counting money for tax savings
counting money for tax savings

7 Steps to Transition Your Firm to Value Pricing

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In my first article for the Intuit® ProConnect™ Tax Pro Center, I discussed why killing the timesheet benefits a firm and its clients. I touched briefly on the Pereto Principle and why it was important to pay attention to your firm’s structure. Here, then, is more of a step-by-step method to help you transition to value pricing.

Implementing value pricing today may be simpler than when I led my firm through the metamorphosis from hourly billing and timesheets to value pricing; however, the challenges aren’t physical, but instead, mental.

I spearheaded my firm’s conversion nearly 20 years ago, shortly after meeting my VeraSage Institute co-founder, Ron Baker. Why did I leap into the unknown of value pricing? I inherently knew it was better and understood how it aligned better with our clients. The timesheet had – and still has – multiple problems: lying, confusion of efforts over effectiveness, chest puffery, stupid compensation models, and most notably, a waste of time and firm resources. Doing away with timesheets also would be more attractive to experienced new team members who wanted to escape the six-minute measurement of their value to a firm.

I was right. It worked. Period. Although I had one partner who for a short time maintained a secretive timesheet, even he gave it up with an awakening realization of how our conversations and services improved when we took the great wall of time-based billing out of the customer service equation.

Here is how we converted from a firm of the past (historian-based pricing) to a firm of our future (pricing for, and with, purpose):

Step One: Decide. Make the ultimate decision that you will leave behind something that is not working for your firm and clients. In the venerable words from Shawshank Redemption, “Get busy living or get busy dying.” I wanted to live, so I made a commitment and stuck to my principles for the health and livelihood of my firm, and even more importantly, for me as a professional dedicated to helping others.

Step Two: Analyze your firm’s Pareto. Nearly all firms fall within this 80/20 rule that recognizes how the minority of items influence the majority. In our case, 80 percent of our firm’s revenue came from about 23 percent of our customer relationships. What this really means is that nearly all the files your firm touches drive little revenue and even less profit. You can effectively ignore them and survive well.

Step Three: Split your customers based on your Pareto. We did this when we transitioned to value pricing and still do it today. Our demarcation line today is $6,000 per year. Below that line, we offer fixed pricing for their core services based on our firm’s pricing matrix, the length of time of our relationship and the connections related to the relationship: other customers, referral sources, how they help our communities and other subjective matters. We offer a raw scope of services, with a couple of options and some payment terms to allow them to choose when, how and what services they receive.

We do not spend a great deal of resources for this level of service pricing. These clients are below our Pareto line, and I want to always professionally take care of these customers, but not at the expense of over-allocating firm thought or manager/partner time into discussions that do not influence our firm’s future.

However, I want to emphasize that people have great value. Customers are valuable and important. I may be cavalier with pricing, but never service. We dedicate significant firm resources on pro bono and deeply discounted services to allow those clients who need us but cannot afford to receive needed services. Value pricing isn’t about money; it is about aligning our interests to serve our customers.

Step Four: Focus on the upper Pareto. We initiated conversations with these clients after reviewing several items:

  • The services we currently offered vs. the services we could or should be offering, aka, the services gap.
  • We certainly reviewed their past year’s invoices.
  • We considered what our competition might charge should we overreach. This is really not too important. The reason CPA firms are hired and fired has little, if anything, to do with pricing or quality. It is all about service … communicating, demonstrating interest, being engaged, volunteering ideas and other proactive matters.

Step Five: Add services that are valuable, such as the following:

  • Unlimited meetings, phone calls and related support.
  • Service-level guarantees, where we would track back our services to our clients’ unilateral satisfaction, and our clients could retrospectively adjust our price to the value they determined. In nearly 20 years, we have had this trigger pulled less than five times, and two of them were for solid reasons. I believe the premiums we earned far outweighed the pain of returning funds.
  • Planning and projections, which we’ve added to nearly all engagements as an included service because we believe that if you don’t need planning or projections, you likely don’t need our services.

Step Six: Meet with your impacted clients. We explained that we wanted to improve our services and the value they received from our expertise. We told them we understood budget constraints, and that there were services they wanted that we either hadn’t provided or that they hadn’t previously requested. We wanted to be their business advisor, and not merely their historian.

Step Seven: Reach a consensus. Once we had an agreement of scope, price and terms, we met as a team to outline how we would deliver value and measure ourselves against our objectives. We tracked:

  • Turnaround time: The length of time a project was in-house before it was completed.
  • New contacts by the customer for the number of meetings, emails and conference – not their duration.
  • New projects: Change orders or special projects.
  • Referrals.

The realities of transitioning are far less scary than thinking about it. Clients really appreciate their firms. They trust us and want more rather than less. They are human and they detest paying by the minute for simple questions; as a result, under a time-based model, they don’t call when they should. Under a value pricing model, they are more likely to call, and even more importantly, we are internally more likely to call on them.

If you want to expand your practice, then get out of the office, go see your clients, find out what is going on in their lives and help them achieve their dreams, all the while being paid fairly for what you do without thinking about how much time it took. Time is not a measure of value. Time is merely time and you are running out of it.

So, get busy living or get busy dying. The choice is yours, so make the best decision for you and your firm!

One response to “7 Steps to Transition Your Firm to Value Pricing”

  1. “Doing away with timesheets also would be more attractive to experienced new team members who wanted to escape the six-minute measurement of their value to a firm.”

    As a recent hire to M+D, I can attest to the improved effectiveness that comes from not tracking each and every minute of the day, as I have done in recent years. Moving from task to task in a busy season (as competing requests are constantly re-prioritized) becomes less encumbered and more efficient to the firm’s success.

    Get busy living or get busy dying!