, allows them to determine value vs. price before they buy. If you do this, they won’t care about the number of hours it takes. If you do it right, they help determine the value.
Some people can’t grasp this concept, and that’s why the world has Professional Pricers. It’s not just a theory, it’s a reality. My books explain this in detail, and provide many examples.
My suggestion is stop reading blogs and pick up a book. Our blog is targeted to those who get it, not those who are looking for a checklist. This isn’t an audit, it’s an art. And by the way, pricing is marketing, because value is created outside any firm’s walls, based on results delivered to customers.
Regards,
Ron
http://www.verasage.com
Stop reading blogs? I guess my post made it sound like I read all the hip value pricing blogs around the net, but I’ve just reached the rank of audit senior and as you may be aware, that means my time to read blogs is minimal.
Reading blogs, for me recently, consists of unbolding the titles of posts from my favourite blogs and very little else. As for the Verasage blog, I’m still an RSS subscriber, and your titles are always the boldest.
Ron, to me it sounds like you’ve just taken the idea of the fee quote, which isn’t nearly as rare in this industry as you claim, and prettied it up with a fancy name: value pricing. Sure, once you quote the fee, the client is able to determine if the value of your services is worth the price. But how do things change from the audit professional’s end?