value pricers ignore half the pricing puzzle

profits.

by frank stitely
the relentless cpa

the best thing about value pricing is that you can succeed with just one piece of information – the value of your services to clients. you can toss your time sheets or any other cost tracking.

more stitely: beware the leeches and consultants | 2 lessons clients taught me | no consultant can solve your biggest problem | the great marketing hoax | what the value-pricers get wrong | 3 rules for asking great tax-return questions

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the income statement for a value-pricing cpa firm consists just of revenue – no expenses. expenses are irrelevant when we have forward-looking metrics such as client and employee satisfaction.

let’s have a little fun with the core tenet of value pricing. you only need know the value of your services to a client. you can ignore the cost of providing the services.

let’s assume that our value to our prospective client, sharon, is $20,000 per year.

value pricing theory holds that we can price our engagement with sharon up to the value of the services we will provide. if we leave some value in the engagement for sharon, she will accept the engagement as she profits more from accepting the engagement than from turning it down. because i’m a nice guy, i’ll charge $19,999.99. that leaves a penny for sharon. she still makes a profit on the deal, so she’ll jump all over this.

because you’re sitting here patiently, we’ll let you play and make a proposal to sharon. we are going to give you one little piece of information. this service will only cost $1,000 to provide. you have a service worth $20,000 to the client that will cost you only $1,000 to provide. what’s your bid to sharon?

because you know my bid was $19,999.99, you could safely bid $19,000 knowing you will get the business. somewhere a value pricing consultant reading this is having a convulsion waiting to tell me, “but frank, how would someone know what another cpa has proposed?”

this is how you know these consultants don’t work in cpa firms. all you do is ask sharon about my proposal. she’s dying to tell you. she’ll tell you my bid was $15,000. maybe you lower your bid to $15,000 or maybe you stick with $19,000. you’re still going to win the business.

then sheri comes along and bids $14,000 for sharon. now you lose. think about this. you lost a really profitable job, because you got greedy. sheri was just slightly less greedy. she wins – at least until john comes along and bids $10,000. and so forth. same as it ever was.

the value pricing dudes will tell you that we’re all just racing to the bottom. economists would tell us that we’re racing to a market equilibrium in which demand intersects with supply. in a market flush with firms hungry for business, the price will settle somewhere above cost, where a reasonable rate of return is achieved. i’m betting on about $3,000. doesn’t this example look a lot like the market for corporate tax preparation?

let’s change our example just a little. now, assume that our cost is $19,000, instead of $1,000. what’s your bid to sharon? you might not even make one. if you’re off just a little bit on your cost estimate, that $1,000 profit will be gone, and you could lose money.

let’s do a third example. let’s assume my cost to provide the service is $16,000 and your cost is $12,000. do you think that gives you a bidding advantage? of course it does.

cost matters. the only variable in our example was cost. cost drives outcomes every bit as much as client demand. that’s why income statements have revenues and expenses. value pricers ignore half the pricing puzzle.

they’re great on the demand curve, but ignore the supply curve altogether.

in the above example, we didn’t even question the $20,000 value amount. let’s come back to that and look at how that number was developed. let’s start with a simple example. let’s determine the value to a client of a basic 1040.

what is the value of a properly completed individual tax return to a client? think about how you might develop a method to compute this. the value pricing people tell you to look at the thousands of tax dollars you are saving for the client. compared to what? an incorrectly prepared 1040?

what level of incompetence are we to assume in making this calculation? are we talking about a preparer who takes his shoes off to calculate the standard deduction? are we talking a preparer who doesn’t know about itemizing deductions?

the real way to determine the value to a client is to examine the additional value any particular preparer brings versus the average preparer. if you’re an above-average preparer who saves a significant amount for clients more than the average preparer, you should get some of the incremental benefit.

this approach has a couple of hurdles to overcome. first, let’s consider the concept of the average preparer. obviously, none of us is average. we are in the top 10 percent of the profession. if you surveyed cpa firms across the country, how many would rate themselves as average? i’m guessing none, except for the maybe one guy with pathological honesty. however, on average the average cpa is, well, average. so industrywide, how solid is the foundation for the calculation of incremental benefit over the average preparer?

second, let’s assume someone really is above average. how does she convey that effectively to prospective clients?

“lookie, lookie, lookie me. i’m the bestest cpa in the world!”

you can hate that wording, but every assertion about being above average really boils down to some version of that line. to which the guy down the street responds, “she sucks. her clients get irs letters. i’m the bestest cpa in the world!”

whom does the client believe? the cpa proposing the lowest cost. because clients can’t accurately assess the quality of a cpa, they buy on price, which they believe they can accurately assess. they can’t accurately assess price, but they think they can, and that’s what really matters.

posted on january 23, 2019