286 The Good & Bad of Value Pricing in 2024

This week we're going deep on value pricing. The good, the bad, the practical, the impractical. I'm no value pricing, Stan. Okay, we're getting real. Going through the Canon to pick out some stuff that's super helpful, super applicable for just about anybody. This isn't a sit in a circle and hold hands and sing its praises sort of thing. It's a meat and potatoes. How does that change this next client conversation sort of thing? So come on in. Roll up those sleeves. Today we're digging into the good and the bad of it. And what I think is probably the number one thing that's keeping us from pricing our engagements better. Let's do it. Okay, just a level set to kick off this week. What is the Canon, the mana for value pricing Lifers? I think you've got the Firm of the Future From I think 2003, written by Paul Dunn and Ron Baker. You've got Implementing Value Pricing, which was written by Ron 2010, I believe. But then Paul Dunn and Ron Baker did time's up in 2023, I think lots of other books. Ron's written a number of other books. These are kind of the core texts that I think people come back to, particularly as it pertains to value pricing in accounting. One other thing worth checking out is Jonathan Stark's work. I will link it in the show notes. His background's actually in running small software agencies, but he's got a ton of great content around. Moving away from the billable hour because I think regardless of your, your appetite for, for value billing and what your relationship with that is, that phrase has almost been, I don't know, I feel like that phrase has almost become divisive, unfortunately. But most of us can agree we all do a, a, a version of it because we adjust stuff up and down. Regardless of how we get to a number like that initial number, we all write stuff up, we write it down. We're all doing a version of value pricing. But it doesn't always feel practical. I'll just say that now I am not. I spent about a week going back through all this stuff, making a bunch of notes, reading all the books again. And I came away more into it than I was beforehand. But I am by no means like a through and through expert. And anytime you talk about value pricing, I think you can get torn to shreds by the, by the diehards. So I'm burying that for you this week. Okay. And if you are one of those diehards, I don't know how useful this Week will be for you. But in my experience, most of us are like, yeah, kind of get it, not sure how to apply it. That's where most of us are. So as a starting point today, just kind of a level set, I'm going to run through a list of the pros and cons of hourly billing. Because there certainly are pros to hourly, right? Like, easy to understand. Time's going to pass no matter what. So it doesn't take a PhD in Priceology to help like somebody on your team understand how to invoice hours. So let's start with the advantages of hourly billing. This is from implementing value pricing links to all these books down in the show notes. Hourly billing is easy and efficient, simple to do with the right time and billing software. It basically makes the pricing function an administrative task rather than this thing that requires all of this expertise. Hourly billing can be perceived as fair since it's largely based on a firm's costs and a quote, reasonable profit margin. It's often perceived as fair by customers. Hourly billing provides market stability. Firms and customers just kind of understand how that works and what the norm is, right? Sometimes a customer demands hourly billing. I've encountered this. I had some clients who would only work with us by the hour. Like that was just. They're like, that's how business is done. Either give me a quote for that or I'll go somewhere else. Hourly billing leads to higher volume. Interesting. The thinking here is proposing a big upfront price for something with maybe an ambiguous scope could cause somebody to go away. Whereas if you tell them it's gonna be X dollars an hour, maybe you win something that you wouldn't have otherwise won there. Hourly billing is a cost accounting productivity and project management tool combined with timesheets. This is the single largest perceived advantage of hourly billing. Causing leaders to wonder, if you did not keep time reports, how'd you know? If you're making money on a particular job, how do you measure efficiency of your people? Hourly billing transfers risk to the customer. Rather than you having to guess how long it's gonna take. The customer bears that risk. And last, hourly billing has served us well. Why should we change? This isn't just an hourly billing thing. This is a kind of everything about business and life sort of thing. If something's gotten you that far and it's all you know, why change? If I can run a general firm that's not niched, why would I niche? If I can make money doing X, Y, Z, why would I do this other version? The answer being the fact that you can do it doesn't mean it's an optimized version of it. Right. Okay. Disadvantages of hourly billing. Uh, hourly billing misaligns the interests of professional and customer. So when it comes down to getting a job done or delivering value or something like that, that's generally not going to be anchored to how long it actually took to