Value pricing is a topic that continues to come up with accounting firms, especially as they navigate new service offerings that include more consulting components, and some believe the movement to abandon the billable hour may have reached a tipping point. IFAC’s SMP Advisory Group met earlier this year to discuss the topic further with Ron Baker, a leading industry expert on this increasingly popular pricing model.
Ron Baker has worked with IFAC in the past, and published a 3 part series of articles back in 2014 on how to implement value pricing in your firm. In that series, Ron explains the rationale and underlying theories that support the switch from hourly to value pricing, he discusses the early challenges and practical steps to take when beginning to transition your accounting practice to a pricing model based on value, and he outlines the 8 steps an accounting practice or firm should take to implement value pricing. Part 3 of the series includes exhibits with practical checklists and forms that can be used by firms when moving to this pricing model.
IFAC’s SMPAG recently heard an update from Ron on what is currently happening in this space and to discuss whether value pricing is being considered or adopted in the members’ respective regions. The discussion turned to the potential benefits and barriers of moving to this pricing model.
What Is Value Pricing?
Even back in 2009, Ron had noted that value pricing has proven to be most successful when products or services are sold based on emotions (fashion), in niche markets, in shortages, for indispensable add-ons, and for customized or bespoke solutions.
Ron was asked in a Future Firm Accounting Podcast what his definition of value pricing is, and he noted that it is charging a price commensurate with the value you are creating for your customer.
According to IFAC’s Guide to Practice Management for Small-and Medium-Sized Practices, a value pricing model is put in place before the engagement commences; it establishes a selling price on the perceived value to the client, rather than the actual cost of the service, the market price, or competitor price; and it recognizes the client as the ultimate arbiter of value. It should be noted that this is different than fixed pricing, whereby a fixed price is typically calculated based on a set number of hours rather than on the outcome of the engagement.
As a 2018 IFAC article notes, “Generally speaking, clients only care about the solution to their problem, not about how many hours professionals have spent fulfilling the engagement.” They stress that the main support for a proposal should be the value for the client, not the price. The article also notes that pricing policy should be part of any firm’s strategy. The firm’s perceived attributes in the market will determine the prices clients are willing to pay. There are many influencing elements that will vary, but there is one constant for success: set a fee level that reflects value for the client in their unique needs and circumstances.
The Value Pricing Adoption Curve
Ron started adopting value pricing into his practice in 1989. He believes the adoption curve was slow to start as this is a true business model change and takes proper tone at the top to be properly implemented. He believes that the U.S. has hit a tipping point, with at least 40 percent of firms in the U.S. engaging in some level of value pricing. Many of them are starting to make significant investments in changing over to this model.
One of the key findings from the AICPA’s 2018 MAP survey was a declining use of hourly pricing and an increased use of value pricing at firms of every size. Firm revenues using this billing protocol were up 10 percent among firms with less than $200,000 in revenues since the 2016 survey. Half of these firms’ total revenues were from value pricing. The numbers show associated fees for firms using this pricing model at least doubled in firms with revenues between $200,000 and $750,000.
Ron noted that value pricing starts at the C-suite level at a firm, and some practices have even created a Chief Value Officer role to reflect the importance of value pricing in their overall business model.
Does Time Spent Equal Value Received?
According to Ron, many firms spent too much time on the scope of work rather than on the scope of value they plan to provide to their clients. Many of us may have grown up in an era where time sheets were critical, and many employees were rewarded or even reprimanded for time reported on engagements. And although we may not discuss this in the boardroom, we all know someone who at some point in their accounting career may have even been asked to “eat time” to make an engagement appear more profitable or to avoid having to go back to the client and have the dreaded overrun and additional billing discussions. In some cases, this even results in more-productive staff being disincentivized for being efficient; in some cases, their salary could even be tied to billable hours.
We have also likely all known an employee who would boast about a high number of hours spent on a job or number of hours worked in a week. But are hours spent necessarily indicative of productivity, or more importantly, the outcome of the engagement?
More and more, companies are focusing on the outcomes rather than the inputs. In a world where flexibility has become more a necessity rather than a “nice-to-have,” is this model more attractive to the younger generation of workers?
For firms that have a compensation structure focused strictly on billable hours or where bonuses are based on overtime worked, it may be time to rethink that model. With work-life balance becoming more important for many workers, focusing more on outcomes might be the key to a firm’s long-term success.
