Value Pricing, with Ron Baker
Presented by Ron Baker , speaker, consultant, trainer, and best-selling author of "The Professional's Guide to Value Pricing"
Session Moderator: Thank you, Ron, for leading our workshop today!
Session Moderator: Ronald J. Baker started his accounting career in 1984 with KPMG Peat Marwick's Private Business Advisory Services in San Francisco. Today, he is a partner in Baker & Barnett, CPAs, located in Corte Madera, California-the firm he co-founded in 1988.
As a frequent speaker at CPA events and conferences, and a consultant to CPA firms on implementing Total Quality Service and Value Pricing, his work takes him around the world. He has been an instructor with the California CPA Education Foundation since 1995 and has authored five courses for them: How to Build a Successful Practice with Total Quality Service; The Shift From Hourly Billing to Value Pricing; Value Pricing, The Graduate Seminar; You Are What You Charge For: Success in Today's Emerging Experience Economy (with Daniel Morris); and Alternatives to the Federal Income Tax.
He is the author of the best selling management book ever written specifically for the CPA profession, “The Professional's Guide to Value Pricing 2000”, published by Harcourt Professional Publishing (now Aspen Law & Business, a division of Aspen Publishers, Inc.). The book has been ranked #1 on amazon.com in Australia and New Zealand.
Ron recently toured Australia (where he climbed the Sydney Harbor Bridge), New Zealand (where he bungee jumped), the United Kingdom (where he visited the tomb of the "Father of the billable hour"), Canada, and the United States, spreading his Value Pricing message to thousands of CPAs and Chartered Accountants.
He graduated in 1984 from San Francisco State University with a Bachelor of Science in accounting and a minor in economics. He is a graduate of Disney University and presently resides in Petaluma, California.
Session Moderator: Welcome, Ron!
Ron Baker: Thank you.
The Timeslips banner ad is interesting above us…turns time into money.
Folks, let be clear: TIME IS NOT MONEY! NO CUSOTMER BUYS HOURS. THEREFORE, WE DON'T SELL TIME. We need to kill the billable hour in this profession once and for all. It is seriously hampering our ability to get paid what we are worth. We live in an intellectual capital world, as CPAs sell intellectual capital. I promise you Bill Gates doesn't charge by the hour. And Microsoft doesn't keep time sheets.
My question then is: Why do we??
Gary Muller: That is how we were taught.
Ron Baker: We need to abandon what we were taught and relearn.
Gary Muller: I agree - not quite so easy to implement.
Ron Baker: The billable hour is a direct cousin to the Labor Theory of Value posited by Karl Marx. It's a false theory and leads to false measurements,
I'm glad you agree Gary, I understand it's not easy to implement.
Gary Muller: In many forms I have been using flat fee arrangements for 12 years.
Ron Baker: But we must do it as a profession if we want to stay relevant in a knowledge economy. I advocate Fixed Price Agreements. We have to price our jobs BEFORE we do them, not after.
Brenda Richter: In your classes you always say to start implementing slowly, I think that helps.
Gary Muller: I know, I attended one of your RAS seminars a month or so ago.
Tommy Beason: Ron, what changes have been made from your 1999 book to the 2000 one?
Ron Baker: 4 new chapters about 160 new pages, Tommy. I also have a 2001 edition coming out in Oct or Nov.
Who here has implemented FPAs??
Brenda Richter: I have.
Ron Baker: Any success stories Brenda?
Brenda Richter: Last week I was the feature speaker at the Santa Barbara Women’s CPA lunch. We discussed Value Pricing. Two days later I received a call from one of the women thanking me. She now has a $1500 month client.
Gary Muller: Many of my clients hate the one month each year when I bill all of the year end work, tax return, etc. They would much rather total up the fees and pay 1/12 each month
Ron Baker: And folks, let me also say that pricing is a marketing decision. Marketing = communication. Think of the 4 Ps of marketing - price is the most complex
Gail Perry: Here's a question that was emailed into AccountingWEB earlier today:
A small CPA firm has an informal time accumulation system that is not uniformly followed. The firm is either going to invest in a better software system and take the time necessary to strictly enforce time reporting of team members or decide against time reports entirely. What course of action do you suggest?
