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Value Pricing: Some Mischievously Misleading Musings

November 27th, 2013

Recently, a practitioner named Frank Stitely, CPA posted his thoughts in CPA Trendlines on how charging a very high fee for work that only took a few hours can backfire. Understandingly, this post invoked a lot reaction from the proponents of value pricing including me.

I thought I would share my comments here because they stem from Frank’s post but they go quite a ways beyond that. Essentially what I have tried to convey is the idea that when you make a decision to engage in value pricing you need to look at your entire business model and the operational strategy it embodies. Once again this comes back to the issues of client selection, the nature of the relationship you have with your “selected” clients, and the services you offer etc.

You’ll need to read Frank’s post to understand the context. But the essence of it is he uses a fable to describe a situation where an accountant charges a client $7k for a service that the client needed but when the client mentioned it to another accountant while playing golf he was told he (the other accountant) could have done the job for a fraction of that price. The end of the story was the client, together with several of his friends, took their business away from the accountant because he felt he had been taken advantage of.

Here is my response to his post ….

Frank, I accept that your post may be trying to convey the idea that taking advantage of a person’s lack of knowledge (you use the word ignorance) when setting a fee may be unethical and could backfire commercially. However, loosely tying that assertion to “value billing” and the “time taken to deliver a solution” is illogical and misleading.

I don’t want to appear rude but this article misinforms people as to the nature, purpose and methodology of value pricing. In my opinion the scenario you describe has nothing to do with value billing. It is a cute use of a carefully worded “fable” intended to lead to a conclusion that would be totally different if the story-line was changed to include something like:

This was an incredibly complex loan situation, the client had been denied the loan by every source she had approached, she was facing bankruptcy which, among other things, would result in 30 people losing their job unless she could get a credit line to give her time to file a patent that had an appraised value of $25m. Time was running out and she had already approached 10 firms with a request for assistance but none of them had the expertise to be able to package the application and negotiate with a lender why it should back this person, the fee was conditional on the loan being granted and had been discussed in detail with the client in advance of the project commencing …. etc.

By the way, the “morality” of this proposal would not change if the “conditional guarantee” was removed from the equation. A guarantee simply reverses the risk and is a value point in itself but getting the loan for the client is the main value proposition.

That said, there are several other points I’d like to raise.

First, Frank the rules of logic stipulate you should not argue a case with a half-baked story which is contrived to present a special case as a general case. With respect, if you don’t understand this grab a book on logic and look for a discussion on the fallacy of the undistributed middle.

Secondly, if you were to ask someone with an IQ above 50 a question like: “How would you feel about paying you CPA $7k for 3 hours work?” that would have to invoke a response such as: “Well that depends on what I’m getting for my $7k.” If it was a simple little 1040 tax return I’d probably say no way, if it was to advise me on re-arranging my affairs to save $1m in capital gains tax I’d say “wow, thanks so much.”

Of course, somebody else who may be in exactly the same situation as me might say “that’s a rip off” and yet another person may say “I’m very happy to pay this firm $7k for my 1040 because I have great confidence in her work.” And another person may say “$700 for a 1040, you must be kidding, I’ll get mine done a Walmart.”

Frank, value is subjective – which means different people place different values on products and services which is actually what makes a market economy work – if we all valued everything the same there would be no specialization and exchange, and no innovation – in fact, there would be no market! To put that another way we would be just another animal on the planet … actually we would have become extinct a long time ago which incidentally is why the concept of subjective value and free markets are so important to our survival as a species and our living standard of living.

And there’s more to this.

I had a rotator cuff operation a couple of years ago and the operation took about 1.5 hours – the surgeon’s fee was $3.9k (there were other significant costs on top of that!) and the nurse told me he had 4 operations scheduled that afternoon. Here’s a question to ask your readers Frank: “How would you feel about paying your surgeon $2,600 for an hour’s time?”

I wasn’t actually paying him for his “time” (e.g. asking him to join me in a game of Bridge) I was paying him for his skill. My arm works great now (which attests to his skill and deserved reputation) and I don’t remember feeling the need at the time to wander around town, with my arm in a sling, looking for a cheaper guy. I do recall being told that the surgeon who did the procedure also does work for the US Ski Team so his “value” in my mind is higher than Dr. Joe Schmo from Schmo’s Rotator Cuff Solutions.

