Posted by & filed under Growing Your Firm Podcast.

This week we’re excited to release our interview with Ron Baker. He’s been our *most requested* guest for quite some time, and now we have the full, one hour interview live!

Implementing Value Pricing: The Ron Baker Interview

In this interview, we cover:

  • The foundation of time based billing, it's origin, and where it falls short
  • The new formula for creating a value based billing process
  • How to build certainty into your clients experience
  • How to structure prices and payment schedules around specific industries
  • How to remove client decision paralysis and package a monthly service plan
  • Why focusing on billable time could limit client profitability

And much, much more

 Click Below to Listen to the Interview:

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Show Links: 

VeraSage Institute 

Ron Baker's Linkedin 

Ron's Books on KPI's, Value Based Pricing, and More (Amazon Link)

The Soul of Enterprise Radio Show

Want To Dive Further Into Value Pricing?

We are offering a new Book Giveaway for Ron Baker’s published book titled: Implementing Value Pricing. To be entered into this book giveaway, leave a comment answering the following question:

Which business model have you implemented at your firm: Value Pricing Model or the Billable Hour Model?

Key Summary

In today’s podcast, I was originally super excited to speak to Ron Baker about his background and how he was able to build his successful Think Tank: Verasage. After a few minutes on the call, I quickly realized the enormous amount of value Ron was bringing with regards to learning how to implement value pricing within accounting firms and why this is valuable for your 21st century clients.

A few questions later, I was given the breakdown of how to decipher if your firm is an old business model or a new age business model, the purpose of value pricing and the 8 steps to implement value pricing within your firm.

Let’s get started.

CPA Firms: Old Business Model Vs New Business Model

Let’s start with what a business model is from Ron’s perspective: Implementing Value Pricing (aka. The Radical Business Model).

Of course, the first question I had to ask was: Why do you use the term radical?

According to Ron Baker, “When I talk about radical for CPA firm owners, I want the owners to realize that they need to get back to the root of ‘value’. Ever since the billable hour business model came in, we lost sight of the value. We tend to think in terms of time, and hours and that's not how the customer thinks as they want to see the value (or the results).”

When defining a business model at accounting firms, you want to first create value for your customers and outline exactly how you capture a share of that value.

For example, ‘capturing a share’ of that mean means identifying and proposing the right price for the service you are providing.

The ‘creating value’ section of the business model is meant towards how your customer experiences or feels when they receive your service. This goes beyond technical expertise and more into how your customer feels with regards to your listening skills, communication skills, ability to empathize with you, and ultimately, talk in the same language as you.

Old Business Model Formula:

Revenue = People Power x Efficiency Of Your People x Hourly Rate

• ‘People Power’ means your capacity in terms of hours
• ‘The Efficiency Of Your People’ is measured in realization, utilization and billable hours
• The Hourly Rate is what you are charging your clients for the service being done

When discussing this old business model with Ron Baker, he continued to harp in on it’s main problem: This old business model is completely consumed by time.

“There is not a customer alive that buys the professionals time. Nobody goes to the doctor to buy an hour. We can’t buy time from one another yet we are essentially selling time with a ‘billable hour’ model.”

Instead, understand that what customers are buying from professionals is an outcome.

As we continued on, Ron focused on the idea that this entire old business model, is all denominated in time focusing on something that the customer does not care about.

“This old business model does not conform to the knowledge economy that we currently operate in. It was instead designed for a factory model, for example the Ford Auto plant.”

Ron’s issue with the old business model is the major focus on what’s not important: The Billable Hour & The Timesheet. Most accounting firms focus on hitting their hours, marking them down into 6-minute increments and then never focusing on the outcome. Which should be the most important part of your work.

By focusing less on the outcome, and more on the billable hour, you move farther and farther away from what your customer really cares about.

“Any time you can reduce the risk of taking away time from the customer, and put in on yourself, the entire risk lies with the customer. If I don’t know what I’m doing, then the customer feels it. That's what customers don't like about the billable hour. It’s a breeding ground of uncertainty.