And he followed up with:
If you suggest no time reports, how do you suggest the firm evaluate the unprofitable engagements and the unprofitable areas of practice?
Ron Baker: Forget the time tracking system. You can't inspire knowledge workers to do great things if they have to account for every 6 minutes of their day. Let me be clear on this issue of profitability: time reporting isn't currently being used to track profitability. The Almightily Hourly Rate is NOT COST ACCOUNTING…IT'S PROFIT FORECASTING. I contend that firms know who their profitable vs. unprofitable customers are.
Paul O'Byrne: If you use timesheets as accountability "weapons", you get the productivity you deserve.
Ron Baker: Good point Paul.
Let's be honest: No firm is using time sheets to assess profitability…they use them to bill.
Paul O'Byrne: But HOW profitable, how do you rank them? On the other hand, If Microsoft doesn't keep timesheets, how does it know how much things cost? When to invent, when to invest?
Ron Baker: Here is my contention: it's hard to lose money in a CPA firm. They manage from the income statement, and use other more important KPIs (Key Performance Indicators). Thus, if you can't lose money in a firm, then the question of "are we making money on this customer” is the wrong question.
Paul O'Byrne: OK. Do I buy a new piece of software or do I learn VBA and Access?
Ron Baker: A better question is: Are we optimizing the profit from this customer? And that is done with pricing, not productivity.
Hobie Frady: We are using the fixed fee arrangements for a bundled service approach, but are finding that once we begin delivering the service that we are called upon to provide even more service that falls outside the scope of the original agreement. What do you propose in this scenario?
Ron Baker: Hobie, use Change Orders when the scope changes. Change Orders are a great tool and allow you to cross-sell more services to the customer, just like contractors and auto mechanics use. I have found that FPA customers will purchase more services than non-FPA customers. Change Orders are the real opportunities with Value Pricing
Hobie Frady: OK, but the clients sometimes do not realize the additional services that they are requiring. I agree that FPA customers purchase more services, we are seeing it on a continuous basis.
Ron Baker: You must make the customer realize it. You wouldn't let your auto mechanic perform a service you didn't approve in advance.
Brenda Richter: It's important to share the value pricing concept with your team members so they don't start working before a change order is issued.
Ron Baker: Brenda, you're right, the Team Members will usually spot Change Orders before the partners/managers.
Gary Muller: Ron, how do you price an engagement to do tax research on a very specific tax issue, with no real idea how long it will take to complete?
Ron Baker: Gary, good question. Let me say this: the time it takes you is irrelevant to the value to the customer. You may not like that, but it's true.
Gary Muller: Agreed
Ron Baker: Ask yourself this, “What price would I desire for this service?" That is not a frivolous question, but very important in order to start to get paid what you are worth. Be realistic though, you can't say $1million. But we all have a price in mind that we'd like… most times, you can get it.
Offering an unconditional money back guarantee is also critical, I think, to Value Price. It lowers the customer's risk, reduces buyer's remorse, and can reduce sticker shock. A service that is guaranteed is worth more than one that is not.
Philip Symchych: What common weaknesses do you see in us trying to implement FPAs and what should we change?
Ron Baker: The biggest weakness, Philip, is lack of self-esteem. We don't think we're worth more than our hourly rates…and if we don't believe it, neither will the customer. I assure you F. Lee Bailey thinks he's worth the outrageous prices he charges. Second, our emotional attachment to the Almighty Hour inhibits us from getting what the customer already thinks we're worth. We are in the best position to do that…compare our advantage over the average salesman. And we can frequently quantify the value we bring to the table. We just need to talk about Value and stop boring the customer with hours.
Gary Muller: Excellent point Ron.
Hobie Frady: We haven't had that much problem with sticker shock, even though we are doubling or tripling the amount the customer has paid in the past.
Philip Symchych: How can we help our clients quantify the value of our services, accounting or consulting?
Ron Baker: Let me say this: CPA customers are not price sensitive. I have two tons of empirical evidence to back that up. We are acting like they are, but there's no evidence to support it.
Session Moderator: Ron, how do you change the "value" of a tax return?
