Joe Woodard is joined by Mark Wickersham, a recognized expert on pricing for accounting firms and the author of number books, including Effective Pricing for Accountants and others, in this edition of the Scaling New Heights Podcast. Mark shares his insight on how to most effectively determine price for accounting firms.
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Full Transcript of the Episode Follows:
Thank you for tuning into this episode of the Scaling New Heights Podcast.
During this episode, we will talk with Mark Wickersham. Mark is a chartered accountant, public speaker, and number one bestselling author and he is known primarily as a thought leader in the area of value pricing.
Mark is passionate about the accounting profession's need to turn a corner on its pricing models and to more directly connect the way we price with the value that we bring. Unfortunately, the reality right now is very different from what Mark has envisioned and what Mark is passionate to create. Benchmarking studies show that over half of accounting firms are actually making a true economic loss.
The principles that we're going to cover in this podcast - my introductory matter about value pricing and my conversation with Mark - are designed to change that reality. Before we bring Mark on, I want to talk a little bit about what value pricing is, what it's not, and then I'm going to give you Ron Baker's five step process for implementing value pricing. That's a very high level primer on it, but I’ll still give it to you.
First, value pricing is not fixed fee pricing. Fixed fee pricing takes the cost you incur to deliver a specific service, or a slate of services, and then determines the price you need to set so your firm has a margin. Then you monitor the cost that you incur on a regular basis, you monitor the scope and nature of the services that you provide on a regular basis, and you adjust the fixed fee price so that you can maintain that margin, whatever your target margin is.
Now, fixed fee pricing is still an improvement over hourly pricing. Ron Baker says no one should price by the hour, because you're selling a product - an hour - to clients, and clients don't buy hours, they buy results. At least with fixed fee pricing you get the hourly rate out from between you and the client and you get to focus on the service that you're providing. Maybe without the distraction of the hourly rate, you and the client can focus more consistently on the effect, the ROI, that you are generating as a result of that service.
But value pricing is something completely different and much more powerful and potentially much more lucrative for your firm. Value pricing does not begin - or Ron Baker might even say, doesn't even consider - the cost that you incur. Maybe your management of your firm considers the cost that you incur, but the price doesn't. Instead, you begin with the value that you're going to bring the client; you begin with the effect that you're going to generate or, as Ron Baker would say, the wealth you create. Wealth is not necessarily limited to an increase in profit. Wealth can be determined by or based on an increase in infrastructure or a stabilization of infrastructure; it could be a reduction in the stress levels of management or ownership. It could be any of the intangible benefits of us working with clients as trusted advisers. But it definitely does include, and the client’s primary value perception might be, the financial wealth you generate.
Once you've determined the wealth you will generate, you price as a percentage under that wealth and not a percentage over the cost you incur. Only then are you pricing based on value which also tends to be fixed, but is not necessarily fixed. It could be dynamic as you generate wealth, as you generate that percentage under wealth, if that's a very defined process between you and the client. Now it means that we must create a result if we're going to create the kind of billings necessary, and I don’t even like the word billings, if we’re going to create the revenue for our firm that is necessary for us to have our own sustained model. But, if we're not in this to increase value for the client, if we're not in this to increase the client's wealth, what are we doing here?
Well maybe the answer is we're merely compliance officers and record keepers. Nothing wrong with recordkeeping, nothing wrong with compliance, nothing wrong with assurance. It’s just if your firm stops there, then it is not, in my opinion, fulfilling its mandate as a profession or within the profession. Instead, offer those things if you choose to offer them, but make sure that they are coupled with wealth generating services that require you to have a trust-infused relationship with the client, require you to be a change leader on behalf of the client, require you to orchestrate outcomes that generate wealth for the client, and then necessitate, if you're going to maximize your own revenue in light of your own unique abilities, necessitate that you value price.
Now that we've defined what value pricing is, let's talk about the five steps. These are Ron Baker’s steps as detailed in the book Firm of the Future, by Ron Baker and Paul Dunn.
Step one - discover what your client values. In other words, figure out what will generate wealth for them. If they are an inventory client, like a wholesaler, then figure out what their shelf life is. If that shelf life is too long and if you can significantly increase their wealth by shortening the inventory turn cycle, you can do that with the right kind of infrastructure, system, process, technology and measurements. Maybe if they're a law firm, it's non-production time. Somewhere in there you can reduce costs or maybe they need some market development services. They're not making the most of the products and services that they're already offering in a very streamlined way, and they can scale revenues disproportionately to scaling costs and you can guide them through that process. Find out what the client values.
