“pricing – that is, fee-setting – is above all a marketing decision.”
by august j. aquila
price it right
there is a completely different way of looking at value and it is tied into the type of accounting or consulting work that is available in any given market and the type of accounting or consulting work that your firm provides.
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nearly 30 years ago william c. cobb wrote “the value curve and the folly of billing-rate pricing,” providing a great deal of insight into the concept of pricing and value. many of the ideas that follow are based on cobb’s article.
in discussing legal services, cobb notes that sophisticated clients do not tie benefits to hours. rather, there are certain types of services that have a significant impact on the client’s business. the key words here are “sophisticated” and “impact.” clients today, even at the commodity level, are much more sophisticated than they were in 1989. all clients are looking for services that have some impact on their business or personal life. they are willing to pay a premium for these services and if you merely charge your hourly rate you are probably underbilling the client.
as we shall see in the figure below, any service that is beyond the commodity range can be considered to be an impact service. i would define a commodity service as one that has little or no real value to the business or its owner. for example, the preparation of a simple 1040 tax return would be a commodity service, while a complex 1040 with multiple partnerships and other schedules would fall under the category of “impact.” at the top end of the spectrum or value curve are impact services. impact services are type ii services (services that add value to the client and are services that the client needs and wants) that have been discussed at map conferences for more than 10 years now.
a note of warning: if you deal mainly with unsophisticated clients you may have more difficulty implementing many of these ideas. you will need to spend some time educating your clients and understanding the worth of your services to them. you can also determine what kind of impact services you can provide them.
the value curve
the figure below illustrates cobb’s value curve. at the top end of the curve are ultimate impact or unique services. these are services that have a high value to your client and that the client needs and wants.
at the other end of the spectrum are those services that must be performed in the course of daily operations. these could be monthly write-up services, payroll tax and other types of compliance services, such as reviews and audits. in reality, the client does not perceive these services to have much value because they add little or no value to the client’s business. it’s unfortunate but true that the client generally will not value them based on the amount of hours that you spend. in fact, the client probably does not care how much time you spend. in other words, value in the client’s eyes has no relationship to the hours that you may put into the effort.
while cobb created the value curve for legal services, it applies equally to the accounting profession.
the value curve shows the relative value of services in the eyes of the buyer and shows the relative value versus the volume of work available to an accounting firm. according to cobb, the higher the available volume, the more price-sensitive the service. like an attorney, an accountant must look at the types of accounting/consulting services that he or she delivers in relation to the competition in the existing market. different types of services fall at different points along the curve.
categories of services on the value curve
cobb asserts that the volume of legal work available in each market breaks down into four major categories. this categorization also applies to the accounting profession. the four categories are discussed in the following paragraphs.
commodity services: cobb states that 60 percent of the total legal work available in a given market falls under this category and the same is probably true for accounting work. in the accounting profession, commodity services include monthly client accounting services, simple tax return preparation and so forth. in the client’s eye any good accountant can do this type of work. in addition, an abundance of service providers do this work, which, in turn, maintains a lot of pressure on the fees.
brand-name services: this work is more routine but is more important to the client. clients requiring brand-name services will go to the firm that has established a position in that particular area. for example, clients that require corporate finance or securities and exchange commission (sec) services will most likely look to the big four or other large national firms. a local or regional firm that has developed a brand name in automobile dealership, nonprofits, real estate or health care, for example, would also fall under the brand-name service provider category.
firm size and reputation are important factors. to achieve this kind of recognition, firms spend a great deal on promotion, advertising, social media and attending industry conferences. about 20 percent of the total work available in a given market is brand-name. most small accounting firms do not have extensive brand-name recognition. the big four accounting firms certainly do as well as national accounting firms, such as grant thornton, rms, bdo and large regional and local firms.
experiential services: this is high-impact or high-risk matter for the client. the client will give it to the lawyer or accountant he/she feels has extensive experience in the area, such as real estate, business valuation or succession planning, and will personally handle the work. about 16 percent of the work available in a market is experiential in nature. the competition in this range is very limited. of all the accountants in your area, think how many would actually qualify for this type of work. obviously, not many. because of this, you will be able to charge a premium rate.
unique services: unique services can often address a life-changing event for the client. think of this as a life-or-death event. the client does not care what it will cost to solve the problem. the important thing is that the issue gets resolved. explosive interactions between family members in a closely held business, succession planning in a crisis situation, unraveling a complex partnership and imminent bankruptcy are all examples.
for unique services, the client will seek the firm or individual that he or she feels will best meet his or her pressing needs with little or no concern for the price of the service. less than 4 percent of the work in a given market is unique.
