This article was co-authored by Drew West of Deltek and Ken McCall of Boomer Consulting, Inc.
Effort Based vs. Value Based Pricing
Think about something that you
recently bought. It could be as simple
as a pair of jeans or as exciting as a new car.
Did you care how much effort went into making the item? How much labor went into growing the cotton
or making the steel? How elaborate were
the distribution channels, or how much mental energy went into the marketing
campaigns? No, of course not! What you cared about was how much value you placed on owning the item
compared to the price it took to
acquire it. If the value (in your mind)
equaled or exceeded the price, then you were happy to make the purchase!
What you have just experienced is
an illustration of the difference between effort based pricing and value based
pricing. The hours, energy, and other
expenses of production didn’t drive your acceptance of a "fair” price. Your judgment of the fairness of the price
and your willingness to pay it was governed by your perception of the product’s
value. Given the choice, your clients
will respond to your pricing of accounting services in just the same way.
Goals: Increase Revenue and improve
An accounting firm is first and
foremost a business. And, like any
business, it must grow and prosper in order to service clients, provide a
career for employees, and a financial reward for the owners. Properly managing the firm means continually
seeking ways to increase revenues and improve profitability. Pricing strategies must be designed to
support these goals. One critical
question firms must address is: which
pricing strategy best supports growth and profitability? Is it a traditional effort based pricing
structure which computes rates times hours?
Or, is a better strategy based upon the client’s perception of value and
willingness to pay a set price for it? In
order to avoid competing on price for commoditized services in the face of a
wider array of competitors, more and more firms are evaluating value pricing as
a model for the future. Industry leaders
including large firms such as Kennedy & Coe, LLC (Kansas) and smaller ones
like Lawhorn CPA Group, Inc. (Tennessee) have already made the move.
It’s not the goal of this article
to justify the reasons for adopting a value pricing strategy or even to outline
the specific steps to get started. That
requires a more in-depth treatment of the topic than a brief article can
provide. If you wish to explore the
reasons and methods, please review The Boomer Advantage Guide to Pricing for
Value1. There you will find everything you need to
get started in a value pricing program. Perhaps,
though, your firm is already considering adopting a value pricing strategy but
you wonder if your processes and technology will support it. Let’s explore the ways in which you can align
information and workflow to ease your transition to value pricing.
Keys to Success in Value Pricing and How to Manage Them
Virtually every accounting firm
uses some form of time and billing software to track time and expenses. Traditionally, this has been used for billing
purposes. The problem is, these kinds of
"back-office” systems are typically disconnected from "front-office” engagement
delivery and client management systems. This unnatural divide makes it hard to
see the current margin on in-process engagements– work must be completed and
"in the books” before final margin is known.
While hindsight may be okay for hourly billing, value pricing requires
more visibility & better control over work-in-process.
As you move to value pricing, this
typically means a practice-management approach that connects front-office
engagement delivery with back-office financial control. Key
capabilities to look for include integration among multiple modules, which
allow data sharing and all-around visibility for reporting. Capabilities like staff scheduling and job
tracking for workflow control will make your management tasks easier. Some
of the ways in which you can use your Practice Management solution to assist
you in value pricing are outlined next.
Communications. In order to be successful in value pricing
your services, you must have frequent and meaningful communications with your
client. The client will tell you what he
or she needs, but you must be listening and monitoring all the communications
which go on between your firm, your staff, and the client’s business
staff. A good Client Relationship
Management (CRM) program is a must to monitor these contacts. Some firms will invest in a stand-alone
product such as Microsoft CRM, while others will opt for one integrated into
the Practice Management system. Either
way, you will need a method of tracking all the emails, phone calls, and other
conversations that any member of your firm has with any member of the client’s
business. Mining those conversations may
well reveal a need that you are well positioned to address.
Estimating. One of the frequently
voiced objections to a value pricing strategy is the fear of underestimating
the cost of the work, and thus reducing the profit from the job. Here again your Practice Management system
should provide the answer. Assuming you
have done some similar job in the past, either for this client or another, the
ability to analyze data from across the firm and draw meaningful reports will give
you the information you need to set the appropriate price.
Costing. One of the robust topics
of discussion regarding value pricing is whether or not to keep
timesheets. Some thought leaders and
firms advocate doing away with them, since you have established the billing
price through negotiation. Others argue
for keeping them and recording time for cost accounting purposes. For those who opt to keep track of time on
the job, your Practice Management software is designed to do just that.
Control. Once the job is underway
you will need a means of tracking progress, ensuring that the right resources
are committed to the job, and that milestones are being met. Remember that it is important to use Change
Orders to adjust the agreed upon price if additional work is added to the
scope. Accounting firms use a variety of
workflow tracking and resource allocation programs to accomplish these tasks,
but you may find them available in your Practice Management software. Seamless integration between these workflow
monitoring tasks, time entry for cost accounting, and staff availability will
ease the burden of keeping your work on schedule, on time and on budget.
Invoicing. A properly written
Value Pricing Agreement (your engagement letter for a value priced engagement)
will specify the terms for payment. If
the service is ongoing it’s common to use monthly or quarterly billing, or
progress billing if the engagement is of shorter duration but still complex. Any good time and billing system will handle
these tasks, but a far better solution is one that is fully integrated with
your general ledger accounting. A system
which will seamlessly issue invoices, post them to client records, accept
payments using paperless electronic banking, and update your financials all
while tracking the effort expended for cost accounting purposes will reduce
your back office work and improve your profitability!
Obstacles to Overcome
There will inevitably be obstacles
to overcome in shifting to a value pricing strategy. Some of them are real while others mostly
perceived. Some may come from your
clients, but many more will be voiced by reluctant factions within your own
firm. Some will claim that you’ll be
unable to price the job accurately, while others will highlight the risk of
"scope creep” – more work added while the job is in progress. Or, they like the level of control they
believe they get from closely managing hours billed. We
have already examined many of these obstacles and how a fully integrated Practice
Management solution can help overcome them.
A final challenge will likely be
simple reluctance to change. Clients
will often be the first to get on board because they see the value in knowing
the costs and benefits of your service.
It is a function of leadership to ensure that partners, managers, and
staff within the firm buy in and support the value pricing strategy. Good leaders don’t let foot-draggers keep the
firm from making progress.
Hopefully by now you have decided
that at least some applications of value pricing might be good for your firm
and may be wondering if you are properly positioned to give it a try. What steps should you take now to get
A good starting place would be to
review your management support software.
Consider, for example:
- Do you have the ability to accurately plan a
value priced engagement?
- Do you have full visibility into past client
contacts, staff availability, and data analytics which will help you accurately
forecast the cost of an engagement?
- Do you have sufficient workflow control measures
which will allow you to track progress and identify early if you are behind
schedule or over budget.
- Do you have seamless integration between
invoicing, collection, and financial reporting?
- Do you have the ability to produce clear and
concise management reports that will aid in partner level decision making?
None of these items by themselves
will ensure a successful entry into value pricing, but trying to do it without
them will make the project much harder than it needs to be.
Getting started on value pricing probably
sounds like a big step, and it is. But,
if you want to raise revenues, improve profitability, and avoid the trap of
competing on price consider another of the industry-leading firms who have joined
the value pricing movement. Good luck!
for Value, A Boomer Advantage Guide.
https://boomer.site-ym.com/store/view_product.asp?id=303102 (Use code VPGuide100 for free download through June 30, 2012)