do that work. Right. So is there. The way you most commonly hear this framed is automation and AI and technology and stuff like that. Why would he adopt all these things if it will cause us to spend less time on an engagement? Because the software helps us do it faster. That's kind of the misalignment of incentives. Hourly billing focuses on hours, not value. Generally, a buyer doesn't care how long something took. They will pay according to what their value of it is. Hourly billing places the risk on the customer. It's both a, both a pro and a con. And we all know what that looks like when that backfires. You get into a project or you delegate something to a team member and you had a general idea of how much time that would take. And then it comes back and you're like, holy what? I'm never getting any of this back. Hourly billing fosters a production mentality, not an entrepreneurial or knowledge worker spirit. So the machine is. Is designed to reward the number of billable hours people pump in, which I, I would agree, leads to a kind of mindless work. This comes up a lot around AI, where it's like, how do I get my team to. To be interested in. In changing tech and, and leaning into AI and experimentation and curiosity and stuff like that. And it's like, well, are they even incentivized to do that? Because if you pay people based on the billable hour, you're not incentivizing people to be curious or challenge the way that something is done if the only mechanism you have is the billable hour. Hourly billing creates a nonsensical subsidy system. And this is because some clients will be overcharged and some will be undercharged. A number of flavors of this from staff people kind of not being 100% truthful to getting to the end of a project. And you see, okay, here's what the hours came up to, but I'm gonna bill this other thing instead. Hourly billing cannot price risk. Completing a divorce for Britney Spears is fraught with more risk than a couple with limited assets. These two divorces should not be priced the same simply based on the risk the firm is assuming. Hourly billing is not predictive of a true professional. It's not really an apt yardstick of are they good at what they do? Are they good at managing clients? Kind of all the things that go into what you would want someone to be. Hourly billing encourages hoarding of hours. Due to compensation bonuses and performance reviews being based on billable hours, folks will have the tendency to hoard work to fulfill their their hourly quotas. Inevitably this leads to low level work being performed by high level associates. Definitely experience that. Hourly billing focuses on effort, not results. So it's just about plugging in hours. It's not about where did we get in that time. Hourly billing penalizes technological advances. Advances talked about that a bit. Hourly rates are set by reverse competition. You look at the rates of your fellow professional professionals doing stuff like you and make a decision on where you feel that you sit in that sort of competitive landscape. Hourly billing prices the service, not the customer. That's one of the maybe the biggest theme or top three themes in implementing value pricing is stop fixating on the service and the inputs and instead think about the customer. And then in Time's up, the most recent book that kind of evolves into pricing the relationship. But ultimately it's the customer that decides is this a good price for me or not? On a whole, everything that you do for them, not like piecemeal service by service. Hourly billing creates bureaucracy. We've probably all experienced that. Hourly billing doesn't set the price up front. So you run the risk of getting to the end of a project and having a disagreement on if they're actually going to pay. Not four more here. Hourly billing does not differentiate your firm. You don't want people making buying decisions on what your hourly rate is compared to somebody else. Right? Hourly billing doesn't measure how much money is left on the table. It gives you no notion of how much the price could have been. It diminishes quality of life since it leads to kind of this sweatshop mindset. And hourly billing limits your income potential. I would asterisk depending on how good you are at it. This episode is sponsored in part by liflow. I love spreadsheets. Yes I do. I love spreadsheets. How about you? But you know what spreadsheets don't do? Integrate with anything. Like anything. All the other tech that we use, except for DAX software has to integrate. Stuff like that's just a requirement now for software. But hum humhow humhouse. Spreadsheets have been left off the hook. And so I end up doing this hokey pokey CSV Export over here, CSV import over there, big hot copy paste mess. Which isn't good when spreadsheets are a part of recurring workflows like month end closes, stuff like that, where you literally rely on the worksheet to make a work paper every week or every month. And gang, that is where Live Flow becomes the Swiss army knife that gives your spreadsheet Jim Belushi superpowers. It's a plugin for your Excel or your Google sheets that'll pull any data in from your client's QuickBooks files. Don't even have to go to QuickBooks, just bippity boppity boop, couple clicks from inside of your spreadsheet and. And