Thirty years ago in the legal profession, the American Bar Association (ABA) actually recommended that attorneys not discuss price up-front. They feared it was unethical and inappropriate for a "professional" to discuss the prices he or she charged. Today, this thinking -- and practice -- is completely anachronistic.

1. Medical services - I would argue that these do not count because you are not spending your own money (approximately 76 percent of the time you are spending a third party's money - either an insurance company's or the government's).
2. Cab rides - although if you ask, many cabbies will quote a fare that is fairly close to the ending price.
3. Long distance telephone calls - but even here you can call your operator and ask the price before dialing.

When CPAs inform their customers that they cannot quote a price up-front because the engagement is too complex or because there are too many variables and uncertainties, the customers are assuming all of the risk involved in the transaction.

Because CPAs assume no risk by charging hourly rates, customers will naturally limit their remuneration -- not a prudent strategy if you would like earnings higher than your hourly rate. That is where value pricing begins.

What If Airlines Billed Like CPAs?
The main objection to value pricing that CPAs give is, "What if I don't know how long it will take to complete a project?"

My first answer is that the time it takes you to complete any project is absolutely irrelevant to its value. "Hourly billing thinking" -- the antiquated method of cost-plus pricing -- is not at all applicable to the intellectual capital delivered in an information economy. But CPAs are a tougher sell than that, and they demand and deserve a better answer.

Therefore, I offer this analogy: Let us pretend that I went to an airline counter to ask for a ticket to Chicago.

"No problem, Mr. Baker, window or aisle," the agent replies.

"How much does it cost," I ask, as he proceeds to book the ticket.

"Obviously, Mr. Baker, you do not understand the complexity of the airline business," the agent replies. "There are a myriad of variables that affect the cost of flying from San Francisco to Chicago: weather, airport traffic, tailwinds, headwinds, passenger and luggage weight, whether or not the pilot utilizes computerized navigation and/or autoland, and how long the flight and cabin crews have worked here at the airline, just to name a few...

"Now, Mr. Baker, you just board the plane. We will fly you there safely, and send you a bill in approximately 30 days detailing the charges for everything we did. Of course, it goes without saying that we will be very thorough and honest. If I attempted to quote you a price now, it might not be enough to cover all of the airline's expenses, and we would lose money, which would not be fair to us. Alternatively, I could charge you too much, and then you would be an unhappy customer, which we do not want either. Have a nice flight."

Sound ludicrous? It is. But the analogy conveys the attitude of CPAs who refuse to quote prices at the start of an engagement. I honestly do not believe that performing CPA services -- from tax returns and management consulting to Initial Public Offerings and litigation support -- is half as complex as pricing insurance policies for earthquake or flood insurance, which is the daunting task of actuaries.

These industries operate in complex markets with only an estimate of their potential costs and risks, yet they offer their passengers and policyholders fixed prices up-front, before the purchase is made.

Litigators and Value Pricing
It is interesting to note that when the legal profession began turning away from the Almighty Hourly Billing, it was the litigators who protested the loudest, stating it was just not possible to quote fixed prices in a lawsuit. Their complaints were similar to ours: There are just too many variables (the aggressiveness of the other side, discovery boundaries, the judge's decision) and so on, ad nauseam.

Today, it is these same litigators who have adopted fixed prices more than any other group of legal professionals. This is the result of customers (including Fortune 500), demanding fixed prices in order to budget their litigation costs with more assurance. How long will it take before these customers start demanding the same treatment from their CPAs?

Pleasing Your Customers
A deleterious effect of not quoting fixed prices is the psychological impact on customers. For example, I had a very good customer who was going through a divorce. I rescued myself from the engagement, and his arbitrator picked a CPA to perform a business valuation.

When my customer asked the CPA what his price was for that service, the CPA said that he would not be able to quote a price until well into the engagement.

My customer, a very astute businessman, replied, "Sir, you just sat there and told me that you have over 15 years' experience in this line of work and in my particular industry. Are you now telling me that you have no idea how much this service will cost? That tells me you don't know what the hell you are doing."

Bravo! The customer is sovereign, and this story depicts the customer's dissatisfaction with a professional who cannot quote a price, demonstrating a lack of experience and confidence.

Customers want to discuss price up-front. ABA surveys indicate that customers are willing to pay a premium for a fixed price established in advance, even if they believe there is a chance that the price would be lower using hourly rates. Does that sound counter-intuitive? It is actually in accord with observed human behavior.

On the other hand, if you quote fixed prices before the service is performed, you can usually extract a premium simply because you are lowering the risk to your customers. For instance, in the mortgage market, a fixed rate of interest commands a higher rate than an adjustable rate because the fixed rate reduces the risk to mortgage holders.

What Is Your Premium for Value Pricing?
What is the risk premium you can command? No one can answer that comprehensively, though I believe it can be anywhere from 10 to 100 percent of the base price of your service. That is why pricing is such a complex aspect of marketing and why all businesses grapple with it. It is certainly far more complex than multiplying hours by an arbitrarily determined rate.

If you are "unable" (unwilling) to quote prices before the service is delivered, you are setting up your customers for surprises and yourself for write-downs, or worse, write-offs. It is far better to discuss a premium price up-front, before you have done any work, to discover whether or not your customers agree with the value.

When do you want to learn that your customers do not believe your price is worth the service, at the beginning or the end of the engagement? It puzzles me that CPAs can easily write up, or more often, write down the price of an engagement after it is completed, but they cannot quote the same price prior to starting the work.

The Psychology of Pricing
This leads into price psychology, which has two components: (1) price leverage and (2) pricing emotions. Regarding price leverage, the important point to remember is that you want to set prices when you possess the leverage.

Leverage does not imply an advantage possessed by one party over the other; it is more a question of who has the most (or least) price sensitivity at a given point in time.

Professionals possess the leverage at the beginning of the engagement, before they have done any work. Therefore, that is the point in time when we can command the highest price. After the work begins, the leverage begins to shift to the customers. Once the work is completed, customers possess all of the leverage, and the professionals are left begging to get paid (ever the hourly rate).

Is it any wonder that statistically, CPAs write down far more than they write up? I believe this is largely the result of pricing services when customers have the leverage -- not a prescription for success in value pricing.

But What If...
Allow me to address a question that I know you have at this point:

"What happens when you quote a project, begin work, and discover that the parameters have changed radically?"

For example, let us pretend that a customer has been deficient in his or her responsibilities by not providing certain schedules or information on a timely basis. That situation calls for a change order, another topic I will address in an upcoming article.

Think about how you behave as a customer. Do you demand to know the price of everything you purchase beforehand? Why do we think, as a profession, that our customers are any different? The fact is, they are not.

As CPAs, we need to assume more risk and quote prices up-front, thereby receiving greater reward from the value we provide. Quoting prices up-front is also an enormous competitive differentiation: Customers are beginning to gravitate toward those firms that have the experience and confidence to do it. So straighten your back, look your customers directly in the eye, and quote prices before you begin any work -- when you have the most leverage.

In time, you will become a better negotiator and receive prices far above your hourly rates. Yes, it is more risky -- but in a free market, the only way to increase your reward is to assume more risk. I assure you Bill Gates did not get where he is today by charging by the hour.

Reprinted with permission from CPA Profitability Monthly, a Harcourt Brace Professional Publishing Publication.