Transform Your Practice with Value Pricing Series - Part 4 of 4
Again, welcome to implementing value pricing. This is the fourth webinars in the series before, so this is the last one. What we're going to do today is basically steps four through eight. I'll still go through a quick review of the eight steps and what this entire webinar was talking about. Which is the eight steps implementing value pricing. Really, what we're talking about is how to move away from the cost-plus pricing chain that you see here that basically says, we perform a service for our customer, we tracked the cost of performing that service and then we take that cost, market up with some desired profit and that determines our price. Then we hope that, that price is less than the value to the customer.
The problem with this cost-plus pricing chain or hourly billing, because hourly billing is the same as cost-plus pricing. Is the customers at the end and yet the customer is the sole and ultimate arbiter of value. Firms that value price, invert this chain, they start with the customer and they determine value created to the customer. One of the big problems with cost-plus pricing is it doesn't look at value to the customer. It simply adds up your costs or labor time, it is kind of a substitute for tracking costs and then tacks on the profit.
Well, value-based pricing starts with a conversation with the customer, which is step one in this eight step process and determines the value and then it's the value that actually determines the price. Obviously the price has to be less than the value. Then it's the price that actually justifies the costs that you can incur to produce the service for the customer. Now, obviously the value, the price and the cost have to be determined and analyzed before you do the work. It doesn't do any good for any of us to learn after we've perform the work that the customer doesn't see the value or doesn't like the price. It doesn't matter how much time you spend on something if the customer doesn't like the price. They're not going to be happy and you're going to suffer a write down or write off or a loss customer.
This is why firms that have made this transition, they all start with the bottom chain. In order to help you do that, we've come up with the eight steps to implementing value pricing. Just as a quick review, the eight steps of the grants are the first step was the conversation with the customer. This is what we dedicated the entire second webinar in the series to, was the types of questions that you asked the customer. How you approach this, this is in art. It's the art of questioning. It's really all about the customer. It's about listening more than you're talking. It's really about understanding the very deep level what the value is to the customer. The additional resources that [inaudible 00:03:32] sent you, various links and other resources that you're getting after each webinar.
I'd given you a couple of resources, one of which is a podcast with a chartered accountant in Canada by the name of Josh Zweig. He's got a very, I think innovative approach to the value conversation, how he approaches it. On my radio show the soul of enterprise which we'll also see in the links. We just did a show with Daniel Morris who is one of the co-founders of the VeraSage Institute. Which is the think tank that I run. He talks about his approach to the value conversation. Folks, these are two really just experts at doing this, especially Dan. Because he's been doing it for a good 15 year. They're really worth listening to the help you with that value conversation.
That was the conversation with the customer and then in the third webinar, we talked about pricing the customer and not the services. I talked a little bit about having a value counsel, not to price alone none of us should price alone. You should always have at least two minds if not more helping you price. You either get your employees involved, get your receptionist involved, get your spouse involved, get a mentor, get a coach involved, get somebody else's involved. Because none of us are good at pricing ourselves. Then we talked about developing and pricing options and all of the economics and customer psychology and behavioral economics behind offering three options, so-called Goldilocks pricing.
Most customers picked the middle option and so this is another art that you will improve, that you will get better in time at crafting your options. We talked about different ways to offer options. I also even provided a sample of, I think it was a bookkeeping firm and their various options. Steps four through 8, we're going to be talking about how to effectively present the options to the customer. We're going to talk about the fixed-price agreement. I'm actually going to show you a sample fixed-price agreement that you you'll have access to. Then we're going to talk a little bit about project management. I'm not going to spend a lot of time on this but I'll just say that project management is important no matter how you price.
Even if you don't do anything that we've talked about in this entire webinar series and you continue to bill by the hour. I still think you need to have some project management skills. Because project management does not mean filling out a time-sheet. Time-sheets look backwards. To run your firm based upon time-sheets, is the equivalent of timing your cookies with your smoke alarm. Project managers have to project into the future and make sure that we have the resources in the future for the work that we've committed to, to make sure that we make our deadlines, and meet our promises to our customers. That's what project management is about. Then, we'll also talk about the seven step, which is scope creep, and sometimes there's another issue called scope seep, which S-E-E-P. We'll talk about the process of change requests and then of course change orders.
The last step in the eight step process is conducting a pricing after action review. I'm going to explain generically what an after action review is. Folks, I do think the after action review is without a doubt the best, the best learning and knowledge transfer device ever devised by man. I believe all professional firms should be doing after action reviews on the technical side of what they do. For your tax, for your accounting for your bookkeeping. You and your team need to be doing after action reviews on a regular basis. Then also the people who price also need to do after action reviews from a pricing perspective. We've adapted the after action review for the pricers, but I'll try and explain both. Those are the eight steps. Again, we're going to effectively focus on steps four through eight today. Let's dive right in to the fourth step which is presenting your pricing effectively to your customer.
Now, you saw in the number three webinar that we did, the concept of the anchoring effect. If you remember the example of a thousand dollars omelet. The thousand dollar omelet is there because it sells a lot of the hundred dollar omelets. Or if you remember the Wendy's triple cheeseburger. Not many people buy the Wendy's triple cheeseburger but what it does do with it sells more than double cheeseburgers. By having an anchoring item on your options, a high priced option. Even if the customer doesn't buy it, they're more likely to buy the middle one. This is all grounded in behavioral economics and there's lots and lots of empirical evidence to back this up. When you're presenting your options, I think you should present your most expensive option first.
what we're starting to see firms do is present options from left to right, much like we read. Usually you'll see three columns. I think what needs to go on the far left is your most expensive option. Don't start with your cheapest option, start with your most expensive option. Because then these people move to the right, they're giving up things, they're seeing what they're not getting as they get to a cheaper price. Because we're more loss averse, there's a thing called loss aversion. It's more painful, less painful for us to lose rather than the joy of winning. Having people move from left to right and see what they give up, is going to be more painful and hence they'll probably pick a higher priced option. Start off with your most expensive price.
Plus, I think it honors your customer to give them the most expensive option. You should be proud of your most expensive option. It's your first-class seat in your airplane. What is your first class seat look like, what kind of food do you serve. What kind of silverware do you use. What kind of China do you use. Those types of things. That's for the customers that really, really want to be pampered. Not all of your customers want that, but some of them do. If you don't offer it to them, well then you'll never know. The other thing is after you state your price or after you show the options or present the options to your customers, I think you need to be quiet. I don't think you need to say anything.
I don't think you need even I, there's going to be a moment of silence. There could be several moments of silence. This is a very uncomfortable time. I've never seen an accountant listen themselves out of a sale. I've seen a lot of accountants talk themselves out of a sale. Once you present your price, shut up. The ball is in the court of the customer and they now have to make a decision and big decisions usually entail a moment of silence. Think about before you buy a car, before you sign on the dotted line or buying a house a piece of jewelry. Anything expensive you're going to have a moment of contemplation. You could be thinking about what you're going to feed the dog that night.
The point is the seller needs to be quiet and not say anything. One CPA I know walks out of the office, he makes an excuse to walk out the office. Therefore gives the customer or maybe it's a couple of time to process and talk about it. Get really good at presenting your price and being quiet. Use the word price folks instead of fee. I can't stress this enough, this is why, we believe words are so important, all changes is linguistic. If we want to change things, the first thing we have to do is change the conversation and to change the conversation we need to change the words we use. The reason I don't like the word fee, is it's a terrible word. Nobody likes to pay a fee. It automatically conjures up a negative image in the mind of the customer or it raises negative feelings.
