I’m a huge fan of value based pricing for the simple reason it’s a great way to make money. Billing hours isn’t because you’re inevitably ruled by a clock, rates are fixed and there are only so many hours that can be legitimately billed. Discussion over? No way. In the US, much as in the UK, professionals are wedded to the timesheet so it was interesting to read L. Gary Boomer’s take on the subject at WebCPA.com:
…personnel who add value (i.e. technology, financial reporting and tax filing) often do not charge time to clients.
I had to snigger because Gary never explains why this is the case and why compliance (non-value add?)work is time based. I don’t get it. If you’ve prepared the accounts and tax work for 100 fish and chip shops in the past then you’ve a good idea how much cost is likely to be incurred to get the job done. If you don’t then you’re not leveraging the rich history of work already completed. More important, you’re not encouraging your people to think in terms of value but in terms of filling out timesheets. It clearly isn’t working because according to Gary:
Are you aware that firms are only 50 percent chargeable?
What the heck? So in America, 50% of time based chargeable revenue never gets billed? I’d be interested in getting an update from UK firms but in my day, we looked for at least 85%. But that was based on a realistic assessment of the amount of time that’s actually available. Our starting point for costing not pricing was that staff were, on average only likely to make 85% of total available time once we’d factored in holidays, average days sickness and so on. We also took employment cost overhead like pension, NICs etc into account. Therefore, our baseline was different to Gary’s.
This was all done in advance because as partners, we wanted to know likely outcomes. We had to do costing exercises to test how prices would deliver value back to us as partners and to the business. What’s more, we constantly monitored what was happening because we had to take into account seasonal fluctuations impacting cash flow.
Where Gary’s discussion fall apart is in the way he mixes up time costing and pricing. As Ron Baker asserts:
CPA firms know their costs to the penny, probably better than any other business on the planet. Being more accurate cost accountants does not make you a better pricer. If it did, CPAs would be the best pricers in the world…What’s important to a pricer are projected costs, not historical costs, since pricing must take place in a world of risk and uncertainty.
Where I think most UK partners would struggle is in Ron’s ideas around how prices are set. He talks about an internal pricing committee based upon the idea that not all partners are good at pricing. I happen to agree with him but then I’ve always been aggressive on price and cost. I can imagine the infighting that would arise.
- First objection: “You don’t know my clients like I do.” True – but I know what they’re costing the firm based on your write offs.
- Second objection: “Your price hike will scare my clients away.” Not if you’re delivering value.
- Third objection: “XYZ down the road will do the job cheaper.” Good – let’s deal with this proactively and sell those clients as a block to this cheapskate because they’re sure as heck not doing us any good.
- Final objection: “Then what do I do?” There are lots of answers to this question. I’ll leave it up to you to decide.
The most revealing fact from Gary’s article I’m saving for last. According to him, newly qualified hires are generating, on average $130K in revenues. That’s a touch over £69K pa. Given what I know about costs in the UK – that’s abysmal.
Technorati Tags: pricing strategies, value based pricing