According to Ron Baker, one of the biggest arguments for a fixed fee/value pricing model is by taking on the risk of the uncertainty of how long the job will take, the customer will be willing to pay a premium fixed fee. This is why the new business model is focused solely on how you create value for your customer, instead of focuses on your billable hours.

What’s an example of creating more value for your customers?

Here are three examples of how accounting firms can create more value for their customers, per Ron Baker:

1. Structure payment terms around the customer’s cyclical cash flow, rather than your firm’s workflow.

The purpose of structuring the terms around your customer’s needs is because value is determined by your specific customer and therefore it’s external to your firm.

For example, if you have a retail store that has cyclical sales towards the end of the year, structure your payment plans around the times when the cash flow has been increased as long as they pay you within the 1 year requirement.

The best part is to not only give your customers the peace of mind of having a fixed fee, but also be able to help them budget for it by providing payment terms around their business, instead of your own. Since you’re the accountant, you know their cash flow probably better than they do.

2. Offer various ‘Value Guarantee Options’

This can be down alongside your fixed price agreement. If you are not satisfied or delighted with our service, then only pay what you think what the value was.

An example of a value guarantee option is to give your customers the ability to have a 100% money back guarantee, with no questions or ridicule from your accountant.

“Just remember that a service that is guaranteed is worth more than a service that does not have the guarantee.

3. Bundle in unlimited access

A tagline you can provide on your contract is to mention that the customer can call you or meet with you at any time, on any topic. The purpose is to showcase that you are here to help your customers, not the other way around.

“Why don't we drop that and reduce the barriers for the customer to call whenever. I’m not saying give it away. Instead built it into your pricing. It's going to lead to more work and more high value offered to the customer. It’s going to be higher value to be involved in the strategy of the transaction, instead of fixing the damage after it has already been done.”

You’re ultimately going to end up selling more services to the customer when they have unlimited access to you.

New Business Model Formula

Profitability = Intellectual Capital x Effectiveness x Value Price

Let’s break this formula down, piece by piece:

Profitability:

The purpose of structuring this formula is to get CPA firm owners in the mindset that not only do you want to be profitable, but you also want the customer to make a profit off of using you and essentially getting value from your service.

For example, when you went to Starbucks this morning and purchased the $4 latte, it was clear that as the buyer, the latte was more valuable to you than the $4.

According to Ron, “We need to focus on the buyer's profit. This is where the added value service comes into play (as discussed above - Unlimited access, service guarantee, etc). That's enhancing your customer’s value perception. So I’m looking at the customer’s profitability over the lifetime, not just within 1 year.”

Intellectual Capital (3 Component):

1. Human Capital

Human capital, defined by Ron Baker, is what is instead the mind of all of us. Most of the wealth resides in human capital and that is why the world is fueled by the Knowledge Economy.

2) Social Capital

Essentially means who your customers are. Remember that nobody owns a customer and essentially how your customer feels and views you makes up part of your business model.

3) Structural Capital

This is all the stuff that stays in your firm after your employees go home at night. For example, it's your workflows, software, computers, and your strategy. Structural capital is completely owned by your firm.

Effectiveness

When describing effectiveness, Ron makes it clear that it does not mean being efficient. Per Ron Baker, “We can be efficient at doing the wrong things. I want knowledged workers to be effective which is defining doing the right thing.”

Value Price

Within this model, businesses do not have hourly rates. Instead, replace the billable hour with fixed fees.

How Do You Shift From Offering Value Pricing Instead Of Hourly Rate Model?

One of the things you can do to start building your intellectual capital is to offer your customers options (choices).

Essentially, people prefer choice.

For example, you have a choice in which American Express card you would like to have. Whether it be a green, gold or platinum card, there is a choice depending on your needs and desires.

This is the first step: Offer Options.

Craft an acceptable range of pricing for the exact same product. You will need to do research within your firm and your customers to determine what that range is.

Give your customer a range of 3 different prices (just like Starbucks does with Tall, Grande and Venti sizes).