If you use the word price, that's a very benign word, it's a very innocuous word. Nobody gets, there's no negative baggage with the word price. Because we're all use the same, what's the price for that. Don't use the word fee, strike it from your engagement letters, strike it from everything. Don't say fixed fee agreement, say fixed price agreement with your customer. Don't use the word contract for the same reason, use the word agreement. Contract conjures up images of lawyers, courts, arbitration, mediation all these negative things. There's a ton of baggage around the word contract. If you say agreement, if you say authorized the agreement rather than sign the contract. That's much less threatening and it's a much better value proposition I think. Use the word fair.
If the customer objects to the price say, or you can say, "Is this price fair to you? Does that seem fair to you?" fair is a very powerful word, because all of us have a unique desire to use the word fair, to be fair. Do not qualify your price, don't say things like, our normal price is our standard price is, regular price is. Because it's an invitation to negotiation. Pricing isn't a negotiation. You're pricing on purpose, you're putting in options in front of them with three prices next to them and they're nonnegotiable. You're not going to budge from these things. Now, you may negotiate other things, other than price like payment terms or scope of work, things like that. You can make fine tune adjustments. When it comes to your walk away price, remember, you don't cut that a nickel for your mother.
Then, remember to negotiate value, not price. Again, we look at scope, we look at payment terms, we look at turnaround time. We look at all these other things. I also believe you need to place a timeline on all your proposals. No price should last forever. This is why when you refresh your screen, when you're shopping for airfares, the price changes. Ever notice that? Or even hotels the price can go up in the matter of minutes because they change their prices constantly. No price should last forever. What we have found empirically on this is. I think that three weeks is a good time limit to put on a proposal. If you propose options to a customer, put a three-week time limit on it. What we found was one week was too soon, even two weeks was too soon. Four weeks, a month basically was too long.
Three weeks seems to be good. It forces the customer to make a decision. Because the last thing I want to happen is you put a proposal in front of a customer with three options. They sit on it for six or nine months, they come back to you and say, "Okay I'll do this now." Things have changed. Now you got you, maybe you got a ton of clients in the in the meantime and you're at total capacity and there's no way you do that work for the same price. I don't want your pricing to last forever. There should be a timeline on it and then close it off. Copyright all your proposals to retain your intellectual property. You're giving away maybe solutions or strategies on certain things. Make sure your copyright it. Which is already in a kind of automatically done if you put it in writing anyway. Remember that real bargaining and negotiation takes place between equals.
You're equal to your customer, you're not a supplicant. Don't let the customer beat you up. Don't let them play all those little games about, "Well you know, you need to sharpen your pencil on this. You need to refine the price. If you give us a break on this, there will be a lot more work in the future." Don't buy it folks, that's a bad strategy. If you start low, you'll stay low. You're setting a precedent in the mind of the customer. Plus, you're rewarding them for beating you up on price and then you've created a little Pavlov's dogs. What are they going to do next time you put a price in front of them? They're going to beat you up again because they know they can win.
We've created a lot of this bad behavior in customers. Then realize also that there's a finite number of price objections. I've been doing this for 25 years and I haven't heard a new price objection in 25 years. There's just so many price objections that you hear. I don't have the budget, I didn't think it would cost this much. Your competitor across the street is cheaper. I mean, there may be 100 price objections, shouldn't we have answers to all of them. One of my goals in this webinar series was to give you answers to why you're more expensive than the competition. Because we offer a fixed price, because we customized payment terms around your cash flow. Because we offer unlimited access.
Because we offer a service guarantee, a value guarantee. These things drive higher prices and they justify higher prices than your competition. We should not be scared of these types of price objections. Let me put it this way, if you never get price objections from your customers, that means your prices are too low. If customers never recoil at your price, if they never slam their head back and go, "Wow, that's expensive. Well then your prices are too low. Price objections and sticker shock as it's called in economics, price sticker shock, it's your best friend. You want to induce sticker shock. You notice how people talk about sticker shock with respect to cars. Car companies like sticker shock, because they want you to go, "Wow, that's more than I paid last time I bought this car." Yeah, because there's value there. Sticker shock is our friend, it's not something bad.
Those are some of the ways that we suggest strategies you can deploy to effectively present your options to your customers. Let's talk about some customer warning signs. I'm not going to go too far into this. There's a lot more detail in my book about these customer warning signs. Let me just give you some of them. If the customer's only consideration is price, then they're price buyer. These are the least loyal type of customers. These are the types of customers that will change providers to save $100.00. Well guess what, when they find somebody cheaper than you, they are also going to switch. It's kind of like dating, the way you get them is the way you lose them. If you've got somebody by being cheap, that's probably how you're going to lose them. Because I promise you folks, everybody on this call, there's people out there who will do what you do cheaper than you.
I promise you that and with the Internet, they're really easy to find. You have to differentiate yourself not just based on price. Don't just get a customer by slashing your price. The customer who never asks you about price, also, it sounds good but it's not. Because price is always an issue, but price is an issue relative to value. Remember, our customers aren't price conscious, they're value conscious. We don't buy the cheapest things, not even cheap toilet paper. I talked about this in one of the webinars with respect to negative goods. Even for goods that are negative. Meaning that we don't like to buy them like prescription drugs and gas and toilet paper or an insurance. There's a whole list of negative goods. Just because they're negative goods doesn't mean we buy the cheapest of them. None of us here probably buy generic aspirin.
You probably buy Tylenol or some other type of generic, or other type of branded aspirin. Well, aspirin is aspirin. According to the FDA it has to be the same. There is no difference between CVS generic aspirin and Tylenol. You know what, my guess is you have Tylenol sitting in your medicine cabinet. That's very interesting because that's enormous premium price on something that I don't know about you, but I don't like to but aspirin. Just because it's a negative good, just because they need a tax return, just because they need books, because they need a compilation. Doesn't mean that they're going to seek out the lowest price.
It doesn't mean that at all. In fact all the evidence runs the exact opposite. Then, if the customer says price is no object. This is another big problem, because the customer that says price is no object probably doesn't intend to pay you. This is why it's so important to discuss price up front, to discuss payment terms upfront. Maybe even get some type of commitment in terms of a deposit or a retainer upfront. If the customer just asks you a lot of questions, then they're probably just using you as an unpaid consultant. At some point you're going to have to stop that and turn it into an engagement and turn them into a customer. Otherwise they're not a customer. If the customer complaints about the predecessor accountant or bookkeeper or CPA, be careful.
Because in another year, you'll be the subject of their laugh. Those are just some customer warning signs and your antenna has to go up, a red light or yellow light, it needs to start blinking. That maybe this customer isn't the right customer for you. Remember, you need to be more selective with customers, this isn't a pricing issue, it's a customer selection issue. What I've learned over the years is, if you take a couple steps back from the customer and say, "I'm not sure we're good that." They'll probably take three steps forward because we tend to want what we can't have. If you think a customer is a bad fit, in your gut, listen to it. Because most of the time your intuition, your gut is right. Because if you think this person is not ethical, if you think they're rude, if you think they're toxic, whatever.
Whatever your gut is telling you, I would implore you listen to it. Because I rather have you heir on the side of not taking on a crappy customer. Because folks, I don't think, I don't think any business is better than no business. I think no business is much better than crappy business. By crappy business I mean crappy customers. People that don't value you, people who are going to complain. People who may be rude, whatever. You got to be really careful with customer warning signs. Then let's just talk really quickly, again lot more detail on this in my book, implementing value pricing. How to handle price objections. If people are objecting to your price, again, if it happens a lot, it's probably a sign that we're not doing a good enough job in the value conversation.
If it happens just every now and then, well then here are some strategies. You can postpone it. I don't ever want you to the quote a price before you're ready. Don't let the customer browbeat you into quoting a price before you're ready. Nobody can force you to quote a price before you're ready, you're in charge. You are in charge of when you quote a price. I would say strongly that you don't want to quote a price until you have that value conversation. Because otherwise you're prescribing before you diagnose. It would be like I'm going to a contractor and say, build my dream house and you don't have any architectural plans. How's he going to build your dream house is he doesn't have plans.
