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One of my teachers told me to draw a picture to better understand a problem.  So this crude chart is my attempt at making an economic depiction of the value pricing proposition compared to the hourly billing model.  Your service generally has a set value to the client, which is the maximum price they are willing to pay for your work.  If your price is based on hours worked as shown by line P, then as your hours increase, your price increases according to the rate. 

So long as your total hours keep your price under the value line, you will easily collect what you bill, as the client knows they would have paid more and feel they have received your services at a discount to their value.  However, if your hours put you at a price point above the value line, the client will either pay grudgingly or attempt to negotiate back down to the value line.  If you are consistently over this value line, you will encounter haggling with clients who don’t want to pay your price.

If you are consistently under this value line, then you are always leaving money on the table that the client would have given to you if you had asked for it.  This scenario is why value pricing increases profitability.  The efficient service provider is punished in an hourly pricing model (same profit margin with less total revenue), but will be rewarded in a value based model with a higher profit margin and higher total revenue.

Good economics dictates that firms wish to maximize profit, not billable hours.  Be efficient, deliver great value, and make obscene profits by pricing for value.

A post on CPA Trendlines has really hit the nail on the head with regards to some of the most compelling arguments to abandon an hourly billing rate in favor of a value pricing model.  The key to maximizing your take from what the market place will bear for your services is to walk away from the cost plus model of hourly billing and decide what work you are willing to do at what price.  After that decision is made, you just need to find the clients who see the same value in your services that you do and have the willingness and capacity to pay for those services.

One of the comments on this article outlined several client ‘reactions’ to bills.  The only time reactions to bills are even an issue is when hourly billing is used and the amount of time required is a bit ambiguous, at least to the client.  The professional may have had a good estimate as to total cost up front, or at least sometime in the middle of the engagement (especially if special problems have arisen that cause more work on the project). 

Had cost been discussed in total up front and been set so long as all goes as planned, these reactions would never take place, because the client and the professional would be on the same page in the beginning, instead of finding out there are differences at the end.  Value based, fixed up front pricing can save a lot of headaches, heartaches, and wallet aches for both the client and the professional as engagements with clients who don’t understand your value will not begin in the first place.

It’s not billable and it’s not CPE, so if there is a burner behind the back one, thatis where this issue resides.  It is a training and development issue, but it is not technical training and development, it is the training and development of soft skills.  The skills that CPAs infrequently tout, but frequently utilize are among the most important but most neglected skills for any professional. 

The lifeblood of the firm is the client base and the engine that keeps that work flowing is the firm’s staff.  However, firm managers are just expected to ‘know’ how to attract and retain good clients.  They are just expected to ‘know’ how to attract and retain good staff.  These skills come quite naturally to some, and they are seen as the ‘naturals’ but others can acquire many of these skills as well with the right training and some work at it. 

Especially considering that accountants tend to be introverts much more than the general population, these skills might be more difficult to come by naturally when your entire group is made up of accountants in the first place.  Not that introverts don’t have good soft skills, but sometimes they need to warm up to you before you see these skills.

The point is that firms train the skills that get the work done as CPE is required to maintain licensing, but don’t pay nearly as much attention to training the skills that bring the work in the door and help keep good staff happy.  To have a healthy growing practice, both must be trained at all levels of the organization so that all client and staff interactions are as positive as possible.

My experience is in a public accounting firm, where the staff are considered to be professional employees. As such, I would think we should be beyond the point of severe micromanagement, but apparently we are not. I have recently been reminded of this as I have had a couple large projects on which I am not allowed to use all of the resources at my disposal.

The tool I wish to use is a certain software program that has been recently acquired by the firm, and in my opinion, its usage would increase efficiency and reduce errors.  I guess when you bill clients by the hour efficiency isn’t everything.