Step two – find the way to leverage your knowledge to create that wealth. You say, “Joe, I don't have any specific knowledge,” or what Ron Baker refers to often in Firm of the Future as any specific intellectual capital, “that will help me to create wealth related to inventory turns.” Well, then I would say there are two responses to that. You can go get that intellectual capital or you can hire it. Or response number two is you're in the wrong niche or you’re looking at the wrong client. Find the client that fits the intellectual capital your firm possesses. Find the kinds of clients, whether that's a market niche or a kind of size of client or particular structure of business operations, but find that kind of client that already fits the intellectual capital your firm possesses, and then you won't have a problem with step two. Every time you determine what the wealth is you can generate, you will always find a way to apply your intellectual capital to that wealth generation and to do so with employed resources of your firm.
Now going outside your firm to contracted resources is another way to connect the dots between the intellectual capital required and the wealth that you must generate, but obviously your margins will be greater, even in a value pricing environment, if you can own the intellectual capital. That doesn't just mean you employ the person who has it in their brain, but it means that you take the intellectual capital into the systems and processes and documentation of your firm. When you own that intellectual capital and you deploy it on behalf of the client not only is your model more solid, but your margins will be greater.
Step three - communicate and, if necessary, educate the client on the connection between your knowledge and their wealth. Remember just having the information isn't enough. You must have the information and you must create a solution.
If I have a knee that hurts and I go in to see the doctor and the doctor expresses to me that they have knowledge on how to fix my knee and maybe they even start using a bunch of medical terms to describe what's wrong with my knee, but if at the end of the day my relationship with that doctor doesn't make my knee feel better, then the doctors provided no value to me. The doctor has maybe educated me a little bit, definitely exchanged hours for dollars, but they have not generated wealth: there is no effect. You need to connect the dots between your knowledge and your ability to generate the wealth.
Step four - set the price according to the wealth the client receives and remember to factor in the non-monetary increases in wealth - the overall well-being of the client as a result of their engagement with you.
Step five, the final step - connect the knowledge you provide the client to the wealth you created (past tense) for the client. In other words, step five isn't done prior to the engagement. Step five is the connecting of the dots after the engagement, because if you don't connect those dots and if you don't do it with measurable data points that you can tie back to the specific ways you made changes on behalf of the client, they won't necessarily connect those dots for themselves. And if they don't connect the dots, they won't see the connection between what they are paying you and the wealth you generated, creating resentment and perhaps even terminating the client relationship. So you have to bring it full circle in step five.
As a practical layer, I do recommend having a certain fixed fee going in, and this is a Joe Woodard recommendation, that you would just base on the measured value you create and that you measure that value incrementally. Then, you wrap up in step five at the end with a total value assessment of the engagement against the fees that you charge or the price that you set. Then when the client sees that they spent a dollar and they got $5 or spent a dollar and they got $10 or $50 or $100, they're going to be more ready to engage with you on the next wealth generating engagement.
So, that is a summary of value pricing and it's a perfect time now to drill down on the topic of value pricing with one of the world's leading authorities on the topic - Mark Wickersham.
Joe: Mark, it is great having you on today's Podcast. Welcome!
Mark: Thank you so much for inviting me. I'm really looking forward to this, Joe!
Joe: You have a lot to share and we've got a limited amount of time. You are known as one of the world's leading thought leaders and experts on value pricing. Why are you so fixed on this? Why are you fascinated by the topic? What drives you?
Mark: Great question! I think it stems back from when I started in the accounting profession myself, way back in the late 90’s. I started my own accounting firm in May 1996. Full of excitement, full of great opportunities, but I didn't realize at the time how hard the first two and a half years would be. In the first two and a half years, I didn't make any money whatsoever. I was constantly going back to the bank and asking for more finance. It wasn't until 1999 when I came across the concept of value pricing, and suddenly a light bulb went on for me, because up until that point in time I thought you had to keep time sheets. I thought you had to bill by the hour. I had no idea how to communicate value. All my clients were saying to me, “Mark, you're too expensive,” when I knew for certainty I wasn't.
When I came across a different way of pricing, value pricing, and started to put pricing systems in place in my accounting firm, the results just completely transformed. So much so that a few years later I was able to then sell my accounting firm to the managers in a management buyout. That was all thanks to the big turnaround because of pricing. That then led me on to now teaching other accounting firms and accounting professionals how to price. Up in the U.K., I've been teaching accountants since the year 2000.
The thing I love about pricing is the fact that more than any other topic, whether it's strategy, team building, marketing, selling skills, it’s pricing that has the fastest and biggest impact on our results. We can change the way we price today, and tomorrow, like that, our results will change. Whereas marketing for example, it takes a while to see the benefits, to see the results - sometimes 6-12 months. So that's why I love pricing; I think it's so powerful.