How can you possibly quote a price until you get in there and do some diagnostic work. Poke around their books you know, the military has a great saying, time spent diagnostics is never wasted. I think that's a really, really important point. Use the lowest common denominator rather than looking at the total price, break it into monthly or quarterly, or something like that, use comparison, compare your prices to the business's prices. How do they price, are they the cheapest provider in their market? Look around their office and see if they buy the cheapest copy machine, the cheapest printers, the cheapest computers. See where they make investments in value and try and use that as the basis of comparison.
Offer them options of course. I think what you'll find when you offer options as it removes these types of price objections. Because the client knows if they're really price-sensitive, they buy the cheapest option. That's what it's designed for. It's designed for the price-sensitive customer. What you'll find is that removes a lot of price objections and that removes a lot of negotiation. Don't be a washcloth that the customer tries to squeeze one last time. People think that the last decision made in the buying process is risk assessment, but that's not true. They've already gone through a risk assessment.
One of the ways you reduce the risk of doing business with you is you offer them, I hope, a value guarantee. What they're trying to do at the very last thing they're trying to do is they're trying to squeeze you one last time. You have to say no, because the person who says no has all the control. Let me repeat that, the person who says no has all the control. You have to be willing to walk away. This why I want you to have a walk away price. You're not going to cut that price. Again, I don't care about your mother. You're not cutting that price a nickel. You're going to let the client walk and you're going to walk away before you take that, you take that customer at a lesser price than your walk away price. Ultimately folks, the only way to justify price is with value.
Because it's value that drives price. It's not your costs, don't talk about your costs, don't talk about the time that you're going to spend. Don't talk about how complicated things are. Surgery is complicated too. The doctors don't sit around and talk about that to justify their price. Talk about value, talk about outcomes. You're going to get the best curbside appeal in the neighborhood. Remember the landscaper example, that's something that I as a customer care about. I don't care how long it takes you to mow my lawn and trim my bushes and care for my tree. All all I care about is the outcome.
You're going to give me the best curbside appeal in the neighborhood. Those are just some of the strategies of dealing with price objections. Now we're going to talk about the fixed-price agreement. Because whatever option the customer selects, the green, the gold, the platinum. Then you're going to codified into a fixed-price agreement. Now I'm going to to jump out of this and show you a fixed-price agreement in a minute. Let me just talk about some of the things that the fixed-price agreement does. It memorializes the meeting of the minds. It basically, it documents what you've already agreed to in terms of the value conversation, and in terms of the option that the customer selected.
It specifies the scope of work and how detailed you want to get here is up to you. I prefer probably less detail than more. A lot of people think you need to have a lot of details and scope. I don't think you do, unless you're relying on the customer to provide certain things. Now if that's the case, then you really want to detail what they have to provide to you. Because you want to make sure that if they don't provide those things, that you could trigger a change order possibly. Then the other thing the FPA does which is a fixed price agreement is include deadlines, possibly delivery dates or other milestone. It obviously is going to detail, if required, the customer's responsibility. It's going to include payment terms. Whether that's credit card authorizations or electronic fund transfer or other types of things.
This is why firms that value price don't have to invoice, because the payment terms are set up somehow automatically, credit card, whatever. Establishes parameters for change order, so we'll talk about that. It bundles in unlimited access, it includes a servicer value guaranteed, possibly even a price guarantee. A couple other strategies here is, there's a thing called perpetual FPAs. Which we tend to see more of in difficult economic times, like the last few years. Where basically you know, whatever their basic compliance needs are. Like say you're a CPA firm. You're going to do their tax return, you might do their compilation, you might do their write-up work. Maybe some other types of compliance work sales tax, whatever.
You just say, "Look, we're just going to put that all on a perpetual FPA and the prices can be X dollars per year and you can put in a cost-of-living increase, 5% whatever." You just say, "As long as we're your accountant, that's going to the be the price, this scope of work." Then the only thing that's going to change on year to year is maybe other services that you're offering them by consulting or business advisory or if they get audited or if they need and FPA loan or something like that. That will obviously be outside of the scope with the perpetual FPA. The perpetual FPA is a great way, just to have the customer lock-in to you for certain services. Now, I wouldn't do a perpetual FPA if I was dealing with a startup company that was growing at a rapid rate.
I'd only do it maybe in a more mature stable environment that doesn't really change from year to year. You have to use your judgment here. Then, the other thing about the fixed-price agreement and I've already got a few questions from some of you via email on this, the fixed-price agreement like the one I'm going to show you does not replace your engagement letter. It does not replace the engagement letter, it's a separate document. You still need an engagement letter based upon your insurance company's requirements. You're insurance companies, if you have E&O or professional liability, they require an engagement letter. What you need to do is you need the probably modify that engagement letter. You need to first off strip out any language that talks about fees and replace it with price.
You also need to take out any references to an hourly rate. If you need the engagement letter for say a tax return, then you say, and the price for this return is as agreed upon in our fixed-price agreement dated blah, blah, blah. Most insurance companies are completely fine with this. In fact they love fixed-prices because it reduces lawsuits. Because firms with fixed-price have better communication with their clients. They're not surprising their clients with bills. They're not billing and docking, as we love to say. They're probably sued less, so there's probably less complaints against them. Because pricing upfront is better communication, it's a better customer experience.
I just wanted to point out, it does not replace your engagement letter. I believe, the reason I like to keep these separate is because I think the engagement letters is a very crummy letter. It's usually written by lawyers and insurance companies that's got a lot of CYA language in it. Where as a fixed-price agreement is a valued document that is more, it's much simpler and it just details, here's what we're going to do, here's what you're go to do, here is the price, here's the payment terms and here's a value guaranteed. Let me just show you an example, this is from the Journal of accountancy article, it's in the email links. It's also on the slide deck. If you didn't attend any of the three priors you're going to see where you can find this online.
It's basically the Journal of accountancy, it's from an article I wrote, called pricing on purpose. It's free, you don't have to sign in. One of the great things about this article is its got 11 exhibits attached to it. One of those exhibits is a fixed-price agreement. I'm not going to go through this in great details, I'm just going to scroll down and show it to you. It's got a client's name, the date of the thing. It's usually done at the end of the year, if it's calendar year client, you're usually these between October and November and December. You're having your value conversation for the upcoming year. You're going to list out the professional services that you're going to perform in the next year. You know, corporate tax return, financial statements, tax planning.
Notice it's got the unlimited access. You've got a price, now this is selected based upon the option that they picked. Then it kind of explains what unlimited access means. It explains that, hey you don't have to worry about calling us. There's no clock running when you call us, it's all-inclusive. If there's unanticipated services, this is basically your change order clause that sets up, that if something pops up that's not anticipated in this agreement. Then that's going to probably be a separate charge and we'll use the change order. This your change order policy. Then you got the service guarantee. We guarantee our work to your complete delight. If you're not happy Mr. Customer, only pay for the value that you think you received.
Then you even got a price guarantee language in here that says basically, if you ever receive an invoice from this firm that you didn't agree upon upfront in terms of price and terms, throw it away. It's just another way to show them that you're giving them certainty and there will be no surprises. Then you may list out payment terms, these could be monthly, these could be quarterly, this could include some type of deposit. Then it says, to assure that our arrangement remains responsive to your needs as well as fair to both parties, we will meet throughout the year and you could set that up quarterly, biannually, whatever. If necessary, we can revise or adjust the scope of the services to be provided and the prices to be charged in light of mutual experience.
