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In search of value

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18th Oct 2005
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'Price is what you pay. Value is what you get.' ' Warren Buffet

Richard Murphy's recent article entitled What price? generated a lot of comment on pricing and value on the subject of accountants' fees. All are agreed that higher value commands a higher fee. But what is 'value'? And how exactly do accountants 'add value'?

To quote from value pricing guru Ron Baker CPA, author of The Professional's Guide to Value Pricing (Now in sixth edition), 'all Value is Subjective, the Customer is sole arbiter of the Value which we in the Profession create, and Price determines Costs, not the opposite.' If you prefer an author with a longer and wider track record, here's what Peter Drucker said:

'What is value to the customer? It may be the most important question. Yet it is the one least often asked. One reason is that managers are quite sure they know the answer. Value is what they, in their business, define as quality. But this is almost always the wrong definition. The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.' (Management: Tasks, Responsibilities, Practices, 1993)

In 1997 the ICAEW published a 2005 strategy paper out of which came the 1999 publication 'Building the Adding Value Practice'. One of the core conclusions was that accountants need to add value. Applying the equation:

perceived value = perceived benefits ' perceived price

the report looked at strategies for:

1. Improving clients' perceptions of the firm's services
2. Improving the substance of the benefits provided by the firm
3. Reducing the clients' perceptions of price.

Unfortunately, it's now 2005 and too few firms have really got to grips with the report's suggestions. This may well be due to the fact that few firms have got to grips with what clients perceive to be 'value'.

To offer a high value service we need to consider the total ownership experience from the client's vantage point. Ron Baker suggests that your clients' interaction of your firm will generally revolve around three areas:

  • Quality
  • Price
  • Service

Focusing on quality alone gets you nowhere. Can you charge more for a 'quality' VAT Return? Can you get a company payroll 'more right' than another firm and hence charge more? In any event, clients can seldom judge the technical expertise of a professional anyway. Quality is assumed by the client, it's your admission ticket into the market in the first place. What clients are more interested in is how they are treated.

Price isn't much better. Do you really want your competitors to set your prices? How will people perceive your firm if you build your reputation on being the cheapest? Price alone doesn't attract business ' if it did we'd all be driving cheap Korean cars. There are enough Mercs and BMWs on the road to prove that low prices aren't everything.

So we're left with service. This is what clients perceive as value because it's the thing they actually experience. Most professionals lose clients not over price or quality issues, but rather over service related issues. Clients don't experience the processes that make up the output ' payroll, annual accounts, tax return, report, etc ' they just experience the output and how you deliver it.

How do you set value prices?

Traditionally accountancy fees have been set on a cost plus basis ' take your payroll and office costs, add a mark-up and there's your price. Unfortunately, this calculation totally ignores the client's viewpoint. To move to value pricing you have to turn the equation on its head. Value, like beauty, is in the eye of the beholder, so you need to start with the client. Understand their assessment of value in order to fix your price, and then use this to determine your costs, not vice versa. Notice how timesheets and hours worked don't play any part in the pricing process ' clients don't care how long the job takes or who does it.

According to Baker, nearly all the Fortune 500 companies in the US have a director of pricing or Chief Value Officer charged with setting and overseeing the company's pricing policy. (Over here this role is either assumed by the senior partner or an office junior!) Some accountancy firms are appointing CVOs themselves to enable them to create value and then capture it through pricing more intelligently. And you can be sure they're not under-cutting everyone else!

Some companies are good at this

Accounting firms can learn from the airlines' 'adaptive ' ticket pricing policy. As Ron Baker says, adaptive pricing gives people what they want ' at prices they are willing to pay. 'People who fly first class aren't treated the same as people who fly coach. They don't pay the same price, either. Yet as long as everyone on the plane receives the service they believe they're paying for, everyone will be happy.' Interesting to reflect on the fact that all the passengers fly to the same destination, in the same plane and arrive at the same time, yet some will pay ten times as much as others. Is this a principle we could apply in our profession?

Starbucks and Disney are obvious examples of companies who understand the value proposition. At Starbucks, a simple cup of coffee, wraps an experience around the product. An individual could easily spend a fraction of the amount by going to a local takeaway for a similar cup of coffee (die-hard bean counters will take a flask of their own coffee). But, the Starbuck's fan is willing to pay a premium for the experience and ambiance. Similarly, Disney does not sell tickets to theme parks, for example, but rather sells the promise of creating family memories. Once again, the consumer is willing to pay more because the perceived value is much higher.

Tune in to WIIFM

Applying these principles to accounting services we need to tune in to our client's favourite channel ' WIIFM ' 'What's in it for me'. Who wants to buy something marketed as 'tax planning'? Maybe you should re-label it 'We help you retire early' ' instantly we are offering something of value to the client. How about 'Business consulting'? Big deal! But if we brand it 'We help you sleep at night' maybe we would have more takers.

Of course, basic marketing theory tells us that clients buy only two things. Tax returns and accounts? No, only joking! They only buy two things:

- solutions to problems, and
- good feelings

So if you're not solving you clients' (perceived) problems or making them feel good you've got some work to do. That's a topic for another article.

Nigel Harris

* * *
Further reading:
Ron Baker's Verasage Institute website.

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Nigel Harris
By Nigel Harris
24th Oct 2005 20:27

Yes but
Alastair –
1. I think it’s more than supply and demand, see my follow up article.

2. Yes, fee levels may well reflect local supply and demand, but the aim of ‘adding value’ is to differentiate your service so you’re not tied to that pressure, otherwise outsourcers and other low cost providers will always under cut you.

3. You’re right on the thrust of the ICAEW report, I was really just underlining the unqualified use of the term ‘added value’ by those who should know better.

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By listerramjet
18th Oct 2005 09:15

mix up
what you are describing as value sounds more like supply and demand. It is a straight forward concept, and if you want to observe it in practice then visit your local market.

I think that many accountants do not properly understand that cost pricing is designed to give an understanding of how profits arise, rather than to provide a pricing methodology.

I would agree with the proposition that many accountants are more interested in their time recording systems than understanding the value they add to their clients, but in practice the (fixed)price they charge is more likely to reflect local supply and demand rather than hours worked times hourly rate, and it seems clear that in the modern world increasingly accountants are making use of the internet to supply their services to a wider geographically spread market place, so the competition is increasing.

I believe the ICAEW report you referred to was simply pointing out that many of the traditional accounting services are becoming commoditised in a competitive market supplied increadingly by those that are not accountants, and the value that the ICAEW can add is by changing focus to sell a service rather than the commodity. It was a simple message and it was a shame that they chose to wrap it up in so much jargon.

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