First class or coach?
February 25, 2008
Ron Baker offers an interesting discussion about value delivery where he demonstrates the Adaptive Capacity Model using the airplane as a metaphor. The illustration at the top of this post sets the scene.
In this model, Ron suggests that:
And here’s the biggest question of all: Where does the customer want to sit?
The firm DOES NOT decide this, the customer does. How? Ask them. We have firms who slide the picture of the plane over to the customer and ask, “Where would you like to sit in our plane.” This forces the firm to communicate the value proposition for each section of the plane, just like the airlines have (quite effectively I might add).Keep it simple with this. I know from experience how we can add many layers of complexity that don’t mean a whole lot. People will draw their own conclusions from the metaphor, that’s the beauty of thinking for one’s self.
Ron goes on to say the metaphor can help the firm decide how it organizes its client groups according to different value delivery check points. I don’t have a problem with this in principle but I do in practice.
Experience shows that clients want value but at the lowest possible price. They consistently push those boundaries and as practitioners we tend to give way - often far too readily. In order to make this model work, we have to be confident we ‘know’ the value we can deliver to each class of passenger. That takes a good amount of effort to work out.
As an alternative, I have recently found that when practitioners adopt a factory style of production in relation to compliance work, they can adopt the EasyJet model of service where there is no real distinction between where you sit. These practices adopt fixed prices but, like the low cost airlines, concentrate on ensuring they squeeze profit from each menu item. They are among the most profitable firms I know. And with the happiest clients. Why? Because for these clients, who constitute the majority of those who cross our doorstep, the work is mostly viewed as a commoditized necessity where price is a sensitive issue but where service delivery has a value. Just as with the low cost airlines, it’s about delivering on the promise of safely landing on time, most of the time.
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14 Responses to “First class or coach?”
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I like fixed price arrangements with my customers. More importantly, THEY like it, too. I have the mysterious and elusive Ron Baker to thank for what little I know about fixed pricing arrangements, so far.
The great thing about fixed price arrangements is that rather than spending N hours at my desk working over billing statements at the end of the month I am spending N+ hours talking to customers and prospective customers. In the long run, that is a WAY better use of my time.
I’m with you, Dennis, in the way I buy air transportation. I buy Southwest Airlines (sit anywhere you like, buddy) over ALL other airlines unless I can’t. SWA doesn’t fly to Dubai (yet).
So thanks for reminder that there is a different perspective/business model. Metaphors work until they don’t. As I fumble towards ditching hourly billing completely I will be wrestling with the airline analogy — and other perspectives — to see what works.
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Hi Dennis,
I don’t disagree with your model of Jetblue or Southwest, but you are suggesting a different business model–one based on price competition, not premium service.
It’s not my experience that the majority of customers are looking for a commodity at the lowest price, but I concede some firms could be serving those customers, and your model would work.
It’s well known empirically that customers of PKFs are not price sensitive, they are value sensitive. And while many PKFs know their costs to serve, they do a horrible at understanding their value.
It’s simply not true that clients want the lowest price, nor do they want maximum value. The empirical evidence for this is overwhelming, whether you look at surveys or elasticity studies.
What clients want and like are choices of price points, trading off value for price, and smart pricers give it to them.
For the boutique firm that wants to offer more than Southwest, like the hub-and-spoke airlines, they have to have different levels of service and price discriminate. Not all customers are equal, and dare I say, even in your model they are not.
Even Southwest and Jetblue price discriminate, based on when you buy your ticket, what type of ticket you want (no changes, or fully refundable, etc), not to mention Southwest even now offers a guaranteed seat for a premium (I think it’s $10, but don’t quote me, I don’t fly them).
These marginal price differences may be within a tighter range on Southwest than United Airlines, but they are still incredibly important to its profitability.
Treating all customers the same is the ideology of the Postal Service and cable companies, not two business models I would encourage any PKF to emulate.
All that said, this is the beauty of the airline metaphor. It requires you to think. And you bet you better be confident of your value. Why wouldn’t you want to be?
Regards,
Ron Baker, Founder
VeraSage Institute
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Thanks Ron - you’re right and I don’t think I emphasized price sensitivity as much as you suggest. However, there is no denying what I have seen going on at certain practices back in the UK.
In one case, a sole practitioner making US $10 mill with this model. That’s not to say everyone gets treated the same way at all, but rather the commoditized part of the service which absolutely exists and at a certain client level *can* be very profitable. If you set your stall out in the right way.
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Hi Dennis,
I couldn’t agree more. A low price (or penetration pricing) strategy certainly works. H&R Block does approximately 19 million tax returns worldwide, average price around $140. They are very profitable. They don’t use timesheets, either.
A firm’s Purpose and Strategy dictate its pricing strategy, not the other way around. A principle that gets lost in all the discussions of Value Pricing.
So I guess the starting question from the airline model is this: What type of airline do you want to be?
Great discussion!
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Interesting discussion.
Of course, with a professional offering, it’s interesting to consider the scenario of, “we will offer you this service, assuming your needs are XYZ.”