In other words this isn't carved in stone. We can revisit this because if you're growing, if you're putting more demands on us, whatever. We can adjust these prices and either party can do this. That's I think a very important clause, if it's a new customer, if it's a start up that's growing very rapidly, you might want to put that clause in there. Basically last one is a termination clause, either party can terminate this thing within written agreement within 10 days. Now obviously there's more burden on us. We can't terminate a customer on say April 14. You got ethical responsibilities and other types of things. By and large, this is not will agreement, neither party can get out from under it.
As long as you follow the ethical prescriptions of the profession, that's okay. That's basically, they sign it, you sign it and that's the fixed-price agreement. Again, you'll be able to get this from the Journal of accountancy pricing on purpose article. Then there's also sample change order that I'll show you a little bit later when we get to that. Let me go back to the slides and that's basically the fixed-price agreement. Then, the next step is proper project management. Again, I'm not going to spend a lot of time on this. I have given you a link to another Journal of accountancy article, from that was written by my colleague Ed Kless. Ed is not only a pricing expert of that, who I teach with a lot. He is also a project management expert. His article for the Journal of accountancy is called project management for accountants.
Again, I have a slide in this deck, you'll be able to see that and you'll be able to Google it and get it. He goes through these various things. He talked about with project management is. Keep in mind the project management is not pricing. One of the problems with the time-sheet and even the billable hour is we have linked pricing to project management, as we do more and more on the file, the price goes up. That's nonsense. The price needs to be set and then the work needs to be done and properly managed and those are separate functions, completely separate functions. Project management is important no matter how you price, even if you go by the hour. I think you need to have the project management. Because project management basically define scope of work, it assigns responsibility for who's going to perform the work.
It outlines the resources needed. B the way, the resources could have to come from the customer sometimes. Maybe sometimes the customer is doing a portion of the work. Keep in mind that our time-sheets are only measuring our resources and they're only doing it backwards. Project management have to look forwards. It has to do capacity planning forward-looking, not backwards. It has to outline the customer's responsibilities and commitments. That it has to put deadlines on everything. Not to rate, not time spent, not effort but duration. I'll give you an example. Let's say on your desk right now sitting there in front of you, you've got a file that has some work you have to do. It could be bookkeeping, it could be tax return, it could be a write-up, whatever.
Let's say that your project manager has said to you, "We think that should take about a day." Now that's roughly 8 hours. Now, if you spend six hours on that, if you spend eight hours on that, if you spend 10 hours on that, if you spend 12 hours on that. The project manager is not going to care about that. It's close enough. The eight hour estimate was close enough. Even if you spend 16 hours on that it, it's probably not that big of a deal. Now, if you went way over the estimate, then okay there's a problem. Maybe you did know what you are doing. Maybe this was the first one you did, whatever. If you're within plus or minus 50%, who cares. That's not what keeps the project manager up at night.
What keeps the project manager up at night is why did that file sitting on your desk that we estimated needed about a day's worth of work to finish. Why did sit in the office for four weeks. That's called duration, and that's what a project manager sweats over. Did we get the package on the doorstep of the customer by 8:30 in the morning. That's what FedEx sweats over, not how long the package sat on the truck. Did we get the package in the time that we promised. I'll give you an example. I have a FedEx priority package today that came, I'm in the Pacific time zone at 8:30. It plopped on my doorstep at 8:25 this morning. I'm expecting another one fro, it's not a priority it's just an afternoon delivery that's supposed to be here by 1:00. Now folks, I guarantee you, I guarantee you that, that FedEx truck driver had my 1:00 package sitting on his truck when he dropped off my 8:30 package.
He drove away and he's actually going to come back that, tats going to cost FedEx more, but they don't care. Because the person sending this package didn't pay for priority, he paid for 1:00. Even though it costs them more, the price is cheaper. Because if FedEx delivered both at the same time just to save money, then they train customers to do this and that's how you could gain the system. You'd send one thing priority and a bunch of other things by 1:00 or the afternoon or whatever. FedEx doesn't allow you to do that. It's really important an that's what they track, on time arrival. This is what the airlines track, on time arrival. Not on-time departure, on-time arrival. In other words, did we meet our commitment to our customer.
That's what we should be measuring and that's why project manager sweat over duration. Let me just add one more thing, when customers ask you, how long is that going to take. They're not asking you for how many billable hours you're going to into this. They're asking you, when am I getting my stuff. That's what a customer means by how long this is going to take. Not how long is it going to take you to perform, but when do I get my stuff. Is it going to be a week, is it going to be tomorrow, whatever. That's what they want to know. Because that's the value proposition to them. Then, we believe there needs to be somebody in charge of project management just like there needs to be somebody in charge of pricing.
Now, the let me just say, this is just an observation based on years of doing this that I have found in my professional career that people who are good at project management tend not to be good at pricing and vice versa. Project management is a different set of skill set. It's mostly inward focused a lot, it doesn't really focus on value to the customer. I have found very few people in my professional career who were good at both of these skills. Ed Kless is one big exception. He's excellent in both, he's just that the type of mind but that's an exception, that's certainly not the rule. The rule is whoever your project manager is, is probably not going to be the person who prices.
Because they are different skill sets. I just wanted to make those points about project management. I would strongly suggest please, please, please read Ed Kless's article project management for accountants. It's free and it's got tons of great ideas in it. Like what's in the scope document, what scope of work mean am all of that and it will help you tremendously with your project management skills. The seventh step is dealing with scope creep. Scope creep is when something comes up that neither you or the customer anticipated. You hire a contractors say to build the family room. The contractor's crew comes out and they smash out a wall to begin construction. They notice that you have dry rot and termites.
Well that probably wasn't in their original bid. Now the work crew is going to stop, the contractor is either going to come up to you or call you or have a conversation with you and say, "You've got a problem, let me show you, walk you over, show you the termite, show you the dry rot." Then you know, he's going to devise a course of action how to solve this. Maybe he has to bring in an exterminator. Maybe he can fix it himself, whatever. That's obviously a change order. That's what they're designed to do. They're designed to make sure that you just don't plow ahead and do the work without talking to the customer. None of us would like that as a customer. If we took our car to a mechanic and we were told we need a $400 tune-up.
While they were doing the tune-up, they found our breaks were bad and they sat out there and they fixed the breaks and then we showed up and there's a $650 bill. We're not to be very happiest customers and rightfully so. It's common courtesy just to call us, plus I think it's the ethical and moral thing to do. Plus, from a pricing perspective, a service that's needed is worth far more than the service that's been delivered. You can usually get a higher price and this is what the change order is designed to do. Now sometimes a picture's worth 1000 words, if you notice this boat, this is a real boat and this is not a Photoshop picture. This is a real boat. I actually talk to a lawyer whose boat is docked right next to this guy's. His boat is owned by a contractor.
The title of the boat is change order and of course the little D is called the original contract. Contractors make their money off change orders. They love change orders. They love to hear a customer go, "I should've had those types of lights. I should've done that type of counter." They're just back there with the clipboard having a field day going, "Yup, we can do that. We can change that." Then they're having a discussion with you about price that you trigger a change order. Now, let me be clear on this. Sometimes and Ed talks about this in his article. What we really start with is not the change order, we start with the change request. Somebody sees that something is out of scope. Sometimes, and I would say most of the time in our world as accountants.
Most of the time you see the change order first. You see something out of scope first. Sometimes it's very possible the customer could see it. Whoever, sees it is actually requesting a change so just like you have a purchase request before you have a purchase order, you have a change request. You kind of document, "Hey this is outside of the scope. This needs to be added on to our engagement." Now, sometimes a change request does not lead to a price change. It may lead to a duration change. It may lead to, you're not going to get this by February 15. It's not going to be the end of the month. It could change the quality. It doesn't always necessarily mean a price change, although I think in the majority of cases, it does mean a price change but sometimes it doesn't. It could just mean you're changing the deadline on this.
