In parts one and
In parts one and two of this four-part Time-Billing series, Ron Baker explained why hourly billing is the incorrect theory of value, and why the firm of the future will price its services based on external value provided rather than internal efforts generated.
In part three, Baker explains the logic of offering fixed prices for all of your firm's services
One of the most successful methods adopted to implement Value Pricing is the Fixed Price Agreement (FPA). It is important to keep in mind that any FPA drafted between your firm and a client is the result of a conversation.
This is your chance to provide the client with a customised list of services to meet their specific needs and wants, to offer a fixed price for those services, specify the payment terms, the scope of services to be provided, and any other level of agreement reached. Thus, no two FPAs should look alike - they should be as unique and individual as your customers. The more customised it is, the higher its perceived value will be.
Advantages of the FPA
It pre-qualifies the client. Discovering the client's perception of value - before your firm commits any resources - is a better strategy than finding out after the service has been performed that the client has a lower value perception than you do, no matter how you price your services. Discussing price up-front puts these issues on the table, and in the long run will save countless hours and back-end costs in pricing disputes, write-offs, collection issues, and other problems that could have been avoided had there been better communication at the beginning of the engagement.
It is opportunity to cross-sell. By brainstorming with the client regarding future goals and aspirations, you will inevitably learn of many opportunities to cross-sell your firm's services. You cannot expect to automatically receive additional work from the client - you have to earn it by demonstrating that your firm is a better alternative than the competition. Empirical evidence proves that with an FPA relationship you will be more successful in obtaining additional work by focusing on value.
Value Pricing gains "ego investment" from the client. All of us want to be in control; this is basic human nature. By giving clients a sense of ownership over your firm's services, offering them choices and customising your delivery to meet their needs, you will get their "ego investment". Once people make a commitment, by and large, they will behave in a manner which is consistent with their vow.
Quoting fixed prices projects confidence and experience. Being able to quote a fixed price before the service is performed shows the client your firm is experienced and confident in its ability to perform - a trait valued by the client, even if subjectively. Imagine an airline not quoting airfares before the flight, but instead charging by the minute. How would you feel? Would you begin wondering if the pilot will deliberately slow down? Would it lower your confidence in the airline? The argument that the profession can't provide fixed prices up-front, is specious. Every other business has to do it, and we are subject to the same laws of economics, consumer and price psychology as everybody else. If you cannot quote a price before performing the work, perhaps you don't know enough about the nature of the work and shouldn't be doing it in the first place. Change Orders are designed to cover any scope creep, or unforeseen circumstances, which may occur (and will be explored in the next part of this article).
It increases a client's switching costs. The more services you perform for the client and the more you know about a client, the more expensive it will be for the client to defect. Creating a partnership with your client links your destiny and prosperity.
It forces your firm to be effective. By offering fixed prices, you must delegate the work to those in your firm who can perform it most efficaciously and not let surgeons pierce ears. It also forces you to review every procedure, work review level, etc., and ensure each task adds value to the client.
It overcomes buyer's emotions. Price resistance (sticker shock), price anxiety (buyer's remorse) and payment resistance (not paying the invoice) will all diminish by utilising FPAs. By discussing value, price, and terms up-front, you will diminish the negative impact of these emotions on the client, not to mention your firm's profitability.
The firm maintains the pricing leverage. A service that is needed is worth more than a service that has been delivered. If this is true - and it is - then why do firms insist on pricing their services after they've been delivered? Because they don't know down to the last six-minute increment how much time is going to be spent. This is precisely the problem with the labour theory of value - because no clients buys hours, they don't care how much time is spent. They only care about the value provided relative to the price charged. And they want to make that decision before they buy, just as you do when you buy anything as a customer. By pricing your services before you begin, you will obtain a higher price because you are removing the risk of the transaction from the buyer. You will also have the opportunity to educate the client as to the value you are providing (if they don't agree with your price) or withdraw from the engagement completely.
Prices can be increased more easily. When was the last time you raised your hourly rate? Do you believe there is a concomitant increase in value to any one client? I can assure you that your clients don't view the world that way. However, when you have customised services and pricing for each client, it is easier to increase the price.
It provides a competitive differentiation. Because each price is customised, the perceived value of your firm increases. In contrast, by using hourly billing, you are simply treating all clients the same, which is not a prescription for success in today's marketplace. Clients prefer fixed prices, up-front, and will continue to gravitate to those firms willing to offer them.
Obviously this is not an exhaustive list of the advantages of Value Pricing, just some of the most important ones.
Firms around the world have successfully implemented the Fixed Price Agreement and have seen many salutary effects as a result. They are cross-selling more services, obtaining a larger percentage of the client's wallet, are able to extract a premium price because they are bundling services into one FPA, and offering a service and price guarantee that lowers the client's risk even further.
Also, they are speeding up accounts receivable collection because the payment terms are agreed to up-front, and many of them are reporting negative WIP in some areas of their practice. Moreover, Change Orders are being utilised to capture the additional wants of the customer, and, combined with innovative pricing strategies (such as the "TIP" clause), firms are reporting some windfall profits indeed. One partner I know received a "tip" of more than $1 million for work he would have valued at $180,000 utilising the outdated hourly billing method. This illustrates the pernicious effects of being mired in the mentality that we must sell time.
The future is here, it is just unevenly distributed. The firm of the future will offer fixed prices, up-front, for every service it provides, just as every other business does. Firm leaders will remove the artificial ceiling they have placed over their firm's head by the antiquated hourly rate billing method. As a result, they will finally begin to get paid what their clients already believe they are worth.
Ron Baker is the best-selling author of The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services; Pricing on Purpose: Creating and Capturing Value; Measure What Matters to Customers: Using Key Predictive Indicators; and Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth.
Go to the final part of this series: overcoming the three pricing emotions
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