Suddenly ASDF and PQRS creep into the scope. Pretty important to keep the scope well defined when you’re going to do that.
And that’s where the pricing fun no doubt creeps in, when “XYZ” and “ASDF” are standard services, but “PQRS” is a freakish new thing that’s only dealt with rarely. What would you do? Fall back to some kind of hours-based model? Try to calculate the ‘value’ of dealing with the non-standard freakish scenario?
I know there are many possibilities, but I’d be curious to hear your ideas on suggestions of what are good alternative metrics other than just hours.
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Krupo,
You are correct, scoping (and project management) are incredibly important. And I would argue those skills are critical no matter how you price, even by the hour.
For a blog post on scoping projects, see:
http://www.verasage.com/index......plex_jobs/
For alternative Key Predictive Indicators rather than hours, see my book, Measure What Matters to Customers: Using Key Predictive Indicators:
http://www.wiley.com/WileyCDA/.....52940.html
For a shorter version of the book above, which you can download for free in pdf, go here:
http://www.verasage.com/downlo.....esheet.pdf
There are also many other posts on getting rid of timesheets on our blog and in our Trailblazers section at http://www.verasage.com. You can search “timesheets” and get even more posts and examples.
I hope that helps answer your questions.
Regards,
Ron Baker, Founder
VeraSage Institute
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hi again Dennis, I am very interested in learing a little (I appreciate that you may have confidentiality issues) more about the UK sole practitioner making £5m a year with the “commoditised” services.
At our firm we are wrestling with how to split our offering into two internally ring-fenced operations - one for the commodity stuff and one for the customers who want the high value-added service. For example we are now converting some customers from £1,500 per for year end accounts and tax to £1,500 per month for a full service.
We want to ring-fence the £1,500 per year guys into a well-oiled “sausage machine”. Can you let us in on the secrets of your sole practitioner’s machine?
Adrian
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They wouldn’t be secrets if I shared them would they? Factory style production is high on the list but sausage machine is overstating the case. BTW - I’m not sure you can ring fence clients in the way you describe without causing internal problems. I went through something similar years back and it was painful. However, there are reward methods that can make the lower end a very attractive proposition for staff while retaining the ‘business class’ approach Ron is suggesting.
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Hi Adrian,
There’s really no secret formula to this (unless Dennis knows something I don’t, which he might).
I can share with you one strategy to “fence” different classes of customers. Set up a low-end firm, with a lower minimum price and service offerings. Ideally, this firm would be in a separate location, different name, etc.
The higher-end firm can then specialize in customers who want and need more services than the basics. This is just one way of achieving what you are asking. There are more.
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@Ron - that’s an alternative but @Adrian would have to weight the short term disadvantages from upheaval against upside. The kind of separation you’re suggesting could add overhead in the short/medium term.
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Dennis,
Yes, you are correct. This is a long-term strategy, and you might even lose money in the first year or so. But profits come from risk, not making a return on every single thing.
Nevertheless, there are other strategies to do what he wants, simply by offering a menu pricing options to customers and let them select where in the plane they want to sit.
Great discussion!
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@Ron - indeed. The problems are more nuanced. Practice partners and senior managers may feel the ‘new’ system creates a level of internal competition about which they are uncomfortable. A physical separation can add to that tension. It should not be an issue provided the profit pooling/sharing arrangements are workable but in reality it can be a headache of migraine proportions.
As I said, I went through this and it was tough.
Point is, human nature is what it is, needing very careful management.
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Hi Dennis and Ron,
Apologies for not keeping up my end of the conversation - I did not know it was going on, as I had neglected to add accmanpro.com to my safe senders list !
We did consider a completely separate brand for the commodity work but decided against it from a marketing point of view. I think we all have examples of a “Coach” customer referring “1st Class” customers (and vice versa). Plus, of course, pretending to be two businesses when in reality you are one is a recipe for confusion in the marketplace.
Ultimately, I believe that the argument will become academic - because compliance work will be a free (or effectively free) service within 10 (5?) years. We will continue to do the work in order to capture the profitable financial services and tax planning work in the future.
The reality seems to me that customers paying to be in 1st Class actually want to take up 2 seats (i.e. are much more demanding of “partner” time) and are therefore no more valuable than 2 Coach customers.
So the challenge will be to systemise all compliance work, regardless of the fare being paid by the customer, and then ensure that the extras (tax and financial planning) are exceptionally well sold by the “Trolley Dollies”.
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Hi Adrian,
I’m not sure it will be an academic question. I’ve been hearing for decades how compliance work will be free, but it hasn’t happened. We know firms that charge an enormous price premium for compliance, partly by bundling other things with it, such as unlimited access (phone calls and meetings), a service/price guarantee, tax planning, payment terms, etc. We see minimum prices as high as $5,000 for compliance work.
This is driven by purpose and strategy, not just a pricing strategy. A firm is defined by the customers it doesn’t have. It’s up to you to decide what type and at what price you want those customers. I don’t think the answer lies in systemization. I think the answer lies in adding more value.
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