A change request is triggered first and then it's approved by the economic buyer on the customer side to go into a formal change order. Let me show you a change order. Again, this from the same article. It's one of the 11 exhibits and this is just a very simple change order. Client's name, the date, the project description and the scope of the services, estimated completion date, the price. Then just an exploration of, "Hey, we use change orders Mr. customer to protect you." The customer can sign this. Now some firms you know, you can do this by email, you can have a phone call. You can have verbal change orders. I've seen that especially if you have a trusted relationship with the customer. It's more than anything folks, a change order is a communication tool.
It forces you to not do unauthorized work. A mechanic, a contractor would never do unauthorized work, never. They don't do it. They don't do it because they know that it would piss the customer off. We do it all the time and then we expect the customer to pay the bill in arrears of you know, that's a crappy time to find out the customer doesn't like the price. You've got to have that, you got to stop the project, back off, have a conversation with the customer and put them in the driver's seat. Let them decide how they want to handle the scope creep issue. Then if they want you to do it then give him a price for it. Now, let me give you a question, one of our colleagues has developed for change orders. He uses this for relatively routine type of change orders.
The customer comes to you and is thinking about buying or leasing a car. Should I buy this release it, what's the best tax angle. Or maybe they're thinking of buying a piece of equipment or selling a vacation home or something like that. What he's found is, he asks them after he talks to him about what they're trying to achieve, what their outcome is, how's the value conversation. I think you do have to have a value conversation with every change order. Then Darryl, that's my colleague, he'll ask them. What's my budget for that. Notice that he doesn't ask them what their budget is for this. Because their budget is probably zero or they don't have a budget. He asks them what's my budget for this. Normally, they come back to him with a price that's his hope for price. If you remember our walk away hope form pompous price. They're quoting a price that he's completely happy to do the work for.
Because it's probably higher than he would've quoted it. That's a very effective question for routine change orders. Now, I wouldn't use that to start off an engagement. I wouldn't use that on a complex change order like if they're selling a business, I wouldn't. I would use it for the least by burst decision or something that you have to go research. Some type of routine thing and just ask the customer, what's my budget for that and see what they say. I think you'll be pleasantly surprised that the price they quote is quite usually tends to be quite decent. Let me go back into the PowerPoint here. That's the change order and it's a very sophisticated pricing tool and I hope you all avail yourself of it. Because it's really important.
It keeps the lines of communication open with the customer. It make sure that you don't surprise the customer for you know, by doing unauthorized work. We can't do that in the value pricing firm, in a fixed price firm. The customer has to agree to the price of everything before they buy it. They can't be ever surprised, ever, it's the cardinal rule and change orders allow us to do that. It's a very sophisticated tool from a pricing perspective. Then the eight step is this idea of an after action review. Now, the after action review was designed by the US Army by the way. At least in the form that I'm going to show you. The after action review is all about capturing tacit knowledge.
Remember in the first webinar in the series, I talked about how your firm is a professional knowledge firm not a professional service firm. That we are knowledge workers, we use our minds and tacit knowledge is really, really the knowledge that's quite valuable. It's that sticky knowledge that's in your head. Yes, we can get explicit knowledge by reading a book or even listening to this webinar. This is a form of explicit knowledge. The tacit knowledge is all the stuff that the expert knows. It's like the difference between searching for a medical disease on Google or on Web MD and then going and talking to a doctor. They're going to have much more tacit knowledge than what you're reading on Google.
Because they're going to have years and years of experience and wisdom with respect to, and that tacit knowledge, that's the stuff that's really valuable. It's really hard to get out of people's heads. In the 1970's as a result the Vietnam War, the US Army started to implement this thing called after action reviews. They didn't do it to capture knowledge, they did it to improve the morale of the military after the defeat in Vietnam. What they found after doing this for several years was, this was a great learning tool. Let me give you the theory behind an after action review. Let's say you have a platoon, I don't know, in Iraq. The platoon is assigned to go build a bridge, a military bridge to transport tanks and whatnot over this body of water.
The platoon will go out there with the Army manual and they'll have the manual on how to build this particular type of bridge. Of course there will be little things that they learn that aren't in the manual. Like, this weld works better here, this bolt works better here. We should pour the concrete this way. Whenever it might be, all those little tricks of the trade that aren't in the instructions. Now what they do is when they come back from building that bridge, they perform an after action review. Everybody who was involved in that project basically sits around the table and they asked themselves four questions about this project.
Here's the army's four questions for an after action review. What was supposed to happen on this mission? In this case the objective was to build this bridge. It could be a paramilitary to kill Osama bin Laden, whatever. It could be anything, but in this case I'm just using building the bridge. Then what actually happened, what the Army calls the ground truth. Because we make plans and then of course reality gets in the way and things change. There's going to be a gap here between what was supposed to happen or what actually happened. Many of the Army says what were the positive and negative factors because of this gap.
Some bad things probably happen and some good things probably happened as a result of this gap. Then the last question is what have we learned from this experience and how can we do it better next time. These are four very, very simple questions the Army doesn't want you to spend more than 50 minutes on an after action review, up to an hour I think is the guidelines. It's a postmortem, it's an autopsy without blame. It's not a blame game, it's not pointing your finger at people, "Boy Baker, you really screwed that up." It's a learning tool. It's to learn how to do it better next time. The Army have a great saying, I love the saying. The Army never wants to build the same bridge twice. Now let's assume on the other side of the world that another platoon is assigned to build the same bridge.
Now, yes they'll go up there with their Army manuals but before they do that now, they'll go into the Army's database of after action reviews on building this type of bridge, this specific type of bridge. They'll read or today, they'll listen because you can obviously, you'll record these as well or video them. There's many more ways to capture them with social media and other tools that we have than we did in the 70's. They'll read this after action reviews first before they go build that second bridge. The question is, do you think because of that after action review, that second bridge will be built not only more efficiently, but it will be built more effectively as well. The answer is yes.
This is a wonderful tool to capture technical learning in your firm. I'm not talking about this yet in terms of pricing. I'm talking about this in terms of the work that you do, do this after complex jobs. Do this after complex customers. I'm not saying do an after action review after every single little tax return. I might do an after action review after tax season to see how we could do it better, what processes need to change. Firms that have been doing after action reviews after a year so, they start doing them with the customer. Imagine sitting down with your customer and going through these questions. One of the things the Army has learned is by doing after action reviews, what it's really good at doing is clarifying those assumptions upfront.
Because the Army has learned that it's usually cloudy assumptions that screw up an engagement more than anything else. That's just kind of another way of saying that there is no good way to execute a bad idea if you got flawed assumptions are flawed theory. I don't care how flawless your execution is, it's going to be screwed up. Because there's no good way to execute a bad idea. The AAR really makes you clarify what your objectives are. A lot of times people aren't clear on what the objectives are. If that's the case, the mission probably won't be very successful. This is a great tool now that, I'll give you some resources that you can find more information on after action review.
Let me show you what the pricing after action review looks like. It's a series of questions. Again, these are for the people who price. I'm not going to go through all of these. I just put them in here so you have them. They're also in the Journal of accountancy article. Did we add value for this customer, how could we have added more value, then we capture fair portion. Could we have captured more. In than other words, how much money did we leave on the table. This is a super important question for a pricer and folks, this question, number five, this can't be answered by looking at your financial statements. it can't be answered by a time-sheet. It can't be answered by utilization report or a realization report. Because those things say nothing about what the customer would have paid.
The only way to understand what the customer would've paid is to understand the value that you created, how price-sensitive they are and if you could've gotten a higher price. This is going to help you refine your pricing over time and turn pricing in to a competency. You can say is that whole bunch of other questions as well are in this thing. I would use the 2080 rule here. I would do pricing after action reviews on the 20% of your customers that generate 80% of your revenue. Again, I wouldn't probably do this for the little old lady's tax return. I would do it for your substantial business customers, absolutely. I want a pricing after action review done after the engagement is closed, after the file is done.