Here is an example of value pricing with options:

Green Card Level (cheapest price): Offer just the basics of doing the tax return (no bells and whistles)

Gold Card Level (medium price): Add in additional items of value that you can do for your customer (for example, cash flow budgeting, KPI analysis)

Platinum Card Level (highest price): This is where you can offer the most value (i.e. 24/7 365 day access to you)

By offering these options, the customer will decide what they want and what they are willing to pay for. Some customers just want the green card and go with the basics. Some customers want the 24/7 access and are willing to pay a higher price.

This is the best way to switch from the old model to the new business model: Offer your customers choices.

How does the initial onboarding process happen with the new business model?

As Ron Baker goes on the mention, “The onboarding process is essential in selling within this new type of business model. We have a saying at Verasage that you cannot value price the wrong customer. You don’t price the service. We are pricing the customer (because value is subjective).”

Value is determined based on what the outcome is (what you are producing for that customer).

Want To Dive Further Into Value Pricing?

We are offering a new Book Giveaway for Ron Baker’s published book titled: Implementing Value Pricing. To be entered into this book giveaway, leave a comment answering the following question:

Which business model have you implemented at your firm: Value Pricing Model or the Billable Hour Model?

8 Step Process To Implement Value Pricing

Here are the eight steps Ron Baker walks you through to determine how to implement value pricing within your firm:

Step 1: Engage In A Value Conversation With Your Customers

This is the first step, and most important step. You need to know how your customer sees and identifies value. In order to get this answer, you need to set up calls with your customers and ask them the following questions:

• What stage of life are they currently at?
• Where do they want to be in 5 to 10 years?
• How do they define a successful relationship with their accountant?
• Why did they switch from their prior accountant?
• Why are they sitting in your office now?
• Why do they need this today, not 6 months from now?

The purpose of these questions is to determine: What are the value drivers that are steering your customer?

Step 2: Craft Your 3 Tier Value Offer

Once you have determined how your customers see and price value, you can create an acceptable 3-tier value range to offer to your prospective and current customers.

Using the same idea as the American Express structure, offer your customers a Green, Gold and Platinum level of service and let them make the choice of the value they want you to offer.

This step also helps firms answer the daunting question of whether or not you priced the service incorrectly (i.e. did you leave money on the table?). This service offering of 3 options will place the customer in the driver's seat and make the decision on how much they are willing to spend for your value offer.

Step 3: Decide Pricing For Each Tier, Through Customer Inquiry
To take a step back, you have first contacted your customer and learned what they see as value driven activities. Then, you have crafted 3-tier level of the value you are willing to offer.

What’s next? Deciding on how to price each tier.

Before you actually establish the price, you want to go back to your customers and perform a series of questions to learn what is the price range they are willing to pay for this value.

Here are a few questions to help move this conversation along:

• How profitable is the client’s company? How long have they been in business?
• How sophisticated is the client?
• Do we like this client?
• What is the client’s cost of not solving this problem in dollars?
• What is the economic benefit to the client if they solve the problem?
• At what price would this be so expensive the client would not consider buying it?
• At what price would this be expensive, but the client would most likely still buy it?
• At what price does this become inexpensive?
• At what price does this become so inexpensive the client would question its value?
• What price would be the most acceptable price to pay?
After you have gone through the questions with the customer, it’s now time to identify where the value buckets lie, in terms of pricing. There are three different types of pricing responses that you should expect from your customer, during this interview process:

Reservation price:
The price that is way below what you are willing to actually work for. This would be generating a normal profit, and something the firm might just turn down.

Hope For Price:
This is the price that falls in the middle of the 3 tier pricing strategy. Most times, the customer will not be shocked with how expensive or how low the price is. It’s generally a solid price that your firm is willing to accept.

Pump Fist Price:
The last tier in the pricing model, and the most expensive, is called the pump fist price because it's the price your firm would kill to have. Within this top tier price, your firm is willing to add extraordinary value and will generate a crazy good profit. You will be fist pumping if your client accepts this price.