you got Data from that QuickBooks file into the spreadsheet. It could pull it in once, it could pull it in on an ongoing basis, you could get hit by a bus tomorrow. And that spreadsheet, it's gonna, it's never gonna stop. It's gonna keep on updating and I don't know, there's just something about that that I guess it becomes a conversation of legacy. What do you wanna leave behind? And will your spreadsheets keep updating even after you're gone? Cause you know what? With liveflow they will link in the show notes. This episode is sponsored in part by teamup Story time. Gather around. Sit in a circle, Jonathan. Happy team up customer. See if this story sounds. Sounds relatable. Clients were beating down Jonathan's door. He was growing so quickly he couldn't keep up. The problem was he couldn't find anyone in the US at a salary that he could really afford. Then he had an experience that opened his eyes. He hired his first accountant in the Philippines. Couldn't believe how good she was. Not only did she do the work well, but she was fast. So he hired another. This time a senior accountant. He wanted to be in charge of quality assurance. He needed her to do things like set up special funding accounts and make sure equity accounts are correct. Things he struggled to get his US staff to do well. It went so well with the senior accountant, he hired another and then in a few months, another. Now not only is client work getting done on time, he has room to grow. Good for you, Jonathan. Here's a quote from Jonathan. We've hired very high level accounting talent stateside. I have to say that our Philippines based team is outperforming most of our US based staff. How dare you, Jonathan. I was absolutely blown away with the type of candidates that we got from our job posting. Team up really helped Us navigate the things we weren't sure of. It's Jonathan's story. A real live accountant just like you. For some reason we have this thing in our head. Maybe it's an American thing where you think when you hire somebody that's not in your country, they're not going to be as good as somebody in your country just because their power plugs look different. But that, you know, that just doesn't make a lot of sense, does it? If you're exploring hiring folks in the Philippines. If you are stuck on your, your U.S. hiring strategy, hit up team up link down in the show notes to help you find some super talented accountants in the Philippines. You'll get that client work straight out the door on time. As I spent, genuinely spent like a week going back through all this stuff. That was one of the big themes, if you remember a conversation I had with Chad Davis a while back, who runs a team of I think 60 or 70 now it's a virtual firm in Canada and they've gone round and round on all sorts of different flavors of, of how they've done things for their clients, been totally upside down, been in a super good spot and tried just about everything. And where they've landed now is on the budgeted hour and they're like, this is good for us. This is the most stable thing we've found yet. And part of where that conversation ended up was the notion that if I had 10 Ron Bakers working for me, the right answer would be value pricing because they're so adept at that. If I had Jonathan Stark on my sales team and he could call out the BS and just totally had his, had his head around like no customer, here's what you're actually buying. I understand the income, the outcome that you want, and here is the best way to set up an engagement to increase the likelihood of getting where you want to go. If I had those people on my team, a hundred percent. But what I, what I came away from this week really feeling was okay, I, I think we just need to acknowledge for what it is, what a skill being able to do this stuff is. If somebody tells you about it, you have a conversation with someone, I honestly don't know that it's realistic to think you go back to your firm and you're like, yep, I'm going to start doing this now. Like, it kind of feels like riding a bike where somebody can explain it to you all they want. But like until you start doing it and getting repetitions and have sort of that ment talk track that we develop, right. The more we work with clients around kind of certain domains, until you've, you've done that, you're just not going to be any good at it. And there is a, I would argue there is a crossover threshold on that skill spectrum where many people probably have more to lose than they have to gain from value pricing. And it may be because they are like at the bottom of the market and don't have a huge level of technical proficiency and are not comfortable having these hard conversations with clients, don't have the self confidence, don't even believe themselves that they have value in excess of say the, the hourly rate that is acceptable for the market. If everyone in my town charges 100 bucks an hour for bookkeeping and I'm a brand new bookkeeper, I'm going to be like, okay, I guess I'll charge 100 bucks an hour or 90 bucks. Now you don't even believe that you are worth that yet. So for that person to start drinking the value price and Kool Aid and be like, yeah, that's just, that's really hard for those people because they don't even have that belief in themselves yet. And a big, a big