The Pros and Cons of Moving From Hourly Billing to Value Priced Accounting
Although accounting firms have a long standing tradition of hourly billing, an increasing number of firms these days are going down the less-traveled road of value pricing.
“Value pricing” is more than a buzzword. Not only is it a frequent topic at accounting conferences; many accountants rave at how it has positively transformed their practices. However, the value-pricing highway is full of curves and “proceed with caution” signs. It takes dedication and creativity to safely arrive at the destination of a more profitable practice.
Value pricing involves setting a fixed price in advance for a service measured by the value it creates for the client. For accountants who have always billed by the hour, value pricing requires a paradigm shift. Instead of thinking first of the cost (in hours) of providing a service and basing the price from the cost, the accountant, instead, thinks first of the value to the client to create the price, then makes sure that the price is justified by the accountant’s cost.
Pros of Value Pricing
Friends and family of a new mother don’t want to hear about the labor pains; they really only want to see the baby. Similarly, clients aren’t interested in how many hours it would take to clean up the books or complete a tax research project. Value pricing changes the conversation to “what’s in it for the client.” Focusing on the value added to the client and a providing a fixed price infuses confidence into a more effective selling process. After all, clients don’t buy your hours – they want you for your knowledge, innovation and solutions.
Clients are more comfortable with price certainty. If you are billing by the hour, you may have many clients who are accustomed to, and feel okay, with that arrangement. However, you may also have clients who cringe when they open your bills (though they don’t say anything) or potential clients who decide to do business elsewhere over the fear that the bill will be more than your estimate. Accountants, assuming they are trusted, may be oblivious and unsympathetic to their clients’ feelings about estimated prices.
CPA and comedian Greg Kyte created a video called “Bob’s Barbecue” that illustrates this point by showing a fast food restaurant patron being told that his meal would cost $60 per hour for the time it took to prepare the meal.
Firms that have implemented value pricing are reporting that clients are willing to pay a premium for price certainty. In addition to charging more, accountants develop a new mindset to provide added value to clients, resulting in more satisfied customers. Isn’t that what every accountant should want?
Cons of Value Pricing
Admittedly, it is easier for an accountant to simply provide a list of services that he/she provides and quote an hourly rate. Value pricing requires more work on the front end in understanding the client’s needs, clearly defining the scope of the engagement, finding opportunities to add value (in ways the client may not even know to ask for), and ascertaining an appropriate price based on the client’s perception of the value received. Unlike hourly billing, value pricing isn’t an exact science, and accountants frequently undervalue their services. Some may find it difficult to communicate their value and price engagements (they don’t teach it in school!) but the skill can be developed with experience.
Firms that have been living and dying by the billable hour for decades may have some firm members who will have trouble adopting value pricing. After all, it is a pretty significant shift in how a firm does business. Though some firm members may initially support the idea vocally, actions speak louder than words when it comes to implementation. Some firm members could become disgruntled and leave the firm as a result.
Firms that move to value pricing haphazardly will fail. Adoption requires careful planning and answering difficult questions, such as:
- Who (individual or committee) will approve new client acceptance and prices?
- Will tiered pricing options be offered, and what level of services will make up each tier?
- How will you add value to your engagements and help potential clients perceive that value?
- How will firm members be trained to price engagements? Will you contract with outside consultants?
- How will existing clients, accustomed to hourly billing, be introduced to the value pricing model?
Perhaps the most perplexing question for accounting firm leaders is: does a firm using value pricing still need to keep timesheets and track hours spent on client projects? Most argue that, despite the pricing model, time tracking is important for measuring client profitability. However, some revolutionary firms are challenging tradition and completely trashing the timesheet.
One of those firms is Corbett, Duncan & Hubly, a large firm of about 60 in the Chicago area, which held a timesheet burning party last year. A focal part of the firm’s recruiting efforts is that people are sought after to make a difference, not just clock billable hours.
Firms who are thinking about adopting value pricing in their practices can find many helpful ideas from the VeraSage Institute, a think tank that helps professionals with value pricing. Its founder, Ron Baker, has written several books with strategies for implementing value pricing. Much can be learned from these thought leaders and others who have blazed the trail.