According to Ron:

“Many people ask how to ascertain value since it’s subjective and there’s no formula. The answer is with a deep understanding of your client’s value drivers, which requires a deep conversation with the client.”

Step 4: Once The Options Have Been Crafted, It’s Time To Present Them To Your Clients
Now it’s time to consolidate all of your hard work, and bring your new 3 tier pricing and value offer to your current clients.

This will provide an opportunity for the conversation and feedback to come directly from your customer, without wondering what they are thinking.

Remember that this conversation needs to be done with someone comfortable to discuss pricing.

Your client might start off with saying it’s too expensive.

You will need to ask additional questions and might need to head back to step 3, to make sure you have identified how to price your value properly.

Step 5: Create A Fixed Price Agreement (FPA)
This step can only be completed, once you have successfully identified your value service offering and the prices you are willing to offer for those services.

Essentially, an FPA is an engagement letter detailing out the value you are willing to offer and the price you have come to an agreement on with your potential new client.

Step 6: Begin Planning On The Engagement
Now that you have your FPA and are ready to start working, it’s now time to plan the engagement. The planning steps can include the following:
• Scoping the work
• Organizing who will staff the job
• Set up client expectations and timelines (due dates)
• Plus other planning items (risk assessment, etc)

Step 7: New Additional Work Arises (Scope Creep)
We have all been there, contracted the engagement to do one job and find out there is a lot of other work that needs to be done.

This is where “out of scope” billing comes into play.

When scope creep occurs, you can give your client the option on how they want to proceed.

Whether it be through signing an additional FPA or adding on additional fees to your current arrangement.

Just make sure you have a clear communication line with your client when this occurs.

Step 8: Review The Work, After It Has Been Completed
Within most jobs, we review the work to make sure everything is in place before sending it to the client to finalize.

An additional step you can take, to confirm the value you have provided, is to perform what Ron Baker calls an: After Action Review (AAR).

Per Ron Baker, “You will need to find out how you did as a service provider. Whether it be through a phone call, in person meeting or a simple email, set up communication with your customer to confirm that they have received the value that was offered in the FPA.”

This is a core competency that all firms should be implementing, regardless of staying with the old or new business model.

Want To Dive Further Into Value Pricing?

We are offering a new Book Giveaway for Ron Baker’s published book titled: Implementing Value Pricing. To be entered into this book giveaway, leave a comment answering the following question:

Which business model have you implemented at your firm: Value Pricing Model or the Billable Hour Model?

Want To Dive Further Into Value Pricing?

We are offering a new Book Giveaway for Ron Baker’s published book titled: Implementing Value Pricing. To be entered into this book giveaway, leave a comment answering the following question:

Which business model have you implemented at your firm: Value Pricing Model or the Billable Hour Model?


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34 Responses to “How To Implement Value Pricing with Ron Baker”

  1. Rebecca

    I have implemented a combination of Value Pricing and Billable Hour Pricing. I track everything and come up to a total for billable hours, and then evaluate that against the value of the services provided.

    There are times when we mark up for value and mark down for inefficiency (again bringing back to value). My experience with large firms was this hybrid method that allows you the best chance at profitability based on costs (capturing the actual costs-time) and then allowing for additional profits based on the value of the services you have provided.

    • David

      Thank for the comment Rebecca!
      To make sure I understand correctly, you track hourly, then deliver a final price (but the line items are not each time entry, but rather a single line item per engagement)?
      Is this across all types of engagements, or do you quote price upfront for certain engagements, whereas others are purely hourly?

      • Rebecca

        Yes, billings are typically done as a single line item per engagement (ie: Tax preparation services to include: ….. total $x,xxx.xx) In my engagement letters I indicate the estimated costs of the services, but with the caveat that there may be variences depending on any variations from what is expected.

        I do have some engagements that I bill at straight hourly rates, such as ad-hoc write-up services as they vary so much that trying to budget them is near impossible and not many clients value that work. We have some regular monthly write-up clients which we bill at flat monthly rates, but I also review the receipts against time spent every six months to evaluate profitability.

