The Radical CPA: The Four Factors for Fixed Pricing

Ron Baker and Ed Kless of the VeraSage Institute are the hands-down experts on value pricing. They do a phenomenal job of explaining how it works and why you shouldn’t track time.

I’ve done it for the last decade and I absolutely love it. I would never go back to time and billing.

My quality of life has changed dramatically because of it. What it’s done for the culture of my firm can’t be measured. It’s an intangible. I started doing it because I figured out that there had to be a better way to sell my services. I didn’t want to sell myself by the hour and I found out that it worked without reading all the economic theories. So I continued.

The technology is only getting faster and better. Eight years ago my payroll only took two minutes using PayCycle. I had to ask myself: how could I make money on it? I believe that the pricing model finally is going to change. Ron Baker was the early adopter and started this 20 years ago. I believe the technology has now caught up. If firms don’t change our pricing model, we’re either going to have 25,000 customers or we’re not going to make any money if we continue to charge by time.

You can choose.

My firm doesn’t keep time. We don’t measure our employees on time. We don’t measure them on chargeable versus non-charge­able hours. We work together as a firm to produce a product to deliver service and value to our customers and our customers appreciate it. Our customers pay us for our work. And that’s how we run our firm.

You can say, “How, how do you manage your employees?” and my response is always, “Managing employees by timesheet is not the way to manage a person.”

• It’s not the way to share knowledge.
• It’s not the way to build a learning culture,
• It’s not the way to build an innovative culture,
• It’s a way to make an employee feel like factory worker and
• It just doesn’t work with knowledge workers.

There are so many other people in other industries who don’t keep time and are still able to price their products and services and become profitable. Why accounting firms can’t seem to do it is an enigma to me. The world has changed.

And yet, I’m often challenged. People may tell me that it’s not a way to create a cost structure, but it’s not a valid response. We still do gross profit margin. I do look at my gross profit, of which my employees and all my software are above the line deductions. I truly have a cost of goods sold or a cost of sales and we look at our gross margin and that’s how I determine profitability.

Value Pricing Vs. Value Billing

Value billing is performing service and billing based on the value of the service you perceive after the fact. You can only value bill after the service is performed. Value billing is not the worst thing in the world. It’s much better than time and billing but it’s still after the fact.

Value pricing is pricing before the service is performed and based on the customer from value perceived before the work has begun. Value pricing takes a lot more work up front.

We only value price probably 20 percent of our work. Another two-thirds of our work is priced up front but it’s more of a fixed price. And then the last 10 percent of our work is probably value billed. It’s billed after and based on our internal perception of the value of the work performed.

Most of that value-billed work is my dad’s legacy customer base and practically speaking, he’s still working with these customers. We’re migrating them. I would say at least 90 percent of our work is priced up front.

• Sixty percent of our revenue is divided into monthly payments and is paid monthly.
• Another 20 percent is individual taxes that are priced up front and paid for or paid immediately after tax season in April.
• The last 20 percent is paid in full on work that’s either pre-priced or value billed.

Our tax returns are pre-priced upfront. This is the easiest thing to actually value price. For most individual tax returns you’re charging them pretty much what you charged last year with maybe a slight increase.

Fixed Priced Engagements

A good portion of my customers are under a fixed price model. In those situations, I only give them one price. The reason they are at a fixed price is because their service level is somewhat routine. The account has no “special value” to my firm and it’s at a much lower price point.

Fixed prices are the same for similar customers with the same expectation of risk and scope. A lot of people ask me how I price and I would say there are a number of factors that I consider:

1. The number of transactions and scope of the work.
2. The gross receipts. What is the risk if I do something wrong?
3. The personality of the customer.
4. Customer service requirements.

If you can look at risk, scope, transactions and the personality of the customer, you can figure out what is required and where that price point needs to be.

A value-priced engagement is based on a particular customer’s per­ception of value, not the accountants or the market perception. It’s discovered by identifying your customer values and thinking about how you can make what you’re offering align with what they value so that it all comes together at everybody’s happy point. I only value price engagements that are greater than $15,000 just because it’s a lot of work on the front end and not every one of our customers needs that. For a lot of our small business customers, it doesn’t matter how much they value it, they can’t afford it – so we come up with a fixed price.

Originally published on CPA Trendlines. For more content like this, subscribe to The Radical CPA newsletter or buy the book, "The Radical CPA: New Rules for the Future-Ready Firm.