The Benefits of Value Pricing
One of the major benefits of value pricing is that both parties know in advance what the price will be; there is less anxiety about the final bill and there are no surprises. Anyone who has had to go back to a client and renegotiate halfway through a job can appreciate how stressful those conversations can be.
Value pricing can also help your clients understand exactly what they are getting with regard to not only the price, but also the scope of work. It also means your clients might not be so hesitant to pick up the phone and ask a question.
On the staff side, it also stresses the importance of providing value to the client and what the expected outcome will be, as opposed to focusing only on the amount of hours they will need to spend on the job. This could lead to growth for individuals on the job and more thinking outside the box with regard to client solutions. Some firms challenge their staff on how best they will provide the solution and which technologies they can use to be as efficient and effective as possible, rather than insist on a certain number of hours to get the job done in accordance with a budget.
In some markets, non-accountants are starting to take over the consulting space. One member of the SMPAG analogized providing consulting services to a luxury car brand, whereby when you have fewer clients, you are able to create closer relationships, and can therefore provide better service. Many firms are moving to a specialized service model with which they focus on their strengths and provide more value to their clients. Often this goes well beyond compliance services.
When looking to adopt a value pricing model, firms should also look to the International Code of Ethics for Professional Accountants (including International Independence Standards)(the IESBA Code) or their local ethics requirements to ensure the arrangement does not create an independence issue. Although the IESBA Code does not specifically address value pricing arrangements, Section 410, Fees outlines the general requirements and application material when performing audit and review engagements. These requirements and application material (including Staff Questions & Answers) build on the overarching provisions in the Code’s conceptual framework and in Section 330, Fees and Other Types of Remuneration.
For those following the AICPA Code of Professional Ethics, they do address value pricing specifically in their Plain English Guide to Independence:
“Value pricing is not prohibited by the code and would not impair your independence. Value pricing is a fixed fee determined and agreed to by the client based on the value or complexity of the service being provided to your client. When determining the fees, you may want to consider the complexity and scope of the service, whether your firm can provide the service for the fee being proposed, how the fee proposal will be received by the client and how you will explain the value of the service compared to the fee to the client.”
Potential Barriers to Value Pricing
IFAC’s SMP Advisory Group has perspectives that span the globe, with representatives from 22 countries. And while some firms have adopted or at least started to look at the benefits of adopting value pricing into their practice, there are some potential barriers to consider.
One issue raised by an SMPAG member was that smaller firms do not necessarily have the sales skills to properly implement this model. Ron noted that some of the best adopters of value pricing have been bookkeepers as they have strong relationships with their clients and can devote more time to each of their clients (because typically they are working with fewer clients overall).
Value pricing also tends to be more commonly used with advisory and consulting services, rather than with assurance and compliance work. In the U.S., Ron noted that only 10-15 percent of firms perform assurance services, so this is not often a barrier. However, in some jurisdictions, every company (whether they be a public interest entity or a private one) is required to be audited, meaning there are more firms outside the U.S. performing attest services and this may deter them from developing a value pricing model.
There could also be some challenges in determining whether a job was profitable if you were not tracking hours spent. However, Ron noted that you would still be able to measure the job outcomes, and that you should also be communicating with staff throughout an engagement. Those touchpoints should allow you to gauge profitability. In addition, Ron noted that even when using a time tracking method, many times it will be too late to go back to the client and try to collect any additional fees once you have started to go over estimated hours anyway, unless you can explain how the scope of work may have changed during the engagement.
Using value pricing does not preclude a firm from tracking hours on the job or at least calculating hours to assist in determining the price. However, that is not the only factor the firm would use to help come up with the overall value of the services to be provided. In fact, some firms just starting out with this pricing model may find a certain level of comfort in estimating and tracking hours, at least in the beginning, to ensure the price agreed upon with the client is at least equal to the hours to be spent. However, there are some firms that have gotten rid of using timesheets altogether and view this as a way to attract talent.
Value pricing seems to be gaining momentum, especially as firms are providing more advisory services. Whether or not this model is right for you and your firm is a matter that requires careful consideration, and an exercise of professional judgment. However, understanding some of the positives as well as the potential drawbacks – and consulting additional resources – may help you determine whether this model is right for you and your firm.
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