        Does that help?

  2. Jay Holmes

    We have moved to Fixed fee and some Value Pricing. If I had more time in the day, it would be Value pricing with some fixed fee. We don’t track time and thanks to JetPack, are now managing the flow of work and due dates of things a lot more effectively. We will try out a new method of coming up with tax return prices this year based on some value adds: We will set a base price for the return, then walk a client through a spreadsheet that has 3 levels for 5 different add ons (i.e. completion time, audit protection, payment terms, etc.). Each level will add to the base price by a %.

    • David

      Thank you for the kind words Jay 🙂
      LOVE the idea of offering/adding complimentary services as part of the package!
      Just a quick note: The package offering should be setup by a value/needs discovery conversation as well (we cover this a bit in the Kirk Bowman interview as well).
      Keep us posted on how this business season goes!

      • Jay Holmes

        David,
        We tried having the value conversation up front, and then we putting the proposal together later. We found this process taking a long time. So the idea/question: can we have that value conversation while we are creating the proposal with the client (either in person or virtually)? We hope it speeds this process up.

        • David

          Yes I agree- I think there’s a case for a value conversation followed by a 3 tiered offering (that is largely standardized as a fixed fee) but it positioned better through the value convo.

  3. Fabien Gendron

    Our firm does billable hours, but off course with write-ups and write-offs to adjust for our perceived value provided. The WIP for each invoice is reviewed to see if additional service(s) was offered: if not, we bill about the same as the prior year (maybe a small inflationary increase) and absord any inefficiencies. If we did provide another service, then we assess with the staff involve how much should be billed for that – straight time, capped fees, etc.

    I can see much value in involving the client in those discussion instead of playing guessing games.

    • David

      Hi Fabien- great point. I believe whether it’s a strictly value based or a fixed fee approach, having More client conversations around their business only helps you position, sell, and price the services better. Thanks for the comment!

  4. Brendan Malone

    keep up the good work, the podcasts are great. fantastic article. We do fixed fee with value pricing when we do a better job, make a difference to the client although its having the confidence to ask for the higher fees when you have done the work but were definately growing in that regard.

    • David

      Thanks for the kind words Brendan. I agree, I think one of the hardest things to tackle is a mixture of those client conversations, as well as handling the transition period!

  5. greenbeancounter

    I do mostly fixed fee but am trying to do value pricing with new clients. I almost never use hourly except for the occasional single research question or something like that.
    Thanks for the valuable interviews – very interesting!

      • greenbeancounter

        This is pretty terrible reasoning, but when I was a bookkeeper at a CPA firm, I absolutely hated tracking my time. So I did some rough calculations and came up with fixed fees.

        • David

          Love the honesty :)! We actually have an interview being released soon (With Tim Shortsleeve) who runs a successful practice but doesn’t manage/track with timesheets … so you’re not alone!

  6. Tammy Williams

    I have a new business and trying to convert from the old hourly pricing to value pricing has been an issue. The issue for me has been to move away from the structure that was in place from firm I previously worked for and to move my clients to the new value pricing structure. This looks like it may actually give me a bit more insight on how to actually implement this pricing structure.

  7. Tom Palm

    I have used fixed fee billing for quite some time now. One area of my practice that is difficult to value price up front, is catch up work or QuickBooks training/consulting. There at some point needs to be a time factor in this, as I can’t charge $500 for QB training that is an unlimited amount of time. All of my recurring clients are fixed fee though.

    • David

      Hi Tom – that’s a really interesting point. I imagine there has to be some ‘baseline’ session included a QB training, then outside X weeks or X sessions, it can be $XX/hour or $XX/session.
      Catch up work can be equally (if not more) challenging…. I wonder if anyone else has had a similar experience?

      • Joao Gomes

        It’s somewhat subjective but in general it has to do with the complexity inherent in the project. For example, most of my value priced work is from international tax work I do. For tax return prep (in general) I still try to follow the hourly method.

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