Value Pricing: An Old Idea in a New Place

Rick Telberg, president and chief executive of Bay Street Group, LLC, has an interesting post ("Are You Earning What You're Worth?") from September 11, 2006 on the diffusion of Value Pricing in the CPA profession, as a follow-up to his earlier post ("How Much Do You Think You're Worth?") on July 10, 2006.

Both posts cite examples of how firms use different pricing strategies to price their services. The post from July 10 even includes a comment from a reader who believes our message of Burying the Billable Hour and Trashing the Timesheet is "hogwash." He's entitled to his opinion, but not his facts. The fact is, there are firms out there that have done both, and are the better for it. I guess some CPAs just have a closed mind, and think they can ignore the realities of living in a knowledge economy versus an industrial one. Not to mention the attachment to the belief that the future will forever equal the past.

In any event, how many firms are really Value Pricing? Telberg's post says:

According to Bay Street's research about 27 percent of CPA firms say they use value pricing, compared with 26 percent for market pricing and 35 percent using billable-hour (cost-based) pricing. The remaining 12 percent cited a mixture of strategies, including combining value pricing with market and/or cost-based methods.

Since this is not a random, scientific survey of all USA firms, I have serious doubts about the percentages cited. VeraSage believes only 7-10% of firms Value Price, at least the way we advocate.

I also dispute the concept of "market pricing," since this is not a recognized pricing strategy among pricing professionals. There is no such thing as a "market," as value is subjective, so this is truly a meaningless term.

I do agree with Telberg that Charlie Larson wrote the first book within the CPA profession on Value Pricing, in 1994. Charlie Larson was one of the founders of the Missouri Management of an Accounting Practice (MAP) movement, and is truly a legend. He also wrote about the idea of a Change Order in his book, written with his son Joseph, Innovative Billing and Collection Methods That Work.

Richard C. Reed wrote the first book, Beyond the Billable Hour, questioning hourly billing, published by the American Bar Association in 1989. I had implemented Value Pricing as early as 1990 in my old firm, Baker & Barnett, CPAs, as well as throwing out timesheets shortly thereafter. I began teaching Value Pricing in 1995 for the California CPA Education Foundation, and published my first book, Professional's Guide to Value Pricing, in 1998.

However, Value Pricing, and the subjective theory of value, dates back to 1871. There were many books on the topic from such pricing pioneers as Tom Nagle, Reed Holden, Kent Monroe, and many others, long before these ideas were introduced into professional services firms.

The true leaders of the Value Pricing movement have been economists, who literally own the intellectual high ground when it comes to the topic of value and price.

In order to test whether or not your firm truly Value Prices, at least the way VeraSage advocates, take the following acid test (we will post this test in the future, and it will allow you to score where your firm is with Value Pricing).

• Do you keep time sheets?
• Do you have Fixed Price Agreements?
• Do you use change requests every time the customer wants or requires work that is not in the scope of the original engagement?
• Do you align your Key Predictive Indicators to your customer's Key Predictive Indicators?
• Do you have a system for acknowledging and rewarding those who innovate in the firm?
• Do you have a leadership program within your firm?
• Do you offer a 100% money-back service guarantee?
• Does each engagement commence with conversations about the customer's needs and priorities, and development of a document detailing the scope of what is and is not included in the work agreement?
• Do you ever bill the customer for services without having discussed a price with them in advance?
• Do you have a Chief Value Officer or pricing cartel?
• Are your fixed prices based upon the approximate amount of time estimated to do the anticipated work?
• Are your prices for the same service the same for every customer?
• Do your prices take into consideration the value of the result from the customer's perspective?
• Do you price all engagements up-front rather than billing them in arrears?
• Do you have a price guarantee? (I.e., If the customer doesn't agree to scope, terms and price they will not have to pay the invoice.)

At least Telberg's survey provides us with a vector on what is happening in firms, and the growing support for burying the billable hour. Let the Revolution continue!