You've completed the work, let's go back and revisit it from a pricing perspective and see what we learned and see how we could do it better next time and answer these questions. I think there's 20 of them. Again, I'm not going to go through them all in the interest of time. You can see them all here on the PowerPoint deck and that's why I put them all in here. One question by the way I really like is number 18. What unexpected value did we create. There's usually things in almost every engagement that you found, you ran across. Maybe you gave them an idea, a suggestion on how to improve something. It's usually unexpected and if you can capture some of that, then that's going to help you be more aggressive pricing other clients.
Because you probably know you're going to find things for them as well. This just build confidence and it just makes you smarter and it makes you more experienced. You're actually not just doing, you're not just pricing. You're stepping back and learning from your mistakes and by the way your successes. This is what turns pricing into a core competency. This is how we get better. It's no different than tennis or golf. If you go play around the golf and then you go out to the driving range. The pros go to the driving range after the round of golf. Not so much before. Because they're trying to correct things that were going wrong out there. This is the same type of thing. That's why the military especially the Army has found it such a useful tool.
They AAR everything. I've talked to people who have done tours of duty in Iraq and Afghanistan. They say, "Oh jeez, we after action review changing the toilet paper in the latrine." It's really become embedded in the Army's culture. Let's go to some pricing key predictive indicators here. Some things that the value counsel, it track in terms of pricing that we found useful is, what percentage of your fixed-price agreements are written above a firm's reservation price, above your walk away price. What percentage of your FPAs are rejected. If you never get rejected FPA, that's not a good sign. If you have 100% acceptance, that probably means your pricing is too low. What percentage of FPAs are at the reservation hope for and pump this price. Then of course you can track which option they're selecting, green, gold or platinum.
How many change orders is the firm capturing. Some firms don't ... They do fixed price agreements, but they might not do any change orders. That's usually a bad sign. That usually means you're giving things away. That's called scope seat by the way. When we do work for the client that we see and we don't bill for it, we don't charge for it. That's scope seep, that's us finding value and just giving it away. That can be a big problem too, just as much a scope creep. Then, whether the number of pricing after action reviews that you perform, a lot of firms get lazy here with doing after action reviews on pricing. I don't want you to do that. I want you to do after action reviews from a pricing perspective. They're incredibly valuable. Yeah, they're time-consuming, but no longer than an hour.
They're going to help you get better. They're going to increase your skill and pricing. Because you're going to learn from your actual experience. This is what's going to make you get better with pricing over time. With that, let me just close out by saying here and then we'll go to questions. Let me give you some characteristics of firms that have made this transition. Firms that value price. They have a clear purpose, a clear strategy and a clear position in the marketplace. Some of the most, well, let me just say, the most profitable firms in the world are all specialized, are all specialized in maybe one, maybe two industries at most. The most profitable firm I know is a sole proprietor and all he does is dentist's, that's it.
He won't take on anybody else besides they have to be a dentist. That's I, that's all he does. That makes him a very big fish in a very small pond. Because he can specialize and there's a lot of advantages to it. The most profitable professional firms have a clear strategy, a clear purpose. They know why they're there. They know why they do what they do. Then they turn pricing into a core competency by following these eight steps. They have excellent project management skills or at least some project management skills. They understand that they sell intellectual capital, and not time. It's not about time, it's about the results and outcomes that you create for your customers. They only work with customers who value them.
They routinely fire low value customers and they routinely reject taking on low value customers. They maintain minimum prices for everything they do and those prices go up every single year for new customers. They don't treat all customers equally, they differentiate based on service. That's what the green, gold, platinum options are all about. You have the same turnaround time, the same level of access or response time to a green card customers as you do go platinum card customer. One of the biggest problems we see in most firms is they are giving first-class service to coach fair customers.
People are paying you coach prices but they're getting first-class service. That's a big problem, the airlines wouldn't do that. The hotels don't you that, the rental car companies don't do that. Why do we do it? Because we have this attitude that we have to treat all customers equally. Customers don't want to be treated equally. They want to be treated individually. These firms have appointed a value counsel and/or a chief value officer. These are some of the characteristics. Why don't I pause for a moment and will take some questions. Donna, if you have questions that have come up, I haven't really been keeping track.
Yes, I have been flagging questions.
Let's start at the beginning. Lori asked, regarding presenting pricing options highest to lowest, is the price options PDF now for providing in the links design from price highest lowest or lowest to highest. She couldn't really tell.
I think that PDF example, unfortunately it goes from low to high. I know there's not a price on it. Because we had to anonymize it. Strip out all the specific language. I believe that's exactly backwards. I'd want it to be your most expensive price on the left. Good catch Lori.
On that same topic, Carlos asked or makes a statement. Every company that he knows prices from left to right, including quick books and build up Tom.
How is it that presenting the most expensive first is better?
left to right, you're talking going from lowest to highest, left to right. Because again, because of the anchoring effect. That's your thousand dollar omelet. Look, like everything in pricing, you can experiment with this. Try it from left to right, try it from right to left. See if it makes a difference. Your mileage may vary, but we have found that presenting the most expensive option first is better. Again, your mileage may vary so experiment with it. Try a couple, each way and see what happens.
Darius would like to know if the value price theme should be presented in person.
Yes. Ideally you want to present the options in person. Folks, let me give you another hint. If you have to do it over the phone because of geography, they're too far, they're on the other side of the country or they're in a different country, whatever. Then do me a favor, and this is hard, this is hard. You're not to like it. I'm going to implore you to do this. You send them the proposal after you get on the phone with them or maybe get on Skype with them. Make sure you connect with them first then email the proposal and listen to them read it. Listen to them open it and take the moment of silence and let them read it.
Because you will gain a ton of information listening to their uhs and ums as they read your proposal and make their selection. Don't just send a proposal blind, because then you're stuck in the position of, did you get my proposal. Have you made a decision yet. You don't want to be there. Get him on the phone and then send it to them. Then they'll be able ask you about it right then and there. More than likely you'll get a decision right then and there. That's a much more effective strategy. It's not easy, it's uncomfortable, we don't like this. I'm telling you, I force myself to do it and it's far more effective than just sending a proposal. I highly recommend that strategy.
Ron asks, what do you think about disclosing prices for different levels of service on your website to eliminate upfront non-qualified prospects.
I don't mind you quoting a minimum price. If you have a minimum price for 1040s are for corporate returns or for audits or for whatever. I don't want you to put down actual menu options like we're discussing, like in the example. Because these are customized one customer at a time. Remember, your pricing the customer not the service. I don't mind you holding your minimum prices on your website or even on the phone when people call. To have your receptionist be able say with the minimum price is. Don't try and put options down, don't put your green, gold, platinum options down. Because you are going to customized those for every single customer. That's going to be far more effective pricing and more profitable.
Scott asks, what's the best way to either price a current customer out or gently fire them. This question can wait until you have time at the end.
Bill Rodgers thank you, you're right, Tylenol is a wrong example, I'm sorry you're right. It's not an aspirin, that's exactly right. I should've used some other aspirin example. Great, great point. Thanks for calling me out on that. I'm sorry Donna, say that again.
Scott just wants to know what's the best way to either price a current customer out or gently fire them.
Gently fire them. Because what happens when you try and increase the price to get rid of a customer, is they stay. F customers are like barnacles. They stick around no matter what. I've seen firms double, triple, quadruple their price and the customer stays. If they're a bad customer and you want to get rid of them, get rid of them. You don't turn an F customer into an A customer by quadrupling their price, you don't. You absolutely don't. They're still going to be an F customer even at a higher price. I don't want you to work for people that you don't want to work with just because they're giving you the highest price. That's not the ethic of a profession, that's the ethic of the oldest profession but it's not the ethic of our profession.
