The Secret? Provide More Value Than the Customer Pays
January 24, 2000 (SmartPros) Why do professionals suffer from write-downs and write-offs? Statistical surveys among CPAs (such as those conducted by the Missouri MAP Conference), Texas surveys, and the fact that average realization rates are 70-95 percent, clearly prove that write-downs are far more prevalent than write-ups. There are many theories for the underlying cause of this phenomenon, but I will focus on price psychology because I believe it illuminates the reasons more than any other explanation.
The Four P's of Marketing
And, certainly CPAs have become more sophisticated with respect to promotion, with firms now regularly employing marketing personnel and aggressively communicating the message of their firms' capabilities through newsletters, seminars, media advertising, and direct mail.
But price has been ignored. The professional has simply refused to challenge the 40-year-old practice of hourly billing. When a typical CPA firm is launched, the partners decide what their respective hourly rates will be by a process known as reverse competition, in which the firm looks at its geographical competitors and determines where it wants to fit in on the spectrum of hourly rates.
The partners rarely "crunch" the numbers (i.e., take the firm's overhead, add the desired net income, and divide by expected "billable hours"). Inevitably, they choose a set of hourly rates that is somewhere in the middle of the market range. What kind of message does that send to its customers?
"We're not the most expensive firm, but we're not the cheapest either. We're right in the middle."
In other words, we compete with everyone! Not a very prudent marketing decision.
What Is Your Firm's Value Proposition?
I have seen variations of the above on signs in assorted businesses (usually located in the back rooms, out of view from the customers) that read something like "High Quality; Timely Service; Low Price - pick any two." That is funny, but obsolete thinking in today's marketplace.
Quality has become a table stake, the minimum you need to be in the game. It is similar to a high school diploma - no one cares if you have one, but watch out if you do not. Quality, especially among CPAs, is very high and is no longer an effective competitive differentiation. I have even had CPAs tell me that their work speaks for itself. I ask, "Have you ever heard a financial statement talk?" (One clever CPA responded, "No, but I've seen some cry.")
When I read firm literature that goes on and on about the quality of the service, I get bored. What firm is going to advertise that half of the work that leaves its office has defects? Of course, you must absolutely keep up your technical skills; just realize that in the customer's eyes this does not - at all - distinguish you from your competition.
There is absolutely nothing fascinating about competing based upon price, unless you want to be a low-cost provider like WalMart. Certainly, there is a market for the discount provider - H & R Block and Jacoby & Meyers prove this - but I believe you are reading this article in order to obtain premium prices for your services.
Price wars are no fun, and there is always someone, somewhere, willing to perform the work you do for less money. Remember, customers are value conscious, not price conscious. The goal to strive for is to provide more value to the customer than the cash price they are paying you.
Unlike quality and price your competition cannot observe your service style or your personal relationship with the customer. They can match your price and your quality but how can anyone intercede on a personal relationship based on trust and integrity?
In today's world, service is the ultimate competitive differentiation and separates successful companies from mediocre companies. People will pay a premium for excellent service; consider five-star restaurants and companies like Disney, FedEx, Nordstrom, and Cadillac. In the long run, excellent service providers will prevail over mediocre "competitors." Excellent customer service is what separates winning firms from losing firms.
After the services have been performed, the customer possesses the leverage. The lesson is that you want to set all of your prices when you possess the leverage; that is, before the engagement begins. This requires quoting fixed prices and removing yourself from the Almighty Hour mentality.
The Three Pricing Emotions
Price resistance is the proverbial "sticker shock." As long as you are dealing with people, you will encounter price resistance. The best way to overcome it is by educating the customer as to the value you provide. Price resistance is usually encountered at the beginning of the negotiating process, and, thus, it is easy to identify. I have found that, in most instances, professionals can overcome this emotion. After all, your customers are dealing with a CPA, and they expect you to be more expensive than a PA, and EA, or H & R Block.
If you cannot conquer price resistance through educating the customer, then I would seriously suggest you not take the engagement. Never decrease your price in order to acquire a customer suffering from price resistance - that cheats your firm's best customers, those who value what you provide, and subsidizes your worst customers, those drawn to you by price considerations alone. Those will be the first customers to defect once they find - and they will - a service provider willing to do the work for less. You do not want to work for people who do not understand, or refuse to pay for, the value you provide.
There is no doubt that some customers will equate high price with high value, especially when there is very little else to judge your value on. I have a customer who used to manufacture computer furniture using authentic oak wood. He advertised a particular model, which was very popular, for $199 in computer publications. Of those customers who did call, the number one question was "Is it made out of real oak?"
They could not fathom that a piece of furniture so nice and functional could be priced so low. I constantly told my customer to increase the price, but he was afraid that sales would drop. I am convinced, to this day, that he would have sold more, not less. The sad part was that he was paying an enormous amount of money for those advertisements, and, thus, each customer who did purchase was providing a low profit margin, compared to his other catalog sales. He was, in effect, subsidizing his worst customers - those who purchased on price alone - while turning away the most valuable customers, those who believe something that good could not be so cheap.
This psychology also exists in the management consulting business. Wise consultants know that if they price their services at the low end of the market, customers do not have the incentive to take their advice seriously. On the other hand, if you charge rates on the upper end of the spectrum (say, $10,000 per day), the customer will hang on every word you say and has a higher probability of implementing your suggestions (Peter Drucker figured this out early on in his consulting career).
If your customers do this (listen carefully and implement your advice) - and if what you are selling is good advice - they will be more successful and thus will value you that much more. It is a cycle that spirals upward: The more you charge, the more people follow your suggestions, the more profitable they become, the more valuable you are to them. This logic applies to CPAs today, as they switch from compliance to value-added services.
Next is price anxiety, also know as "buyer's remorse." It is a well-known fact that luxury automobile advertisements are targeted at existing owners, not so much potential owners. This is because after such a large purchase, customers want reassurance that they made a good decision. That is a significant psychological emotion all customers will go through, especially after entering into a Fixed Price Agreement (FPAS) with your firm.
You overcome price anxiety by constantly staying in touch with your customers and assuring them that they made the right decision in hiring you and by exceeding their expectations. You can also offer a 100 percent Money Back Satisfaction Guarantee, which dramatically lowers price anxiety.
Payment resistance is simply the customer's unwillingness to cut the check. Who likes to pay their bills? You overcome payment resistance by involving the customer in the design, price, and payment terms of your service. Once people are committed to an FPA, they are much more likely to pay on a timely basis.
All of my experience with FPAs - and the experiences of other CPAs who have begun using them - have been positive with respect to accounts receivable collections. In fact, my only accounts receivable difficulties are with customers with whom I did not negotiate price and payment terms up front.
One effective method you can use to overcome payment resistance - besides the FPA that details the payment terms - is to deliver all services in person. This provides your customers with another factor to judge your value besides just the bill you present. Developing a personal relationship has a salutary effect on lowering a customer's payment resistance and should be used as frequently as possible to speed up your accounts receivable collections.
Pay Attention to Price
Reprinted with permission from CPA Profitability Monthly, a Harcourt Brace Professional Publishing Publication.1999, Harcourt Brace Professional Publishing. All Rights Reserved. Reprinted with permission.