Ron Baker: You bundle it with more services…add tax planning, an Annual Consulting Service, a money back guarantee. You find out not just what the customer needs, but what they want. You offer them something different, something customized to them. Customers don't want to be treated alike; they want to be treated individually. You also offer Total Quality Service.
Session Moderator: What if they got all of that before?
Ron Baker: I would be surprised! If they got that before, they probably wouldn't have left.
Session Moderator: Could that be one of the problems of value pricing in a firm that has already given "value" services at an hourly price? I'm asking about firms that want to implement a new pricing system.
Ron Baker: It could be, since our profession has set the precedent that we price by the hour. That is why I'm so insistent we stop blabbering and measuring time. It's pointless. Nobody here asked to see General Motors' time sheets before they bought their cars.
Gary Muller: How many times have you had to refund a fee and what do you do with the client after you have refunded the fee for a rather insignificant issue?
Ron Baker: Gary, I have never had the guaranteed triggered. Some CPAs have, but only two that I know were full 100% refunds. The others, the CPA admitted fault.
Gary Muller: That is a pretty good record.
Ron Baker: It's an excellent record, and I have found it true around the world. Paul from the UK would back me on it, I think.
Ron Baker: If the customer is a problem, they just self-identified themselves by triggering the guarantee, and you fire them.
Paul O'Byrne: Our existing clients are skeptical of the guarantee. They say it would sour the relationship. New clients, great!
Ron Baker: That's interesting. I haven't heard that before…but yes, it works wonders for new customers.
Ron Baker: And let me say this to everyone: Folks, you already offer a guarantee…it's just a covert policy in your firm. One you get no marketing muscle from. I want you to make it overt and gain a competitive advantage from it.
Back to the Value Proposition: Quality, Service, and Price.
We can't compete on Quality, because that's a table stake. No one is going to stick with an incompetent CPA.
I don't think you want to compete on price…no fun being in a price war.
That leaves Service…people will pay big premiums for quality service.
Gary Muller: That is true Ron, but how many clients know if a CPA is competent?
Ron Baker: Gary, they will eventually find out if a CPA is incompetent…the market tends to weed them out.
I’m just saying you can't run around and say you are better qualified than KPMG to do a tax return or audit. In the customer's eyes, our quality is equal.
And, by the way, I am not saying you can't compete on price, you certainly can. Wal-Mart, H&R Block and Jacoby and Meyers do it. It's a successful strategy, it just doesn't excite me, or anyone in this chat, I bet.
Look at Fed-Ex, Ritz-Carton, Disney, Nordstrom. All price at premiums because they offer TQS. CPAs can do the same. As your competitor I can beat your price, match your quality, but very hard to match your service/relationship.
Paul O'Byrne: I am not sure "in the customer's eyes, our quality is equal". That's part of why I am keen on Value Pricing and the whole dialogue it gets started. It's a distinction, in the UK at least.
Ron Baker: Good point, Paul. VP can be a distinction, since our customers grapple with pricing issues daily. And I have found most consultants know little, if anything, about pricing theory. It's a great consulting area, folks. That's why my 2000 edition devotes a chapter to advance price theory so you can use with your customers.
David Turnbull: if a client can't tell a good CPA form an average one, they will probably believe you when you describe your services and why they are better, thus allowing value pricing. Agree?
Ron Baker: David…agree. High price sends a distinct message: high value. Services are hard to judge, even after they are experienced. So price sends a definitive quality signal to the customer. YOU ARE WHAT YOU CHARGE FOR!
Paul O'Byrne: Clients look at you differently when you explain extracting the customer surplus in their business.
Ron Baker: Good point Paul. I think customers respect that
Hobie Frady: We are using the FPA's for bundled services, what are some other opportunities for VP?
Ron Baker: Change Orders Hobie. Anytime an additional service comes up, wrap it in a Change Order and experiment with innovative pricing policies…like the Retrospective Price. Let the customer set the price based upon his/her satisfaction with the service. This doesn’t mean a contingency, by the way
Philip Symchych: What do you suggest for a consulting project that has a specific start/finish?
Ron Baker: Philip, give me an example…a fixed price for starters.
