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Ron Baker's Value Pricing Mission
Three Steps to Value Pricing

June 2006Ronald J. Baker is on a mission. He wants to spread the word among professional service firms -- from accounting to advertising to law -- that value pricing a service is far superior to relying on the traditional cost-plus method and old-fashioned timesheets.



Read Baker's community blog or any of his books -- or speak to him in person, for that matter -- and you'll instantly feel his passion for the subject. He travels around the world giving presentations and heads the think tank he founded, VeraSage Institute. He also has penned several books on the topic, including the bestseller Professional's Guide to Value Pricing, 2003's The Firm of the Future, and this year's Pricing on Purpose. He's in the process of writing another comprehensive guide to be released this fall titled Measure What Matters to Customers.

In a recent conversation with SmartPros, Baker discussed the current state of value pricing in accounting firms, the steps a firm can take to implement the model, and future trends.

The state of value pricing today

Value pricing -- the practice of setting the price based on the value of the service to the client -- appears to be on the increase. Approximately one-quarter of accountants in small and sole practitioner firms have implemented value pricing, according to a recent study by marketing and research firm Bay Street Group.

However, Baker believes this estimate is probably too high because many professionals don't follow the specific tenets of value pricing. He believes between 7 percent and 10 percent of accounting firms practice value pricing in its true sense.

"Our definition is you have to price before you do the work," Baker said. "Value pricing does not always mean a higher price. Value pricing could very well end up a lower price to the client. What's important is that the price is set commensurate to the value, and that could mean that some of the work that CPAs do is going to come out as a cheaper price to the client."

Baker said many people incorrectly consider value pricing the same thing as value billing, which firms do after the fact, marking up the cost of service after reviewing the hours and expenses spent on that client's account.

In contrast, firms that use value pricing enter an agreement with the client that sets the price up front and that offers a 100 percent unconditional money-back guarantee. "And that should be in every client agreement," said Baker. "Yes, partial refunds are sometimes due to clients, but in most of those cases the CPA firm admits they screwed up and they would have discounted it anyway."

Baker pointed out that accounting firms already have a service guarantee. If they have a lot of client complaints, they'll do what it takes to keep them happy. So it shouldn't be a big stretch to publicize your value pricing service guarantee, to "put it out there and get marketing buzz," said Baker. "[FedEx founder] Fred Smith wrote it on his plane: 'Absolutely, Positively Overnight.'"

He acknowledged the existence of "unreasonable" clients, adding, "You should fire them anyway!"

Three steps to value pricing

Baker knows moving away from cost-plus pricing and the billable hour is scary for accountants. After all, the profession has relied on this method for half a century. He recommended three beginning steps in the transition to value pricing.

  • Create a new position, a Chief Value Officer. This person owns the value and pricing functions and is held accountable for creating and capturing value across the entire range of customers. Pricing should get as much executive commitment and attention as purchasing (which is managed by the Chief Purchasing Officer).

"I'm really excited about this idea," said Baker. He explains in Pricing on Purpose that the role was created through a VeraSage experiment with professional service firms.

As a result, in March 2005 Brendon Harrex, a VeraSage senior fellow, became the world's first CVO. At 31, he assumed the new position at Ward Wilson, a chartered accounting firm in New Zealand. And this year Harrex was named chairman of the firm.

Baker said the CVO position exists in the United States, but was not at privilege to name the firm.

He acknowledges in Pricing on Purpose that "it is an unusual position, one that has yet to prove its value." VeraSage Institute has moved forward with the visionary idea, however, and created criteria on the type of person who can fill CVO shoes. 

The five-prong criteria includes leadership, attitude and commitment, as well as experimentation and youth. The latter probably raises eyebrows, but he explains, "Organizations, like people, tend to calcify with age, and youth can keep the blood pumping at a more vigorous pace. No doubt they [young people] will make more mistakes and incur more failure, yet risk is where profits come from."

  • Implement a pricing cartel, a committee of people in your firm, under the CVO, who develop pricing policies in alignment with the company's overall strategy.

The cartel meets as often as necessary and views pricing from a company-wide perspective. This means someone may need to communicate and work directly with, for example, the salesman to make sure he understands the full value of the service. Pricing on Purpose explains, "the sooner a company establishes a price, the lower it will be. Why? Because most likely it has not given enough thought, creativity, and innovation to the value proposition being offered to the customer."