part of value pricing is like founded in the conviction that what you are doing is valuable. Right. So tomorrow what we're gonna, what we're gonna talk about is kind of overcoming client resistance to pay you more. And on sort of a bunch of different dimensions that you can look on that, but one of them is very much you. It's internal, it's does, does me and my team have the profound belief that we are worth a number or do we have the belief in the outcome and the problems that it solves for them to have the confidence to price that instead of pricing my time. To be clear, I do think like the ceiling of the best way you can price your stuff. I, I, I genuinely do think it's value pricing. The problem is everybody's at a different stop in their skill level and being able to do that. And you could certainly organizationally develop that as a skill and arguably there may not be any more important skill for the health of your business than that than to price your engagements better. Obviously you, you, if you can on average price your engagements 20% better, that's all going straight to the bottom line. So is it a thing worth investing in? Like, almost certainly. I do think we just need to acknowledge it for the skill that it is not like you flip a switch and we're now a value pricing firm. It's like, no, the people who are involved in this process need to learn this, need to get up to speed with it. It's going to take time. It's not something that comes naturally at all for people that came of age in the traditional accounting structure. It's kind of counter to all of that. But it's a skill that can be learned that is probably one of the more valuable things you can develop inside your firm. The one other thing I want to be sure to touch on today is the whole conversation of, of commoditization. And this might be the biggest blocker for, for accountants and is whether, whether they acknowledge it or not, there's an element that many accountants feel that what they are doing is just getting that work done, getting the books done so that person can go file a tax return, getting the tax return done. Because this person has to file a tax return and I go to jail. And if it's as transactional as that, and that's all I'm providing to somebody, how are value price? Like, if I'm just doing that, won't they just go to somebody else and be like, hey, will you do it for the price of that other person did? There's that element of like taking out the financial garbage. What is the bare minimum that needs to be done for me to just be in compliance? And the folks that are just doing that, it's going to be very hard to get your head around this whole concept of value pricing. This episode is sponsored in part by Ignition. Come, come, come, come, come. Here's the thing. Here's the thing about client billing. You can't bill for the time you spend billing. You can't, you can't. It is pure waste. And we're bad at billing because it's, it's icky. You let things slide. You don't get paid. You waste time, waste time chasing people for money. That's not what I did. I would just, I didn't want to waste time chasing them and so I would just, I just eat it. Don't do that. This is where Ignition comes in. The leading revenue generation platform for accounts and professional services. When I was running my firm, Ignition wiped out our ar, it's true. And significantly reduced the time spent billing clients. Saving our partners over a thousand hours in the first year because they didn't have to bill all that stuff manually. Man. With the condition. We won more business with impressive online proposals. No more hustling, hustle and PDFs and Word docs. We automatically pulled payment up front or at the End of a job. When it was done. No more dialing for dollars. We transitioned our firm to more recurring revenue and better managed scope creep. No more leaving money on the table. TABLE Ignition is making thousands of firms more money and genuinely made us more profitable. Check out why over 7,000 of the smartest businesses run on ignition@ignitionapp.com put a link in the show notes. This episode is sponsored in part by the fine folks at Genwise. Have you ever wanted to hire like a CTO or a coo? But that's a thing you can't do because you run a firm, a small firm, you hire chief executive, anything. Genwise gang, they're gonna come in, they're gonna, they're gonna fill that role for you. Be that cto, be that COO partner. All that stuff you dream of doing where like, that's a good idea, Jason, let's go and implement that. Or I want to explore that tech further that could help us. And then you never ever do. Imagine having a little buddy, little buddy alongside you where you could be like, hey, hey, Mr. Or Mrs. Wise, could you come on in? Can you do this thing that we're thinking about doing for us? I do it myself, but whenever I say I will. I don't. Gen Ys are not just consultants. That arm's length agency, they're gonna work in the trenches with you through the good stuff and the bad stuff to actually make those changes happen. The system stuff, the hard people stuff, they're gonna be with you through all that. They get their hands dirty. To ensure that change is managed effectively. They do this via weekly work sessions and asynchronous synchronous improvements. They've got, they got