Joe: It is powerful and if it's tied back to value, you're absolutely right. You're going to communicate appropriately to the client why your price is set the way it is. It will be connected to their ROI, which is going to make the selling process better. And like you said, it's the fastest way to throw a trigger on increased profits. But in light of all of that, why are so many accounting professionals struggling with it?
Mark: That's a great question, and I do find this all the time. If I go back to 1999, way back then, I think value pricing was something new and nobody was accepting of that. They all thought you have to bill based on time. But I've seen over the last 10-15 years a big-sea change in attitude that now most accounting professionals recognize that we have to change, but so many say to me, “Mark, I just don't know how to switch from time sheets to pricing based on value.”
I think the reason it's hard, number one the biggest reason is because what's holding us back as a profession is a lack of confidence. When we have a lack of confidence we don't like to change the way we price, we don't want to push the boat out, we want to keep within our comfort zones. Yet confidence really comes from two things. It's about, number one, having the knowledge. When we understand and learn how to price and how to value price, it increases our confidence. When we couple that with the second thing, which is having some pricing systems - and that's what I'm really passionate about, giving people systems so they can do things, they can price the same way, the best way, every single time - and when you have that system and that knowledge, confidence goes up. Suddenly, when you're having the conversation with a client or prospective client, you get better results because you feel confident about what you can offer and about your prices.
I think I’m going to share one more quick thing, Joe. I think the other thing that is a huge thing that's holding us back in the profession is this big myth that we believe that clients are price sensitive. The reality is that is completely wrong. Clients are not price sensitive. That might sound a bit strange and I often get people looking at me strange when I say that and disbelieving. But the reality is clients are value sensitive and value sensitive and price sensitive are two very different things.
There has been some research by behavioral economists that show that yes, there are price sensitive people in society. It's about 20%, about one in five, and they are not the clients of an accounting or bookkeeping firm. The price sensitive people are people like the retired old lady with time on her hands that goes through all the free newspapers cutting out the vouchers meticulously to get a couple of cents off her butter. That's not our clients. The way I demonstrate this on the stage is I ask the question of the audience, “How many clients have you got that own an Apple product, whether it's an iPhone, an iMac, an iPod, whatever?” and all hands go up. I ask questions like how many clients have you got that drink their coffee, go and buy it from places like Starbucks, and all the hands go up.
If an accounting professional has got clients who are either buying from Apple or buying their coffee from Starbucks, for example, then by definition they cannot be price sensitive, because there are cheaper options out there. What we want, whenever we buy something, is we want value. What we have to do is when we recognize that, when we understand that, and it's a mindset shift, we suddenly realize that what we need to focus our clients' attention on is the value, the profit on the deal, and not the price. Yes, price is important but it is only one aspect of the value equation. The problem is because we have this mistaken belief that clients are price sensitive, we focus on trying to be competitive compared with the other accountants and bookkeepers down the road. That leads us all as a profession into a downward spiral of undercutting each other and getting cheaper and cheaper and cheaper. We have to get out of that spiral and recognize that what people really want is value.
Joe: I couldn't agree with you more. If that’s how they want to purchase - they want something valuable, they want something that’s a cut above, they want then I would say something connected to a projected return on investment. Can you just give me a couple of strategies? You have a section that you covered in your breakout at Scaling New Heights recently called “Five Strategies for Making Your Price Seem Really Really Small”. I can only guess that there's sort of an unspoken “. . .” there that says “in Comparison to Value.” Can you just take a couple minutes to give us a couple of those strategies that will help us set value and set price in the proper perspective?
Mark: Gladly! It's all about a tool I mentioned earlier - the value equation. The value equation is essentially the value to the customer is the difference between what they get, the benefits that they get, less the costs, which is your price. But it's actually not as simple as that, because there are different things that make up benefits and we have to understand what those things are. Also, we have to recognize that it's also about perceptions. Our goal is to make the gap between the price and the value seem as big as possible. The bigger that gap is, the bigger the value, the more likely people will buy it from us, and the more likely they'll buy at bigger prices.
Now, to make that gap bigger there are a number of different things that we can do. One of those we could do is actually reduce price, but I don't recommend that. We've done that for too long as a profession. To make that gap bigger we either add more value which is one thing that we do, and there's different strategies we can use to do that, but the other thing that's really key is there's this word perceptions. It's not actually about the absolute; it's about the client's perceptions of value and price.