other considerations when using the value curve
cobb goes on to make several implications about the legal profession that again also apply to the accounting profession as well. let’s look at each of them.
first, according to cobb, not all work should be done with the average leverage of partners to staff. the mix will be different depending upon the type of service provided. a large audit will require a greater number of staff performing lower-level work than a more sophisticated merger analysis that requires specialized skills from one or two senior professionals. there is no leverage with the merger work and the weighted average billing rate will be higher than in the audit engagement.
second, because most firms develop their billing rates based on overhead, most professionals of a similar status carry the same billing rate. there is a basic assumption that all work will be performed at or better than the average leverage. as we saw above, the partner who is working on the merger engagement should have a much higher billing rate than work that the same partner might do on the audit engagement. there is a critical implication here regarding the work that a partner does that is below the average billing rate and that for the most part should be done by people with lower billing rates. if clients perceive that the work being done by the partner falls into the commodity area of the value curve, one thing will surely happen: the client will eventually leave the firm or require that the fees be adjusted downward. in most cases, the client leaves the firm because another less expensive, more efficient firm will come along.
third, having just one billing rate for all your services causes another problem on the value curve. all services in the commodity area (any type of compliance service) may be overpriced. as competition increases and clients become more sophisticated, clients will continue to perceive these as low-value services. to compete in this market, the firm will either need to reduce its overhead, develop more efficient systems and procedures to get the work out or learn how to better manage the engagements. if the firm cannot do any of the above, then it will ultimately have to discontinue that service area. we are witnessing this today both inside and outside of the accounting profession. some larger firms have given up the lower end of their market because they can no longer service it profitably. of course, the firm can always decide to continue to offer a service at a loss if they consider it to be a loss leader – that is, a feeder for more profitable work.
there are firms that are quite profitable doing work at the commodity end of the value curve. through proper staffing and efficiencies these firms are able to reduce the cost of the service for the client and realign the cost-benefit ratio. because of proper staffing there are fewer write-downs and write-offs. and, certain resources of the firm (that is, partners and senior managers) have more time to work on more valuable matters for the clients.
using the value curve to define market position
the value curve, as cobb notes in his article, can also be used to develop marketing strategies. the number one issue that most accounting firms face is how to differentiate themselves from all of the others in their market. this can be accomplished by positioning either yourself or your firm in one or more areas on the value curve.
it is unfortunate, but true, that in the minds of most clients there is little difference between most accounting firms.
one way to differentiate your firm is to create a market position or personality. the figure below provides a traditional positioning grid (sometimes referred to as a product space map) that you can use to determine your client’s perception of your firm and your competitors.
this is no different than when you walk into a supermarket looking for a box of cereal. do you want a high-fiber, low-sugar variety, or are you interested in high sugar and no fiber? you can imagine your confusion if you could not tell the differences between the boxes. you should be able to develop a perceptual space map that indicates where clients in a segment perceive the different competitors.
in additional to the four items listed, the firm can also be described as expensive or inexpensive, full service or limited service, aggressive or nonaggressive, innovative or conservative, providing timely service or late service, good value or poor value, having a good reputation or a poor reputation, being a high-prestige or low-prestige firm, local or regional.
given the various attributes cited above, where would your clients place you on this grid? is it the same place that you would place yourself? if you gave two different answers, do you want to be where you are? if not, what do you need to do to change your position?
for example, if you want to be known as a full-service firm but aren’t, then you may have to develop a more complete line of services. this may require a merger. or, if your firm is considered an inexpensive firm and you want to move up on this axis, then you might need to provide higher-value services to your clients.
selecting your positioning strategy is clearly a marketing task. it reflects your firm’s personality. clients should be able to distinguish your firm from the others. i know a local firm that has decided to position itself as innovative and aggressive, and everything that the firm does supports this image, from the look of its webpage to the kinds of professionals it hires. another firm in the same locale has positioned itself as the mercedes-benz of accounting firms. it is more conservative, seeks to serve established businesses and charges a premium fee for its services.
when all is said and done, it is the client who ultimately tells us what our positioning in the market really is and what our value is in relationship to other service providers. the key to your success is knowing what that value is.
as you now know, pricing – that is, fee-setting – is above all a marketing decision. valuing services needs to become an important part of your daily routine, not merely a mechanical multiplication of time and billing rate. we should look at hourly rates as just part of the evolutionary development in the maturity of the accounting profession.
other elements in the profession have come and gone; so will the hourly rate. if you are not in the front leading the change, then be prepared to be behind in more ways than one.