back door relationships with most of the powerhouse tech in the accounting space, so they can usually move the needle faster than a firm could on their own. Okay. Dirty hands and needle movers. And the result is all those things that you always want to do that you never get to, they happen. Finally. Wow. Okay. Where to start? You start with GenWise's efficiency assessment, which is designed to help everybody understand exactly what needs to be improved and inside your firm. Every assessment culminates in a firm roadmap that outlines all the efficiency improvements they'd recommend along with an implementation timeline and estimated costs. Just like that. But wait, there's more. Sign up now to get 25% off your efficiency assessment. Normally three and a half K discounted down to 26, 25. And then this entire value gets discounted from an annual engagement. If your firm decides to Engage them in a larger capacity, like an onboarding project. It's a paid onboarding project, but it gets discounted against the ongoing if you become a full blown client kind of thing. Pretty cool. If that's been a blocker for you, check out the link in the show notes to Gen Wise. If this hasn't been a blocker for you and you do all the things that you always say that you're going to do, then you are lying. We talked about the analogy recently that was framed in like, you know, what's changing with AI and all of that. And it was, it was a guy that runs a design agency said it is not the job of a designer to create the design, it is the job of the designer to decide what the design should be. So like, what is the good design? Like what is the output? What should it be? And that that analogy kind of carries over to accounting, I think, where you could say the same thing about accounting firms and design firms, that the job of the accountant is not to do the accounting, but to ensure that the output is correct and understand what, what decisions should be made based on the output. But I think you could say the same thing about designers and accountants, that that's not the vast majority of those people's reality. The vast majority of designers, all they do is they do the designs, they do what the client tells them to do. The vast majority of accountants, all they do is they do the accounting, they do it the accountant, what the client tells them to do, Right? And so if we are, we are in that state where we are order takers, there's an element of commoditization already to what we do that can be really hard to overcome. But one of the kind of core tenets of their flavor of value pricing is that anything can be decommoditized. So to pull an excerpt here from Time's up, the most recent book, many leaders push back on the idea that they can charge higher prices since a lot of services are quote, commodities, for instance, the tax return or accounting and other compliance services are grudge purchases because customers only buy them to stay out of jail. But this is empirically false. Economists refer to negative goods to describe products or services we really do not enjoy buying, but do so because we have to. The list would include gasoline, insurance, aspirin, prescription drugs, and so on. But do you buy the cheapest of these categories because it is a grudge purchase? My guess is you don't, as most people even have branded aspirin, not generic, even though aspirin is Aspirin. According to the fda, the fact of the matter is there's no such thing as a commodity. Anything can be differentiated, which is precisely the marketer's job. Believing your firm and the services it offers as a commodity is a self fulfilling prophecy. If you think you are a commodity, so will your customers. And where your brain probably shut off there was when I said which is precisely the marketer's job. I'm not a marketer, man. I'm an accountant. Get off my back about all this marketing. Every time I turn this podcast on, he talks about marketing. I do agree with this. The notion that anything can be decommoditized. There's a way to differentiate just about everything. I mean, you buy premium toilet paper, you go to the more expensive gas station because you're like, yeah, that'll make my car run longer. So just to get hyper practical here and cruise through a few service lines that certainly there are commoditized versions of. So let's talk about bookkeeping. Take bookkeeping. Super basic compliance bookkeeping. Somebody's just coming to you to do their books because they got to file a tax return every single year. What are some ways you could decommoditize that make that a little more interesting? How about developing education around how to understand the work that you do specific to what the client does? So do they know how to read a balance sheet and a P and L? You sure do. Could you put together some education to help them understand that better? I'm real into access and we talk a lot about communities and stuff like that. These days more than ever, people want to belong to something. They want to fill that affiliation. They actually talked about affiliation quite a bit in Times Up. Most recent book how that's a growing trend where people make buying decisions according to like feeling like they belong in a group. And there's an opportunity there for, for firms to be sort of hubs of really smart