The surgeon was Dr. Kyle Swanson and he’s at Lake Tahoe Orthopedics & Sports Medicine — I mention that to make another big point: when you get great work done (irrespective of cost) by a skilled professional you are very happy to refer him/her. I have referred Kyle dozens of times to my ski buddies because we bust and tear body parts quite regularly – birds of a feather flock together which is exactly what relationship marketing recognizes. But referrals rarely happen in relation to low level work (because there are so many obvious solutions) and when they do all you get is lower level, low price work. I raise this point in the context of your post because when you focus on, and engage in, value creation you get talked about and you get referrals to value-seeking clients.

Thirdly, I think a good part of the problem with this type of essay is a mindset focused on 1040 tax returns! Accountants can and should be creating far more value than tax returns and it’s not the preparation of those where their real value lies. Smart clients (i.e. those who are not ignorant) understand this and are willingly pay for it. Not-so-smart clients are the ones who, through their focus on keeping their fees low, encourage their CPAs run the race to the bottom.

CPAs who are more discerning about client selection choose not to run in this race. They are able to value price and their clients are delighted that they do because it means they are always looking for ways to create and deliver value, in other words they are client-value centric and they’re rewarded by the market … as you say Frank “The market is what the market is” to which you could add it’s a mechanism for allocating resources where they are most valued.

Importantly, and what’s missing in this fable, is the fact that a client-centric CPA who is using value billing will discusses the fee and the service up front so both the client and the CPA understand very clearly what the outcome is expected to be. This will include a discussion of what the fee will be (quite possibly, indeed advisedly in most cases, with 3-4 options) as well as how any change in the scope of the project will be dealt with. This is what fee transparency is all about.

In contrast, the type of time-based billing that most firms use inevitably results in some clients feeling “ripped off” because they think the work should be done in less time than it actually takes – the reason most of them don’t change accountants is they have switching costs except in the case of the really low level work. And this is the supreme irony … the client who is happy to pay $7k very often is the one who, when charged $700 without knowing how it was arrived at, feels “ripped off.”

I have facilitated hundreds of client advisory boards (focus group) and have rarely been told by clients that their CPA’s fees are too high. The complaint, if any, involved the lack of transparency i.e. “how was the fee determined and what value did it create for me?” When asked if they would like to know the fee in advance (with provision for change orders in the event of scope creep) the response is almost always YES!

Finally Frank, you refer in your post to “Value billing experts, most of whom have never faced a client complaining about a bill…” I’m hoping that you are not using this literary license to advance your argument in the belief that your audience will conclude “therefore they don’t know what they’re talking about.” This is the old “theory versus practice argument” but at the end of the day all good theory must stand the test of practical application and value pricing has done that!

Having said that I need to add that your allegation categorically does not apply to me, nor to many of the people I know who advocate value billing and ALL that it entails. I do not hold myself out to be a value billing expert but I have been in the trenches as a partner in a significant accounting practice for many years and I have confronted clients who complain about the bill. Some of those clients were referred to cheaper CPAs who are well suited to work with people at that end of town. In other cases we explained exactly how our billing process worked and we made the invisible visible by implementing a transparent pricing process. When you do this the complaining problem goes away or the whining client does (with or without our assistance) in either case both parties are winners.

Interestingly, when a client complains about a bill you have a perfect opportunity to talk about the nature and purpose of value pricing (although this would be much better done BEFORE the complaint because if it was you won’t have complaints in the first place.) This conversation would take the following form: discuss how by focusing on ways to create real tangible value for your client you both win, talk about how your firm has always placed the welfare of its clients at the fore by actively seeking to work with clients in respect of whom you are able to add value, clients who understand the contribution you make to that process and who are willing to share a fair proportion of that with you.

This is an opportunity to share your Client Selection Criteria with your client which turns this into an amazing opportunity to have a conversation with your client about referrals to prospects “who you [the client] think would benefit from the type of work we do based on our firm’s guiding philosophy of value creation.”

When you have this conversation one of two outcomes emerge. One is the identification of a client who will be a loyal and valuable client for many years (and a great referrer) the other is the identification of a client where there is a bad fit with your firm. As Jack Welch would suggest you need to fix, sell or close that relationship.

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