Philip Symchych: To help someone hire, a recruiting project
Ron Baker: My partner recently did a couple of those. One was a fixed price and one was a % of salary. The time it takes is irrelevant to the value. If the job is really a black hole, segment it. Break it down into stages.
David Turnbull: How do you quote a price on a project or change order when you have no idea how long it will take? For example it could take 10 or 75 hours depending on condition of client records. I wouldn't even know value until job is complete.
Ron Baker: I would never quote a job without pre-qualifying the customer and the state of their records…and even if you blow the price, stop the job when the scope changes and do a Change Order
Paul O'Byrne: OK Ron, if your partner doesn't keep timesheets (I'm guessing) And he has limited time available, how does he know that was the BEST use of his time?
Ron Baker: Paul, how do you know the "best use" of your time with time sheets? Do they answer that for you?
Paul O'Byrne: Some of our clients do job costing, we try, too.
Don't confuse pricing with opportunity cost. I’m not against costing, but the hourly rate is not cost accounting…it is profit forecasting. Take out the desired net income built in and that's cost accounting. That goes back to my point that it's hard to lose money in a CPA firm.
Paul O'Byrne: Why not? Any suggestions for implementing FPAs and VP with consulting clients that are totally used to hourly rates?
Gary Muller: Paul, you say existing clients do not favor this approach. Have you made it a policy not to bundle services for existing clients?
Paul O'Byrne: No, on the contrary.
Ron Baker: What is the reaction from the group when I say: Tear up the time sheets!!
Brenda Richter: I agree - tear up the time sheets.
Paul O'Byrne: Excuse me if I'm being a bit British about this, but I think clients DO care about our business. If we lose money on an assignment, they know it hurts and we can't repeat that indefinitely.
Ron Baker: State this: we don't discuss hours, we talk value.
Gary Muller: I only use time sheets to track the time of my two employees. I work from my house and they from theirs. So that I know what they are doing.
Ron Baker: Well, Gary, I posit there's other ways to track what they are doing other than time sheets
Gary Muller: Such as?
Ron Baker: Other Key Performance Indicators. Such as contribution to revenue, customer feedback, and job turnaround.
Gary Muller: How do you know when to, and how much more work to give to staff?
Ron Baker: What I am saying is this: the KPIs we use and measure should be how our customers define success.
Paul O'Byrne: If Microsoft doesn't keep timesheets, how does it know how much things cost? When to invent, when to invest?
Ron Baker: Paul, do you think Microsoft is any less successful because they don’t keep time sheets? I say cost accounting can be helpful management information. You have cost accounting information; look at your income statement.
Paul O'Byrne: Hey, raw hours are helpful management info.
Ann Smith: I tore up the time sheets during tax season. When I did, we realized that filling the time was not an option. The important thing was to complete the tax return.
Ron Baker: THANK YOU ANN!
Douglas Dutton: A propose that GM & Microsoft do keep a type of record of time. They know exactly what they have invested in a project or car and they price it accordingly.
Ron Baker: Douglas, cost does not determine price…price determines cost. Let's not confuse cost accounting with pricing. That's another major problem we have as CPAs. I know the cost of a team member without seeing a time sheet.
Douglas Dutton: Also, should a farmer pay $500 for his tax return if it only takes my staff 1 hour and another farmer pay $500 if it takes me 4 or 5 hours, without some idea of the time spent, how do know what the work is worth?
Ron Baker: Douglas, the time it takes you to do a job is irrelevant to it's worth.
Ann Smith: Would you pay the farmer more if his cow took longer to grow up than his competitor's?
Ron Baker: Good point Ann! It just shows how endemic the time = value mentality is. That's a false theory of value dating back to Karl Marx, and it's wrong. Karl was wrong on that one. I think KPIs and internal measures should be defined by customer success. Hours measure efforts and activity. Customers buy results.
Douglas Dutton: No, I wouldn’t want to pay more, but if I took a cow to be raised and it only need to be fed for a month, I would pay less then if it had to be fed for 9 months!
Ron Baker: Not necessarily Douglas. Why did Arnold Schwarznagger pay $1.3M dollars for JFK's golf clubs? No additional "time" went into them since JFK bought them? Value is like beauty; it's in the eye of the beholder (the payer)…it's not measured by internal costs or profit levels.