You've asked the question about some of the five strategies about making price seem small. That's the power of price psychology and that's one of the strategies that we can use. It's all about making that price seem as small as we possibly can. I normally teach about 26 six different of these strategies and at Scaling New Heights, I taught five of them. I’ll give you one or two examples now.
One of those is something which I call “Don't Reveal the Headline Price.” There's lots of evidence and research that demonstrates how powerful this is; what that means is wherever possible don't reveal the headline price, which in other words is the total price. So, for example, if you were pricing annual accounts the mistake that we make is to give the price as an annual figure. The cost for doing a set of accounts might be, for example, $3,600. That’s the headline price to do the accounts. What we shouldn't do is give that headline price, because that seems a big number. What we do is we chunk it down, in the case of bookkeeping and accounting, we would probably divide it into a monthly figure and divide by twelve. So when you expressed that $3,600 as 12 monthly payments of $300, it's exactly the same number. The math of this is the same, but at the subconscious level price psychologists have demonstrated that we perceive that as being a lower number, because we focus on the $300 rather than the $3,600. This is why the leasing industry has been around for years making so much money, because the leasing industry never tells us the total payments we’ll make. They just quote the monthly figure and that always seem smaller than the headline price.
So, that's one idea that we should definitely be using - which is chunking the price down. That also works with one-off services. For example, if you are going to set somebody up with QuickBooks Online and you might decide that you offer that as a service for $3,000. Actually, it's better to spread it over a period of time and quote as a chunked down number. You’ll get a better result by doing that.
Joe: That is fantastic and I'd love to be able to cover all of them. I know you cover these in your book, so I would encourage everybody to go get those. And if you attended that breakout at Scaling recently, I know that you have absorbed those.
I want to say some time here for the seven-step formula. You talked a lot and the answer to one of the previous questions was about the need for systems. And if accountants had a systematic approach to the way they approached value billing - that’s the way we're built… we like checklists, we like methodologies, we like proven systems - then you're saying we would adopt better. But the fear of the unknown is a deterrent. So you have a seven-step formula and it operates as a system. You talked about it on the main stage at Scaling New Heights briefly and you covered it in-depth in your breakout. Can you summarize it here?
Mark: Glad to. What it gives us is a framework. Because as I said earlier, one of the biggest things holding us back is a lack of confidence and we get over that lack of confidence if we have a system. I'm an accountant myself and as you rightly said, accounting professionals love their systems, they love their checklists, their standard forms, their standard letters. I'm big into all that sort of stuff. So a number of years ago I recognized that every time I was pricing and teaching accounting professionals how to price, I was following a particular process, I formulized that some time ago and I’ve been teaching it as this seven-step process. Essentially, what happens is whenever you have the opportunity to price anything, if you follow the seven steps before you reveal the price to the customer then you will get a better result. And so this formula gives us a structure; it gives us something to help us formulate price.
Here we go very quickly. As you know I spent quite a bit of time on the stage at Scaling New Heights and I sometimes spend a full day doing a workshop on this. So, this will be ultra-quick. Here they are.
The first thing we have to do – and I think this is the most important message about value pricing - is that value pricing is something that, firstly, is subjective and, secondly, every single customer values things differently. That I think is another reason why we find it so hard to make that transition, because everybody values things differently. We don't know how much a client or prospective client is going to value things until we start have a conversation and follow a process. The very first thing we have to do - the first step in a formula, which I think is perhaps the most important step and if you just master this one step I've seen accounting professionals increase their average prices by twenty percent by just doing this one thing - is what I call price discrimination. It's what the economists label it, but it basically means charging different customers different prices.
My hero Ron Baker has a wonderful expression. He says, “we should price the customer, not the service.” That’s so true. We have to use techniques, and I think the single most powerful price discrimination technique for the accounting professionals is what I call menu pricing. It's about creating different packages and giving the client a choice. It actually goes deeper than this. What we should do, the general rule of thumb is that whatever we're trying to sell - whether it's bookkeeping services, accounting, tax returns, setting people up on QuickBooks Online - we should always (unless we can prove something else that works better) offer three packages.
I call it the magic of three. We haven't got time to go into psychology here, but all the most profitable companies on the planet all do this if you go and buy a latte from Starbucks, then you get a choice of three. You can have the tall, the grande, the venti. If you go on to Apple's web site now to buy an iMac computer, you'll see they offer you three choices. There's a very important reasons for the magic of three, which I talked about at Scaling New Heights. The general rule of thumb is to always create three packages, because what happens is the customer then gets to choose which package best represents value to them. Because every customer is different, you don't know which one they'll choose. By giving them choice, what some people choose to do is to pay you more money than had you just offered the one single solution that you might have done in the past. That’s the first step, then moving quickly to the others.
