The various pricing approaches discussed in the accounting profession these days can be really confusing. There’s a lot of overlap between them and many misconceptions, especially about “value pricing.” Defining any of these with a tidy little soundbite is tough so I’ve listed several characteristics and indicate where each falls along the spectrum of exhibiting that characteristic.
This chart compares a handful of approaches including my own, Advanced Pricing Methods® (or APM). APM is a built upon a foundation of worth-based pricing that harnesses best practices that a) position the seller for higher worth in a buyer’s eyes, and b) package multiple services together to achieve a buyer’s overarching goal.
In addition to the chart above, this written description might help explain why I don’t advocate using the phrase “value pricing” ever, preferring the term worth-based pricing instead.
I hope you’ll find these helpful and I expect these definitions may involve so I wholeheartedly invite feedback either here, on X/Twitter (@michellegolden) or LinkedIn.
I had the pleasure of working with Jane when she contacted me a few years back to embark on changing their firm’s pricing model to adopt Advanced Pricing Methods®. She oversaw this endeavor that they outwardly call “Choice Pricing” and she was a visionary in that process and absolutely committed to getting it done and done well.
During working sessions with firm leaders, they aligned their future revenue model with their core values, deciding that a new level of “transfairency” (coined by them) by pricing up front would suit the customer-centric firm’s clientele perfectly. They are now three years in to this business-model change and are growing by leaps and bounds in large part through Jane’s vision and execution skills.
It’s so wonderful to see Jane recognized for her leadership in this and many other areas of her great firm. Congratulations Jane!
I keep reading how buyers across all sectors are “demanding discounts” and it’s easy to see how this creates strain and pressure for us to do the same. Fact is, CPA firms are a relatively low-margin-high-volume industry that, when billing by the hour, already writes off about 20% of WIP. Shockingly, that’s the equivalent of a day a week of “free” work (average realization rate of US firms is roughly 80%). We can do better! But I’m not going to talk further in this post about why hourly billing is a bad idea, or that realization is a bogus concept. I’m going to talk about what to do when someone asks you for a discount.
My point about profit margin is that you don’t have much wiggle room, and sometimes none, to do the current work for less money. And to agree to do the same work for less damages your price integrity! So please don’t go there. Whenever you change the price, you’ve got to change the deal. Period.
First, don’t panic if customers ask to negotiate price—even if they ask for discounts. This is actually GREAT news because it opens the door to discuss what they value and what they don’t. To do this most effectively, you’ll want to change the conversation from “what you do” (your inputs) to “what they get” (their outcomes). In other words, what goals, objectives or ideas of theirs are advanced as a result of working together.
Stakeholders satisfied so that… Expansion so that… Securing more capital so that… Streamlining the business so that…
It’s the part after “so that” that reminds the buyer (and you) about the worth of their investment in you. That’s contrary to what we default to in defending our hourly fees which is justifying the activities and inputs that lead to simply satisfying the stakeholders, aiding expansion, getting more working capital, and developing processes to streamline. Your activities don’t matter much. The “so that” is what very much matters. It’s the purpose of the work.
Take this opportunity to move those customers from open-ended hourly billing with unfortunate surprises to a fixed-price agreement where you both know exactly how much they’ll pay and when. Wouldn’t you like to have more predictable revenue? Probably almost as much as they’d like more predictable expenses.
Learn to offer multiple “package” choices (aka options). Through developing options, you’ll define scope parameters. Say you have a range of $3-6k in mind; options permit you to clarify what must be exactly “so” for $3k, and what considerations elevate price to $6k. People love choices. Even when we have to buy an annoying necessity (like tires or insurance… or tax help), simply having some choice empowers a sense of control. Businesses who’ve lost all control from recent events will especially appreciate this!
When it comes to options, “three” is the magic number. With current customers, it’s best to show goodwill with one option that’s actually less than they now pay, a middle option that’s closer to their current spend with you, and one that’s higher but you’ll need to make the ROI clear.
For all three prices, tie them back to the “so that” and you’ll find the conversation about worth is much more satisfying, and nowhere near as painful as a conversation about hours.
Final thought… if it truly doesn’t make sense to spend the energy to develop options (it’s usually worth it, though!) you can change the deal another way. Changing the deal can be something besides the actual work you perform… it can be the level of included access to you and your team, timing of the work, or even payment terms—maybe shoot for 1/4 down to 100% up front in exchange for a slightly lower price.
Two things this pandemic has taught us are that we have to be more creative in how we view things, and we have to be more flexible. It’s time to apply those to how we position our work and price it.
We’re seeing some really big strides in the business (and revenue) model shifts in the accounting profession. At this writing, FIVE of the US Top 100 largest CPA firms, and several Top 200 firms, are currently instituting Fore’s Advanced Pricing Methods℠. These brave large firms are on the very front end of the innovation curve: the pace at which new ideas are spread or diffused.
In her recent article about Changing the Business Model, INSIDE Public Accounting’s editor Chris Camara did an amazing job summarizing what’s happening, why (what’s driving changes), and some of my thoughts on how you can get started on a new pricing approach.