Douglas Dutton: Because they were one of a kind. I have lots of competition that can do a farm tax return.
Ron Baker: No, scarcity does not determine value. I'll tell you what Douglas…I'll sign my book in pink crayon, one of a kind. How much will you give me for it? For something to be valuable, someone has got to want it. Then you need to offer things your competition doesn't. Differentiate your Value Proposition from theirs.
Douglas Dutton: You are saying that if there were millions of Mona Lisa's, they would all be just as valuable.
Ron Baker: Perhaps they would. That depends on how much they were desired.
David Turnbull: We haven't used timesheets for a long time. We price according to market. Downside is we don't know our most efficient/profitable areas of our practice.
Ron Baker: David, I think you can figure that out by running a pareto analysis…looking at trends. Look at this way, airlines major KPIs are on time performance, customer complaints, baggage lost, and DOT rankings. If airlines can fly planes around the world with 4-5 major KPIs are we really saying that we can't run a firm without time sheets?
Airlines don't keep time sheets. Why? Hint: they don't price based upon time, period. We should, therefore, measure results.
Gary Muller: Ron, did you start out with timesheets? If so, how long did it take to convert to VB?
Ron Baker: Yes, I did Gary. It took me about 2 years to trash them. It took my partner longer.
Paul O'Byrne: Ron, are you going to talk about TIP clauses?
Stuart Jones: Good evening Ron. I shall have to read the transcript. Scrapped timesheets two months ago. No regrets.
Ron Baker: Thanks Stuart, awesome. More proof an accounting firm can run without time sheets and the walls won't come crashing down.
Gary Muller: What was the hardest thing you had to do?
Ron Baker: Change my mindset from cost accounting to value pricing. Realize that it is the customer, period, who determines the value of what I do. Not my internal costs, desired level of profit, and certainly not the time it takes me to do something. That is a major paradigm shift for us as CPAs
Douglas Dutton: We actually use a hybrid system but I just can't convince myself that taking time out of the ratio makes great sense.
Ron Baker: Do it gradually Douglas. Use time sheets for true cost accounting. Just don't use them to PRICE.
Philip Symchych: Ron, I'm negotiating year 3 of an ongoing consulting engagement. Any ideas for FPA? Narrow the scope and use change orders?
Ron Baker: Philip, that's a hard question, I need more facts. I'd be glad to help you after this session. You can contact me directly.
Philip Symchych: Thanks.
Ron Baker: my preference is usually one year FPAs, but I have seen them for 2-4 year periods. It does have a "lock-in" effect that is advantageous.
Brenda Richter: I suggest staggering your FPAs so that they don't all expire at once.
Stuart Jones: Six months ago we were charging £200 to incorporate a company ($300). Now we charge between $1000 and $2000 and sell more at $2000 than $1000.
Ron Baker: Good point Stuart.
Ron Baker: We need more time. I know, I know, time is money. Folks, let me just say this: nothing will ever be attempted if all possible objections must be first overcome. I want to make our profession price on purpose.
Paul O'Byrne: Can I try to redeem myself? I love the ideas of Value pricing, FPAs, TIP clauses. The transition is tough. Maybe more for us than our clients.
Ron Baker: For sure, Paul. We project our own price sensitivity onto our customers. We have more problems with Value Pricing than they do. That needs to stop. Which is why I've dedicated my life to burying the billable hour in our profession.
Session Moderator: Ron, it looks like we are out of time.
Ron Baker: ok.
Paul O'Byrne: I have a philosophical issue: How do poor farmers get their tax returns done, if we all have inflated (compared to present) fees. Serious question.
Ron Baker: The market will take care of the tax return price. The market will drive price downwards. But the farmer wants more than just a tax return.
Paul O'Byrne: Are poor people not entitled to good advice? Business development advice.
Ron Baker: Poor people usually don't have a need for BD advice. But if they did, I have no problem with Pro Bono work like lawyers do, many CPAs here do that.
Session Moderator: Thanks so much for being here - great topic and discussion!
Ron Baker: I enjoyed it. Hope everyone found it valuable
Session Moderator: Thanks, too, to all of you for being here today. We enjoyed having you.