After two successful webinars, our partnership with pricing expert Ron Baker continues. Here’s Ron’s recap of these insightful sessions.
It was an honor to present the first two webinars on Value-Based Pricing on behalf of Receipt Bank this month. The content focused around the following themes:
-> The First and Second Laws of Pricing
-> The Eight Steps to Implementing Value Pricing.
There were many excellent questions that were answered in both webinars, focusing on the specifics of implementation.
In fact, the third webinar in the series is dedicated solely to questions and answers. The following summarizes Webinar #1.
The First Law of Pricing
This law is critical to grasp: All value is subjective. Think about a bottle of water. It’s relatively easy to calculate the cost of producing one bottle.
The price you will pay varies tremendously for the same H20 depending on where you purchase it, whether from a warehouse or grocery store, a sports arena, or at an airport. But what about the value? What is the value to the customer of one bottle of water?
That depends. What are you trying to achieve? If you’re in the desert and haven’t had water in four days, the bottle of water is valued incredibly high—everything you own. That same quantity of water used to wash your dog has much less value. And if you are flooded in your basement, now it has a negative value.
Notice we didn’t change the product at all. And the cost of getting the water to those three locations cannot explain the wide variance in value. In fact, accounting—indeed, Generally Accepted Accounting Principles—cannot explain value. It can only record a transaction after the fact, at an agreed upon price.
The Second Law of Pricing
Webinar #1 covered The First Law of Pricing: All value is subjective. The Second Law of Pricing is: All prices are contextual, the implications of which are many.
Have you ever wondered why every business offers us at least three choices? I bet even where you get your car washed, they offer you choices. Why are car wash establishments more sophisticated pricers than accountants?
What we are willing to pay for something is tremendously influenced by what we compare it to. If I were to try to sell you a unicorn, you’d have no idea what to pay since there’s really nothing to compare it with.
There is enormous empirical evidence of the effectiveness of offering your customers options.
- Humans prefer choices over one take-it-or-leave-it offering.
- Most customers will select the option in the middle, since most people do not want to purchase the cheapest offering of items they value—and accountants are highly valued.
- Offering options allows you to anchor your pricing. When you present a high price first, it makes the other two offerings appear more valuable.
- Placing three options in front of a human mind transforms the decision from a price to a value deliberation.
- Lastly, offering options places your prices in context. They are comparing you to you. One accountant said to me, “It forces me to compete with myself.”
Exploring Value Pricing
The Value Guarantee
I recommend that your firm offer all customers a value guarantee, such as this:
Our work is guaranteed to the complete delight of the XYZ Company. If you are not completely satisfied with the services performed by ABC Accountants, we will, at the option of XYZ Company, either refund the price or accept a portion of said price that reflects XYZ’s level of value received.
By making the policy overt, and placing it on your choices, in your engagement letter, etc., you raise the value of your firm in the mind of your customer.
Hourly Billing vs. Value Pricing
Hourly billing is nothing more than cost-plus pricing, a suboptimal pricing strategy since it completely ignores customer value. View this infographic to see the two methods of pricing side by side.
Scope of Value Before Scope of Work
We then discussed how important it is to understand what your customer is trying to achieve, not what they need.
The Maximum Becomes the Minimum
The most serious disadvantage of hourly billing is that it is silent with respect to customer value. It simply looks inward and adds up hours, overhead, and desired net income to establish a price for the customer.
Another disadvantage is it places a ceiling on how much accountants can earn.
Hourly billing ignores the value to the customer. Worse, we only find out the customer doesn’t like our price after we’ve done all the work.
The strategy is to convert the artificial ceiling of hourly billing—a maximum that we cannot seem to rise above—into a floor that you will never go below.
Not Final Words
Webinar #2 ended with a discussion of the Stan Shih Smile Curve, an incredibly useful tool for enabling your firm to always construct three options for any customer.
We also discussed the idea that, as Werner Erhard said, “All transformation is linguistic. If we want to change our culture, we need to change our conversation.”
Since value-based pricing is a cultural, and a business model, change, it requires new language, such as customer rather than client, team rather than staff, deadlines rather hours, education rather training, etc.
In partnership with Receipt Bank, we will be offering more resources to help your firm transition from hourly billing to value pricing.