Barbara asks, do you ever have clients, customers who don't want to give your their books before having a price. What do you do when that happens?
You walk away. You walk away, that's like going to a doctor and saying, "I want this prescription and I'm not going to let you examine me." That stuff, a lawsuit waiting to happen to a doctor and that's a customer that is somebody who doesn't want to be forthright with you, have a value conversation with you. That's an incredible red light that should be flashing and you need to run, not walk away.
Cathy works at a very large firm. They're onboard, she's onboard with everything that she's learned through the series. She spoke with her six partners yesterday, explaining the value pricing concept. The partner said that they, that that's what they do now. They told her, it was a great concept but how do they go, how do they determine what they're actually netting on the job.
Cathy this is a great question. Boy, I hate to pour cold water on this, but you're not going to be able to get your partners to see the light. One of my questions would be, why aren't they on this webinar listening to this. You can put articles in front of them like the Journal of accountancy article that I've written with other things. You can send them to my website, you can print out trailblazer case studies of firms that have made this transition. The short answer is, I don't care about what you're netting on a particular job. That's the mentality of, we need to make profit on every minute. What I care about is optimizing and maximizing your profits overall.
Some firms you're going to make, and some customers you're going to make a normal profit. Other firms you're going to make an incredible windfall profit. Overall, it's going to be much more than billable hour. I don't worry about it by the customer. I don't worry about it by the job. Because that's the mindset of somebody who hourly bill. I have to make a profit on every minute that I'm billing. What I'm trying to do is say, "If you price for value and you really concern yourself with creating more value, you're going to be able to charge higher prices. That's going to drive more profit than anything else you could do." It's not about becoming a better cost accountant, it's about becoming a better pricer. I have learned especially with accountants, especially CPAs that they have that mindset that's very, very difficult to get them to see the light.
I'm convinced you can't get anything, anybody to do anything that they don't want to do. Your prospects of getting them to change I think are pretty slim. You can try, you can put articles in front of them. You can have them listen to these webinars. If they're stuck in that mindset, that's a cost accountant's mindset it's not a pricer's mindset. They're worlds apart. I know, because I made the transition. I used to be a cost accountant and I used to have that exact mindset. I used to be really scared about what if I lose money. What I've learned by becoming a better pricer is, it's not a matter of, oh gee, did I make money on that. It's a matter of, oh gee, I left money on the table. In other words, we could maybe even more if I were to price this better. That's a tough question, I don't have good answer for you.
Michael asks, how do you communicate value without talking about time, effort, complexity, et cetera. When the client doesn't appreciate the outcome. Example, cleaning up messy set of books.
Michael, the customer will see value and outcomes. They don't see value and effort and time. They don't care how complex something is. I go back to the surgeon example, I go back to LASIK surgery. LASIK surgery is incredibly complex. It looks simple, but the knowledge and the experience and the list, it's complex. What I care about is when I stand up, can I see better. Focus your customer on the outcome, don't talk about your labor. They don't care. Do you care how long it took Porsche to the build your car. No, you could care less. What you care about is the excitement of owning it and you know how you're going to feel driving it and the effect that it's going to have on other people.
We need to stop focusing on the inputs, the labor and the hours and start focusing on the outcome to the customer. Remember the landscaper, which landscaper are you going to pick. The one that wants to charge at 40 bucks an hour. The one that's going to give you a fixed price or the one who's going to say, I'll give you the best curbside appeal in the neighborhood. Which landscaper has got the most value and which is going to the command highest price. By the way, that's going to be far more profitable in the landscaper doing it at 40 bucks an hour. Back Cathy's question. I hope that helps Michael.
There's a question about the FTA. Understanding that it's different from the engagement letter. Can you please delineate the elements to include in an effective engagement letter.
I can't, because an engagement letter is written by your insurance company. Go on Google or go to your insurance company and get engagement letter. It's going to have all sorts of things about tax, or if it's for an audit, if it's for a reviewer or a compilation. Again, it depends on the type of service you're talking about. If it's a consulting services, it's going to be even different. I'm not in the business of giving legal advice. You have to use the engagement letter that's approved by your insurance company or that's approved by your profession. If you're part of a bookkeeping association, the have sample engagement agreements. If you're part of a AICPA state society, they'll be able to give you sample engagement agreements. I even think insurance companies share their engagement agreements. You can find these online, they're pretty easy to get.
Lynn asked, so it would be okay to require a retainer before beginning services with a customer as long as it's part of the fixed price agreement.
Say that again. I'm not sure I got that.
She said, so it would be okay to require a retainer before beginning services with customers as long as it is part of a fixed price agreement.
Yes, absolutely. In fact, I'd highly recommend it that you take some type of retainer, some type of deposit. You haven't prepay something because once somebody writes a professional check, it changes the relationship. Now you're my accountant, you're my lawyer. If I'd given you a lawyer, or $15,000 retainer for a legal matter. They are now my lawyer and that changes the psychology and the dynamic of the relationship. Yes, I am a big believer in getting deposits of some kind. 10%, 15%, 25% across all of your options even.
Especially for new customers. You might not require it on existing customers, but certainly for new customers. Because folks, there's only two ways you're going to get paid before you do the work. You have to give a price up front and you have ask for it. United Airlines right now, I don't know, they have $15,000 of my money. I've already paid them, they haven't flown me a mile. They haven't flown me a mile and yet they have 15 grand of my money. How does that happen. Well, they asked for it and they give me a price. They taught me, this is the way it works. You can teach your clients the same.
Okay, let's see what we got.
I noticed a typo, thanks Warren, I appreciate that.
Lee asks, please revisit the pricing after action review. Do we need to know the time expected and if so, are we to track hours even with value pricing.
No. What you need to know is, did you get the workout in the promised duration. Did you meet the deadline. Now, you could, as the back of the envelope calculation in the pricing after action review, go around the room and say, "Hey Lee, how much time did you spend on that?" "I spent about a day." "Okay close enough." You don't have to track things down to the six minute unit that. This is the big fallacy about time-sheets that we need to track things so accurately. That's just because we're accountants and we love precision. It's meaningless, it's absolutely meaningless.
If you got the value right and if you got the price right, then the profit is going to take care of themselves. If the job blew up, if you didn't catch Scope creep, you didn't do change orders. If you didn't meet your deadline. I'm hoping you know about it way before the after action review. Because you're going to know about it if you do the project management. If you read Ed Kless's article, you're going to learn how to be able to forecast. Whether a job is going to come in by its due date. That's by looking forward not backwards with time-sheets. That's by tracking tasks and are they being completed by the expected due date. That's what you need to track. Now you don't need to track hours, track duration.
There's a question from Jerry. When you find that a change order is needed, and the client does not want to move forward. How do you decide how much they should pay you for the work to date.
You mean like the client doesn't want to engage you anymore. They just want to stop the project. Remember Jerry, if you follow the way we're teaching it, you've got a value guarantee on your service. That means they could pay you nothing. They always have the ability to ask for their money back under the value guarantee. I'm not sure I understand this question. If there's a scope creep and you bring up a change order and they don't want pay it, then you don't do that work or you let them do the work or you let somebody else do the work. You don't do it if you think it requires a price. Now, if they terminate the relationship because of that, well then yeah. They're under a fixed-price agreement, you've probably done some work, they probably paid you some money. You're going to have to reach a settlement if you owe them or they owe you more. That's just handled one case at a time. It's impossible to set a policy on that. You have to deal with it one customer at a time.
Emily asks, she said that twice now she has received the responses of, I don't know or I don't know what the market is for that type of work when she's inquired. What's my budget for this, the question. Does Ron have any advice on these responses.