Here’s a snip (click on article thumbnail for the full piece):
Within the last few years, firm leaders have begun accepting that a new revenue model is inevitable, spurred by the rapid introduction of time- saving technologies. Since fewer hours mean reduced WIP-based billings, firm leaders are implementing – or at least investigating – different revenue methods that capture each solution’s worth, not the time spent on it, which is irrelevant as far as the client is concerned.
The impact of work speed on traditional billing is already being felt, says River. One East Coast firm, for example, implemented data analytics and reduced time spent on one aspect of audit from five hours to about 15 minutes. If an hours-X-fee system is used, the time reduction across hundreds of clients means a serious revenue deficit, River says. Another example is an IPA 200 firm that implemented Lean Six Sigma techniques and a workflow product that reduced tax preparation time up to 50% in some cases. Without another revenue model in place first, even after adding clients, they had a $900,000 shortfall between their 2017 and 2018 WIP.
If you’re interested in more “how to” check out my half-day workshop on Nov 5, 2019 in Indianapolis at the 2019 PRIME Symposium. This workshop is open to the public and is limited to 50 guests. Contact email@example.com for details!
My friend and colleague Gale Crosley kindly featured an article I wrote in her excellent Crosley+Company Business Discipline of Practice Growth newsletter last week.
Here’s a brief excerpt:
In the early days of new-model exploration, CPAs saw “value pricing” as an opportunity to lift the artificial revenue ceiling “hours X rates” creates. Others defaulted to fixed prices because they detested timekeeping or did it so poorly their bills were just guesses, anyway. Some felt it was a more ethical or appropriate way to price—that a seller should be able to answer a buyer asking “how much will this cost?”—not expecting clients to hand them blank checks. And others figured up-front pricing would be a competitive differentiator. These motivators still exist, but we have new factors at play now, as well.
I also highlight some outcomes from those early adopters and then talk about what it is that partners are telling me this year that’s quite different from before. I don’t want to give a spoiler but it has a lot to do with creating a business advisor culture.
Advanced Pricing Methods℠ (APM) is a term I coined to encompass techniques that I teach professionals to use to price knowledge work before the work is performed. Key is presenting the work in such a way that the focus is on the worth of outcomes and results of the sellers’ solutions, rather than a list of activities and tasks the seller will undertake. My methods include learning how to incorporate options into offerings, significant attention to defining scope, and ways to engage in deeper dialogue with the buyer about what’s important to them, and discovering why or why not.
With APM, the buyer has certainty in price and a welcomed sense of control in the initial purchase as well as when accepting additional work that is also pre-priced. And with APM, once both buyer and seller have a strong sense of WHY the work is going to be done; they can agree on the worth. The buyer agrees to a price worth paying for their defined outcomes, and the firm agrees it’s worth doing the work for that price associated with their thoughtfully defined scope.
When would you rather know the buyer is happy with your price, before you do the work, or after?
Pricing in advance is not a foreign concept to CPAs who have pre-priced audit and certain other work for years, but it’s usually with the caveat that the price is just an estimate and will be adjusted if “actual” work took longer than the CPA firm originally thought. Long-term fallout from having this built-in “cushion” potential, firms simply aren’t careful about overages. But with that comes a handful of consequences that include having to choose between suffering unchecked profit-margin erosion or risking damage to customer relationships from hitting them up to pay “surprise” bills after work was already performed. I call this “billing and ducking.” As someone who did it, too (once upon a time when I used to charge hourly rates), billing and ducking was exactly what it felt like to send that bill and hope beyond hope that they wouldn’t be upset, they’d just pay it. What a terrible way to feel (on both ends). And I knew it was a lousy way to do business and that it compromised my buyers’ trust in me when I did that.
The biggest difference between pseudo pre-pricing (with after-the-fact adjustments) and Advanced Pricing Methods℠ is that APM eliminates surprises. When price certainty is adhered to, customer trust is not only preserved, it increases.
I suspect that the ability to rely on a back-up plan of billing overages after the fact has led to an unfortunate skill deficit: most firms lack people with highly developed project-management skills—skills that start with really good project definition—which is the number one way to prevent scope creep. Great project management corrects much of that margin-erosion problem even if work isn’t priced in advance. And it becomes essential when the firm commits to absorbing overage risks instead of transferring the risk onto the buyer. It also improves communications for managing expectations, both with the customer and among your team members. APM will enhance your project management skills, too.
My Advanced Pricing Methods℠ teach:
How to ascertain the most valuable part of what you do
How to identify scope risks and head them off at the pass (leading to better project definition for better project management)
How and why to offer multiple price options instead of a single price
How to use your options as a key scope-management tool
How to anticipate and easily capture extra revenue for the additional work that arises
Why it’s advantageous to put your customers in control of their purchases
Is your firm ready for Advanced Pricing Methods℠? Some firms institutionalize it, and others pilot with an industry group or two. No two firms are the same. And lots of CPAs just want to learn the methods and “go rogue” practicing the techniques one proposal at a time.