The second step is we need to add more value, which might sound obvious but this is crucial. We’re talking about value pricing. The more that we can add value, the more we can create a better solution. Firstly, there's more chance the customer will choose to buy from us rather than somebody else, because we're different, we're better. Secondly, they’ll pay a higher price. Of course, it’s in the client's best interest to add more value. So, we need to be creative. Whenever they ask us to do anything, there are always things that we can do over and above what we've done the past.
Step three is we have to better communicate that value, which is something as a profession we are not very good at. We seem to assume that clients understand what we do when we do bookkeeping or when we do accounts, for example. We have to use marketing language and techniques to properly communicate value. For example, when we do bookkeeping, we would reconcile the bank accounts, but the client has no idea what that means and the value to them. So we have to make sure we communicate exactly how they benefit from us reconciling the bank account. That’s the first three steps.
Then what we have to do in step four is make sure we communicate the payment terms as well because that's part of the pricing equation. At Scaling New Heights, I talked about the importance of being paid in advance not in arrears, because we're in the service industry; and I talked about how we do that.
Then, in step five, it's about coming up with the price. The key thing here then - because in the first four steps what we've done is we've built up the value, we've communicated the value and now we’re ready to give a price - but the key thing about step five is we have to price based on value. That means we never go back to the time sheets to look at how long the job will take because of two reasons. Firstly, nobody buys an hour of our time off us. When a customer buys from an accountant or bookkeeper they're buying a result, they're buying a solution, they’re buying peace of mind, they’re buying value; they're not buying an hour of time. Secondly, when we look at how long it takes to do a piece of work, there is absolutely no correlation whatsoever between the number of hours we spend doing the work and the value to the customer.
We have to, in step five, find a different way of pricing that relates to their perception of the value. At Scaling New Heights, I talked through a software system for doing exactly that to make it really easy to get much better prices and let the customer be empowered and in control of the buying process. Essentially, the software process I taught at Scaling New Heights was the customer gets to choose price. What price psychologists have shown is that when we are in control of the process as a customer and we can pick the various options and choose the price, we end up spending more money. That's really powerful.
Step six is the stuff we talk about a little while ago, which is the price psychology, and then making that price seem pretty small. Step seven is the power structures, things like the power of testing. We have to continually test our prices. So, there's a very quick whistle-stop tour of the seven steps, Joe. I think I've just about got all of them in.
Joe: You did and that was blazingly fast! That was incredible, especially since you know there's enough meat on that bone for an entire day one-day workshop. But I have no doubt these seven steps are covered also in the books that you’ve published. I do encourage everybody to go out and check those out.
A great way to wrap up would be you know how can people find out more and how can they learn more from you. A lot of folks were able to hear you by either watching our simulcast when you were on the main stage or by attending your breakout. We would love for you to come back if your schedule permits for Scaling New Heights 2017. But there is a lot of calendar between those two events and I know that people need to act now. Where can they go to drill down on us? Give them options.
Mark: First, I’ll be delighted to come back in 2017! Connecting to me is really easy. I'm big on social media. You can either friend me on Facebook but in particular connect with me on LinkedIn. I’m really easy to find. Connect to me on LinkedIn and what I do is when I have an accounting professional or an accountant or bookkeeper connects on LinkedIn, then within a day or so I always send back a thank you message. In the message I put some links to a whole bunch of free stuff. I send a link to a free e-book, a free in-depth video training program I've created, and tons of other stuff. That's the simplest thing - just find me on LinkedIn, connect with me, and I'll send you some free stuff. And if you want to friend me on Facebook, that would be cool, too.
Joe: Fantastic, and what's your website?
Mark: I have a ton of different websites, which is why I always say just find me on LinkedIn.
Joe: LinkedIn is the best way to go - LinkedIn and Facebook. Mark Wickersham, it's been fantastic really exploring this topic again with you right here after the show. I would encourage everybody not just to listen, not just to be inspired, not just to be intrigued, but to walk through the seven steps, to deploy the five strategies, to begin now to convert the way that you engage your client from selling hours to selling results, selling yourself, and selling again the value proposition you bring to your client relationships. It will change your world, but it will also connect your clients more deeply to the value that you bring and that will allow you to change their world.
Mark, it has been fantastic having you here with. Thanks for being here.
Mark: Thank you so much. It has been a pleasure, Joe.
Joe: Thank you for tuning into today's podcast and our conversation with Mark Wickersham.
For more information about today's episode, to explore other episodes in this podcast series, or to learn more about our annual conference, visit Woodard.com. As always we encourage you to stay tuned in, stay connected, never stop learning and Scale New Heights.