It’s been ten years since Ron Baker first published the Professional’s Guide to Value Pricing, but the technique is still only used by a minority of practices. Yet despite low-take up, it’s clear the issue remains a hot potato for the profession. Will value pricing remain on the sidelines, or is it about to enter the ascendancy?

For speakers with a professional view on the matter, not least of all Baker himself, business is brisk.

“I’m on the road about 220 days a year,” Baker says, “and value pricing is the number one topic people want to talk about.”

For those that don’t know, value pricing is precisely what it says on the tin: pricing your services around what you think they’re worth to the customer. Value billing, on the other hand, is the act of value pricing “in arrears”, charging what you think your work is worth to the client but only after completion of the job. It’s simple enough to explain, and it has attracted a lot of attention, so why have so few accounting practice implemented it? According to Baker’s estimations, there are roughly 90,000 accounting firm in the world (half of which are in the US), and only 3% to 7% of them use value-billing.

Baker argues that take-up has been slow because the move represents a fundamental change in theory. Indeed, it is a theory he has occupied himself with for many years. A well-read man who clearly does not shy away from abstract thought, Baker compares the shift towards value-pricing with the medical acceptance of germ theory, and says that diffusing a new theory into the population, be it scientific or otherwise, is measured in decades, if not centuries. His writing and speaking on the subject frequently makes reference to philosophers like Karl Popper, Immanuel Kant and Karl Marx, as well as the economist Adam Smith.

Off at the deep end

“I owe it all to the economists,” says Baker. “Adam Smith, Milton Freidman, Milton Freidman’s son David, and Steven Landsberg.”

These US free market thinkers are not surprising influences, perhaps, for a Californian who believes the accountancy profession is a business that should be defined above all else by what it can charge for. In fact, there is an American flavour to much of the value billing argument. The VeraSage Insitute, which Baker co-founded, asks its members to sign a “declaration of independence” akin to the one the continental congress adopted in 1776. Last month he described the billable hour (value pricing’s mortal enemy) as a form of communism.

Yet at the same time, Baker believes the world’s accountants share a body of knowledge that gives them more similarities than differences. Nevertheless, take-up rates have varied by country.

“In terms of the diffusion of the concept of value pricing, Britain certainly lags the rest of the world,” Baker reckons. “New Zealand or Australia are the leaders, with America second.”

It’s tempting to think this is a reflection of cultural differences. Perhaps British accountants don’t like to discuss the matter of money when they first meet a client, or as may be the case, the accounting market is just too staid. Either way, the low levels of value pricing in the UK and elsewhere may not be down to the radical nature of its theory. The billable hour, which value pricing aims to replace, only dates back to the forties. Billable hours and timesheets began with the law firms, and had become widespread by the sixties. It’s proof that the professions can adopt a new approach in a relatively short amount of time. So what’s the real reason why value pricing isn’t being used?

Practice versus theory

The truth is, when boiled down the theory behind value pricing is not complicated. Using value pricing in practice is where the headaches come in. Pricing itself is a tricky and intricate activity, and in the US there are even certified professional pricers who make a living out of doing nothing else. In Britain it is more often the work of market research companies. No surprise then that it can be a hard job for a partner in small practice or a small practitioner.

“There is no doubt it is definitely a separate body of knowledge,” Baker says of pricing. Knowing exactly how much to charge for your services when a new client comes into your office is what it comes down to. Is it really possible to learn that from a book? There are a myriad of differences that come together to make every new job unique. It’s also an aspect of value pricing where the theory contradicts itself somewhat.

Value-pricing is supposed to create a market-led, client-focussed competitive marketplace. It’s also supposed to boost your profits. And that is a big paradox.

“Of course we’re professionals, but we’re also business people,” Baker argues, “and I don’t see anything unseemly about charging a price centred around the value you create. Sometimes that could very well mean a lower price.”

Really? Rather than invoicing your billable hours and charging, say, £1500 (which you believe they will happily pay), you value price, decide what your work is really worth to the client, and charge £1200. For most people, that would be a decision that flies in the face of normal economic behaviour. And the problem theoretically, of course, is that the market isn’t really making that decision: you are.

The importance of value

It may be the reason why value pricing is done by so few firms is because the firms that are doing it are market leaders, offering exceptional service and heavily specialised knowledge. For these elite few value pricing is surely often little more than naming their price.

After that, there may be a few other firms who practice value pricing or are experimenting with it, or regional pockets where it could just be the norm. But for the average firm, value pricing may not be way to go.

One issue could be that you end up charging clients wildly different sums for the same work.

“I’m not comfortable with that at all,” says one partner in a south east firm, who says he is interested in value billing but has reservations. “Clients talk. It’ll create bad feeling.”

“That’s an objection we hear a lot,” says Baker, “but I doubt very much that clients sit around talking about how much they spend on their accountant. And there are ways to get around it, if you’re dealing with a family member or close cousin, you can keep the prices relatively simple. But the other thing that bugs me about this argument is no two clients are the same.”

Airline passengers happily pay wildly different prices for the same plane trip, Baker argues, so why wouldn’t your clients? It’s an interesting perspective, but it is also worth pointing out that the billable hour prevents these problems occurring in the first place.

Another area of key concern is that value pricers are supposed to ditch their timesheets. They may be the bane of your office life, but timesheets are a useful management tool, and on occasion they collate handy information to present to the client too.

“You have to get rid of the timesheets,” Baker argues. “They are the ultimate cancer. People say they’re for cost accounting, but if they’re there you’ll use it to price. You’ll link labour to value and that’s an idea that goes right back to Karl Marx.”

Value pricing requires a certain leap of faith in those regards, and faith is an issue that does tend to crop up in this field. Earlier in the year Baker received an e-mail asking him how to implement value pricing.

“It is simply impossible to know ‘how to’ do something until you attempt it,” Baker responded on the VeraSage website. “This is why VeraSage recoils at ‘how to’ questions, especially when people want to dive right into them without first understanding the ‘why to’ questions. Tiger Woods didn’t ask ‘how to’ become a professional golfer.”

Baker’s books do provide guidance on this, however. The Professional’s Guide to Value Pricing features chapters on how to establish a pricing cartel and how to appoint a Chief Value Officer, amongst other things. But surely the simplest way for most accountants to make sense out of value pricing is to forget about the pricing bit, and just concentrate on becoming more valuable?