people and folks immediately jump to Circular 2, 30, get disclosed and all these different things. And there's, I think there's 100% ways to navigate this and let people opt in and stuff like that. But what if I did your books but you also got access to a community of other really smart SMB owners. If I'm a bookkeeper, I'm thinking of other ways I can, I can differentiate and get out of commoditization. If I'm a bookkeeper, is there a partnership I can form with the tax preparer? Not like, not like a legal partnership. But to say, hey, there's a version of my service that is just me going through your bank statements and classifying. And then there's a better version of my service where every, every quarter I check in with your tax prone. We run through some transactions that are like, hey, maybe this or that could be deductible or I see that they bought some office furniture but they don't have an office. Can we, can we make sure that we've got an office and home? Maybe there's a version of that where now you're part of the team, like that bookkeeper. You are part of the squad with the tax pro and the client that's decommoditizing you. If we think about the risk of audits and the documentation you're required to have, being a little more of an advisor for that client to say, like, hey, if you did get audited, here's what they would come and look for. Do you want any, any help with me following up with you to make sure that you've got the documentation you need? Receipts, invoices. Do you want to talk about, you know, spend management and card management? If you had a card stolen or something like that? I would argue even basic stuff like compliance, bookkeeping, which is maybe, maybe the, the lowest rung on that kind of professional accounting ladder right now. Right or wrong, I think that's the perception of it. Even that can be decommoditized if you find your own way to do it. But as long as we see what we do as a commodity, a tax return that people don't want to do, as long as we see it that way, to the point of the book, it'll be a self fulfilling prophecy and you won't be able to price it uniquely. You'll be a price taker instead of the price setter. One other example I jotted down around doing tax work. You know, you can, you can hold out three levels of that tax work. There's the version that keeps you from going to jail. There's the next version that ensures that you aren't paying more than your share of taxes. And then there's another version that aligns business goals and personal goals with strategic tax planning. So the version that's just keeping you from going to jail, sure, that's going to feel commoditized, right? Going to be hard to differentiate yourself there. And to give you a peek into something that we're going to talk more about tomorrow because specifically why I love this is it contextualizes this into a client conversation. This is a very simple example of how you can start a conversation with a client that's maybe in a place where it feels like you're doing something commoditized and evolve it into something more valuable. So five steps here. Step one, you show your customer or ask a potential one if it's a lead where they're at right now. And you do that by focusing on some key numbers like revenue, profit, and so on. This is from Time's up, the most recent book. Step two, you ask questions about where they could get to where they want to go to, and you reframe problems they may have today into kind of potentials. You see the issues now, but you reframe them as potential opportunities. Step three, you ask, you ask what shifts do they think are needed to make those possibilities a reality? And then your job. Step four is to create the transformation ideate, like, what is the plan that will get them from A to B? And step five is. Is kind of executing and monitoring the success of that plan. So it starts with a conversation. Here's where you're at. And if you've got clients that are paying you peanuts, that are, you're doing commoditized work today, that is a conversation you can have with them tomorrow over coffee, on a zoom, whatever it is that will get you to something more valuable, at least open their mind up to like, yeah, there probably is more that this person can do for me. Value pricing. Like, a lot of change in our firms, easy to get your head around for new clients when they come in. And it's another one of those things where like, yes, let's stop the bleeding. Let's not let another client in the door under this old pricing methodology. But for my existing clients, how do I change the game for them when they've done this for the last 20 years? Right. I think this is a really practical example of how you have a conversation with them and you acknowledge what we've done for you has been basic and there's a lot more that we can do for you. And once you've done that, you're a big step towards disassociating the value of what you're delivering from the time that you put into it. Gang, this is going to be a fun week. I'm excited for this. Tomorrow we're digging into overcoming specific client resistances to paying you more. What we just talked about. It's a great example of one, clients who are used to paying a certain price, they want to pay a different price. So come on back for that tomorrow. I'll see you there?