Well, yeah. I mean if a customer you know, if you ask them, what's my budget for this and they say, "Well, I don't know. I don't know the market prices. I don't know what people normally pay." Well then you're going to be in the position to quote them a price. I'd probably quote them a hope for price on a change order, on a routine type change order. I would first run Darryl's question by him. Because a lot of times you're going to find the customer does have a price in mind and it's usually a pretty fair price that you'll be more than happy to accept. test it out, you have to test these things folks. You have to test and them and see what works for you. That's how we learn a lot of the stuff, is by testing it.
Cathy says, if we throw away the time-sheets, how do we know our labor cost on a project for the after action review.
Again, you can estimate that just by going around the room and asking, "Hey, how long do you think you spent on that." Again, it's the back of the envelope check. I've already had the pricers estimate the labor cost when you priced it. Which is before you did the work. I don't really need to know if I was how close was I on that estimate. I've already made that decision. I've already priced the work. Now it's just matter of doing it. The better pricing is what's going to drive the profitability. Not trying to figure out to the penny what your labor cost were. Your labor costs are fixed folks, stop trying to divided up per job. It's an insane task and it's full of arbitrary assumptions. One of the webinars I'm trying to get into it to approve and I'm hoping we can do. Is I want to do a webinar that once and for all destroys this idea that you need time-sheets for cost accounting.
You certainly don't need them to price, I've proven that in these four webinars. You certainly don't need them for project management. Ed Kless has proven that in his article. You don't need them to evaluate team members and you don't need them for cost accounting. They're lousy cost accountants too. I'll just give you one reason why, your hourly rate has profit built into it. That's not cost accounting, that's profit forecasting. If you really wanted to allocate cost based upon your hours, you would actually have to take your GL costs, divide it by the actual number of hours you billed in a time period, month, year, whatever, and allocate it that way.
No firm does that. They take their hourly rate that's got this inflated profit number in it that has nothing to do with their actual costs. The whole thing is kind of kabuki theater. It's absolutely crazy and yet we're mired in this mentality that we have to know our cost in every job, no. What you have to know is your cost overall and what's really driving your profit is your pricing and your value creation and your ability to get a good price. Put your time and energy there and that's going to be far more profitable.
Emily says, she's got a client on the phone and you sent them your three price options. If they say, "Well, let me have some time to look this over and can I call you back." How can you gracefully keep them on the phone without seeming like you're forcing the issue.
You can't. I don't want you to force the issue, because then you sound like a pushy salesman and that turns people off. If they actually say that, then let them do it. Let me tell you this, my experience with this is, every time I've done it, I've gotten an answer right then and there. This is one of the reasons why it was such strong components of it. I've never had a client delay on making a decision when I've used this but you might and that's okay. That's okay, but I think most of the time you're going to get a decision.
Pam asks, when a perspective customer calls and one of the first things they say is, "How much do you charge?" How do you respond to that.
Not by the hour. You come in, we have a discussion about what you're desired outcomes are, what you're trying to achieve and we'd give you a fixed price. We give you 100% certainty in price. You'll never be surprised by an in-voice from our firm. We don't bill by the hour. What I think that does is it separates you from all the other firms that they just called. Because the other firms told them, "Our hourly rates are blah, blah, blah." They've written that down and then they come to you and you say, "No, we give you a fixed price and we even offer you choices and we even structure your payment terms around your cash flow." If they're a business. I think you're going to find that, that differentiates you from the rest of the competitors and gives you a big leg up.
David asks, how do you handle change orders for the federal government when they are, especially when they're pushing scope creep.
David that's a great question. Government contracts, they vary so much. Some demand it by the hour like if you do bankruptcy work, that has to be billed by the hour. Getting scope changes, getting change orders in that environment, it can be difficult. It can happen, you have to force the issue. You have to train the customer. You have to be very, in this case, you do have to lay out your scope very well. If something changes, you need to back off and you need to have a conversation and you need to be persistent and you need to push it and you need to stop work. Otherwise, they're just going to run all over you and keep changing the scope and it's going to erode your profitability.
Why would we want that type of work if we don't have reasonable customers. Either you have to build those change orders or that possible scope creep into your original price or you have to be very persistent in chasing down the change order. Now, contractors is you saw with that boat, are very good at getting change orders. They tend to put out a pretty low original contract price and then pray that there's change orders. You can do that with government. I've even seen it done with not-for-profits. You better have your customers well-educated that your firm, it demands change orders when they're scope creep. There is no other way to deal with it other than to educate the customer.
Sarah, she says that I understand that without change orders, you're probably giving things away. If we want to change this but the clients are not used to it, what's the best way to all of a sudden introduce this.
Its done one customer at a time. You're just introducing it one customer at a time and you can intellectually explain the change order process to them. Even though you haven't done one with them yet. Use the auto mechanic example. Use the contractor example. These things resonate, most people have taken their car to a mechanic and gotten a change order. That's happened to most of us. If you use that language, they'll be able to relate to it. Because they'll understand that you're doing this for them. You never surprise them by giving them an invoice that they didn't pre-authorized. It's done one customer at a time.
How would you do a proposal you know, a web conference. Power point?
You can use PowerPoint, you could you know, you could use, like we're doing here. What is go to webinar and through our PDF or Excel. Whatever is comfortable for you, doesn't really matter to me what the medium is. I do prefer providing options in person so you can read body language. Because so much of communication, at least one-on-one communication is nonverbal. It's hard to pick up these clues on a webinar. It's hard to pick up these clues even on Skype call. Although video Skype can help a little bit, it's not the same as sitting in the room with somebody and being able to see and hear everything they say and do. Use whatever you're comfortable with.
Jazz asks, can you please elaborate on copy-writing proposals to retain intellectual property.
That's really in there for advertising agencies when they do pitch work, that if they copyright it then they own the intellectual capital, not the client. For accountants it's not that big of a deal. Although I have found that some CPA firms do put in some strategies that might be proprietary. All I'm saying is if you copyright it, then you got some legal protection. Basically anything you write on paper is copyrighted even if you don't file it with the copyright office. You have a copyright on anything that you put on paper basically. That's just all I'm saying. It just protects you from stealing, them stealing your ideas.
Oscar asks, where could I find examples of price comparisons regarding bookkeepers controllers and CFOs.
Price comparisons. You mean like benchmarking information? If you're talking about benchmarking information, I mean there's various studies that are done by various organizations on what average .... They're usually couched in hourly rates. I would really highly recommend you not look at benchmarking information to set your prices. I want you price based upon your value, not what some average report tells you. I mean, the problem with these benchmarking studies is their averages. Which is the worst of the best in the best of the worst where they meet. That's a terrible way to set a price. You can bet that Apple is not pricing based on benchmarking data in the iPhone market or in the tablet market. That's not what they're doing. They're pricing based upon their unique and special value and that's how I want you to do it.
Sorry, I was just answering someone about a recording. I do want to announce to everybody, there will be recordings for all of the series. They will be sent to you via email by end of day tomorrow. That email will also include links to all of the supporting documents that Ron has shared with us over the course of the four webinars. To date, we have sent out emails after each webinar. A lot of folks are finding this in their spam folders, so please check there.
Karen, you asked a good question here about how often do you raise prices. Raise your prices every year even on your annual tax returns. Go up every year, I don't care, 5%, 10%. Don't stick with the price for years on end like a lot of firms do, it's crazy. Now folks, here's the links from the slides to the articles and I've even included one on after action reviews that we talked about today. Then this is where you can find more information on all the stuff at my website. We have lots of articles up. You can follow me on LinkedIn, I've lots of articles up there. You can follow my radio show on voice America. We deal with a lot of these topics, in fact we have a show on after action reviews as well. The book is the implementing value pricing book, the one on the far right with the orange and purple cover. That's the book that coincides with these webinars. If you wanted more information on these eight steps and some of the other strategies, it's in that book.