Ron Baker is long considered the godfather of value pricing. So I was thrilled to interview him and get the Ron Baker value pricing 101 straight from the man himself in a recent episode of the Future Firm® Accounting Podcast.
Ron’s book “Implementing Value Pricing” has had a huge impact on the profession. As good as it is though, there’s still some confusion on how to value price. In this podcast, Ron outlines the 8 steps to value pricing. In addition, we chat through some of his biggest tips & tricks that your firm can implement to master this method of pricing.
Check it out!
1:34 – What is Ron’s definition of value pricing?
2:43 – I’ve seen Ron talk about value pricing for years with great passion. I ask him why he’s so passionate about value pricing. In short, he wants to help the profession adapt to the future.
4:25 – Ron tells me the exact moment when he knew billing by the hour didn’t make sense anymore. Since Ron started using timesheets in high school, it was a big adjustment for him. The result was a much happier customer. He states that you can’t be a great customer service organization if you bill by the hour.
7:20 – When Ron realized that value pricing made more sense than hourly billing, how quickly did Ron eliminate his timesheet?
8:10 – Ron gives his take on whether you should start value pricing on new customers or existing ones.
9:27 – I mention that many firms engage in upfront fixed pricing but use a timesheet to see if their engagement was profitable after it’s complete. I ask for Ron’s opinion and he laughs at the absurdity of that concept. Ron goes deep on his take on this and talks about the flaws of cost accounting when measuring your engagement profitability. “Products and services don’t have costs. Firms do. Customers don’t have costs, firms do.” Ron says to look at maximizing profits over the entire firm rather than looking at profit by customer since profit by customer is far too arbitrary.
12:15 – We continue the conversation about measuring profitability per project. We talk about why it doesn’t make sense for pricing and for measuring efficiency. The answers provided will likely not make most accountants happy.
17:38 – “The fact of the matter is, value is subjective. It’s a feeling, not a number.”
20:00 – Ron’s book “Implementing Value Pricing” had a major positive impact on my own firm. The book lists 8 steps to implementing value pricing. I ask Ron to list out the 8 steps. He starts with step 1, the value conversation, which he calls the hardest step.
23:24 – Continuing on the topic of the value conversation, Ron throws me off when he says, “the value conversation is the closest thing business has to church.”
25:11 – Once the value conversation is complete, step 2 is to develop pricing options. Here, pricing the customer, not the services, is what’s critical. This is the premise of value pricing.
26:11 – I ask Ron how you actually pick that price. He states that the price is based on the value conversation and the impact you think you’ll make.
29:15 – We talk about establishing price. Price is not based on a formula. It’s based on what you’ve learned from the value conversation. Price is based on a feeling.
32:00 – While Ron doesn’t believe in timesheets, he does believe in forecasting your time requirements. Proper project management is not possible without it.
38:15 – We touch on step 3 of implementing value pricing is developing pricing options to present to your client rather than just 1 option. We speak about why 3 options is best.
40:30 – Ron also says that offering 4 pricing options can sometimes make sense. That’s the first I’ve ever heard him speak of this so I ask why.
42:50 – When presenting options, should you develop a tight price range or a wider one?
44:45 – The 4th step of implementing value pricing is presenting your pricing to the customer. Ron gives his tips on how to do it.
46:40 – The 5th step is developing the fixed price agreement. I wanted to know whether Ron finds that firms are having issues defining their services adequately in this step. What’s interesting is that Ron believes that you have to be a bit reasonable when it comes to scope and not niggle on every little thing that might be out of scope. This is different from what some in the space say.
48:40 – Proper project management is the 6th step. And this comes down to doing your timesheet in advance (ie. forecasting your time) in order to plan the engagement. Ron touches on the 8th step of implementing value pricing here as well, which is an after action review, which has to do with reviewing the engagement once it’s complete.
49:55 – The 7th step has to do with dealing with change requests when the engagement goes out of scope.
50:45 – We also chat about scope seep. That’s the first I’ve ever heard of this term. It has to do with when the firm does something not included in the mandate which the customer has never asked for.
52:13 – Ron’s number 1 tip to get started with value pricing? It’s 1 customer at a time.
53:49 – Value pricing is hard. Do firms need to be comfortable with making mistakes at the beginning?
56:00 – Ron has been involved in value pricing in the profession since the beginning. Where are things trending at the moment? For one, he says that 15-20 Top 100 firms are seriously going down this path. Interesting.
58:28 – Why does Ron think things are trending away from the billable hour? He thinks the big factor is technology.
59:30 – Ron lets listeners know what’s next for him (value pricing 2.0) and where people can connect. I’ll have to get Ron back on to chat more about value pricing 2.0!
Great chat Ryan, Ron’s been a thought leader for a long time, and there is no doubt every Accounting firm needs to be aware of and consider his ideas. However, I get slightly frustrated with his instant dismissal of some of the counter thought, ie maintaining time sheets to better understand how capacity is being utilised. How can it not be beneficial for a firm to understand when they’re not competitive with the delivery of a service or a segment of their clients aren’t performing and capacity could be better used else where.
Having said that, the industry needs more people to talk up and challenge the status quo, which is good for all involved.
Thanks Ryan, loving the podcast, bring on the subscription model 🙂
I can understand the frustration here and I think that’s what most firms have difficulty with. I think one argument is that timesheets just aren’t accurate. For instance, I know most, though not all, will not record time accurately for a number of reasons. Other reasons are mentioned in the podcast as well, but they usually don’t satisfy most accountants. I think for the most part it’s possible to “just know” which mandates are not working well without a timesheet…. again, another answer that most accountants don’t like.
Glad you’re liking the podcast and I’ll have to try and get Ron on the show again soon to chat about Value Pricing 2.0 🙂
Thanks for the comment, David. I feel your frustration with my dismissal of timesheets–I’m a former cost accountant. But there are better ways to measure capacity. Timesheets don’t have anything to do with capacity management since that we to plan capacity into the future, not by looking backwards. Capacity management is essentially analyzing opportunity cost, and that is done prospectively, not retroactively. If you analyze it retroactively, it’s a sunk cost at that point and it’s too late. I’ve written extensively on this, and it’s too hard to summarize in a comment. I understand it’s difficult for accountants to get this, but my mind has been changed by empirical evidence (Bain and McKinsey don’t do timesheets; Toyota doesn’t have a standard cost accounting system, After Action Reviews are far superior to timesheets, etc.). These facts challenged my worldview, so I researched them extensively, and changed my mind. You simply have to wrestle with this on your own. I’d be happy to send more information if you’d like.
Thanks for chiming in, Ron.
Great podcast! Very valuable information. As someone who just started on own, I find my biggest obstacles to be putting a monetary price on value… how to come up with that range. And another issue I have is when we all know the value should be high up there, but the client is used to lower fees (maybe because the previous accountant charged lower or the ratio between hourly fees and hours spent).