Some of the functions of the cartel are: establishing all prices, including minimum prices and tiered bundling offers; reviewing and grading customers; establishing pricing policies, who has the authority to grant exceptions, and the company's 100 percent money-back guarantee; conducting after-action review; dealing with price objections from customers and salespeople; developing sales compensation plans; monitoring competitors' pricing; and becoming active members of professional pricing organizations.

  • Remove the bad pricers. Once you have a CVO and pricing cartel in place, it's time to take bad pricers out of that role. Oftentimes, a partner is responsible for setting the price, but that doesn't necessarily mean he or she is good at it. 

"Centralize the pricing function and don't leave it up to the individual mood of a partner," said Baker. "You can go into any CPA firm in this world and ask them, 'Think about the people who do pricing in your firm and grade them as acceptable, mediocre, or wimps.' Since pricing is the number one driver of profitability, since prices are so sensitive to price changes, why would we let mediocre or wimpy partners price? You need to be good at it or you shouldn't be doing it."

As Baker writes in Pricing on Purpose, "Pricing is far too important to the viability of the firm to be left to mediocre pricers. No other area -- not cost cutting, productivity increases, or increases in volume -- can have as large an impact on profitability as does pricing."

Of course, there are internal challenges during this transition. Baker pointed out that a partner might have trouble accepting the CVO's pricing authority and sabotage value pricing (for instance, by meticulously tracking time in an attempt to prove hourly billing is more profitable to the firm). Another obstacle is poor training. The entire firm needs to understand the process, including the required paperwork. "Not catching scope creep and [not] pricing change orders will kill a value pricing initiative," said Baker.

Finally, firms need to stand behind their prices and resist giving up too soon. Baker compared this to Tiger Woods giving up after a bad shot on hole two. "We're not going to become better pricers by becoming better cost accountants. We're going to become better pricers by focusing on the value that we're creating for the client," Baker said. "We already know our costs. The hard part is figuring out the value." 

For those firms that have properly implemented value pricing, Baker has seen very positive outcomes, of which one begets another. Baker said the best outcome is an improved quality of life, as employees are no longer fretting over the amount of time they spend at the office or with a client. In turn, clients get better service because they're not afraid to call and rack up the hours. Firms are more profitable and able to shed the less important clients, and this gives workers more time to "think and innovate."

What the future holds

Baker fully acknowledges the roadblocks, all of which stem from the mentality, "this isn't how we're used to doing it."

To compound this problem, there is "no burning platform" requiring firms to change. In fact, Baker quipped, "We're doing pretty well right now with SOX." He called Sarbanes-Oxley "the worst piece of legislation since the Securities Act of '33-'34 ... It's costing way more than the benefits."

Baker also believes that value pricing is "nowhere near a tipping point." He knows more firms are embracing the concept, but he's still waiting to see it implemented by a "top 100 firm."  When that happens, "it will bring them all around," Baker said.

He also mentioned the war for talent, and warned that firms that stick to the timesheet method will have a difficult time recruiting young talent. "The young kids should be given the chance to shake things up and ask 'why are we doing this?'" he said. "These kids are knowledge workers and understand the value that they bring. Yet we're treating them like union employees, making them worry about being paid by the hour."

Baker himself moves forward with his mission. In about two week's time, he traveled from Australia, returned to his Petaluma, Calif. headquarters (during which time we conducted this interview), jetted off to Ireland for a week, then returned to the states for the AICPA Practitioners Symposium in Las Vegas -- all in the name of value pricing.

He's also writing his next book, Measure What Matters to Customers, a shorter book on a narrower topic than his previous hardbacks. Baker said this new title makes a distinction between key performance indicator (measurement that looks backwards) and key predictive indicator (measurement tied to theory). The book also discusses intellectual capital and how to increase the effectiveness of knowledge workers.

Conclusion

Now, with all this talk of pricing and profits, let's not forget the needs of the client. Baker said it's simple: they want good communication, efficient turnaround and met promises. 

And, according to Baker, your clients can have all of this once you ban the "almighty hour" and fully embrace value pricing.

Do you agree? Does your firm use value pricing?

NIQUETTE M. KELCHER is the Web Managing Editor for SmartPros Ltd.

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