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Monday, March 6. 2006
You Are What You Charge
GET THE FREE EXECUTIVE PREVIEW HERE.
What do your prices say about you? If you're not thinking about the value of your products and services, you're not doing your job. Are you priced right?
LOOK INTO THE STUDY'S KEY FINDINGS AND TABLE OF CONTENTS.
by Rick Telberg
At Large
We are gathered here today to bury the billable hour, not to praise it. For there is little to praise in the billable hour.
With apologies to Shakespeare, no one I know has unqualified praise for the billable hour. The best an accountant can say is, "It's easy. It's clear." There are some who say billable hours are fair, but even that's arguable today.
In fact, the billable hour may be one of the worst things that's ever happened to the CPA profession. I am not here to urge the profession to raise or set prices. But I am suggesting that faulty thinking about pricing is at the heart of many of the profession's business and economic issues.
And we're not just talking here about CPAs in public practice, it applies as much to financial executives and managers in private business ? you have a special responsibility to bring empirical thinking to the often fuzzy-headed thinking about pricing in most businesses.
Ron Baker would agree. In his new book, Pricing on Purpose, the international guru of "bury the billable hour" argues with erudition and a delightful sense of humor that professionals are failing to use all the skills at their disposal to properly analyze pricing policies and implement value-driven strategies. As a result, they've commoditized themselves and their businesses into a corner, have fed off scraps of profit margin and have taken to eating their young to survive.
GO TO THE FREE DOWNLOAD PAGE.
What do your prices say about you? If you're not thinking about the value of your products and services, you're not doing your job. Are you priced right?
LOOK INTO THE STUDY'S KEY FINDINGS AND TABLE OF CONTENTS.
by Rick Telberg
At Large
We are gathered here today to bury the billable hour, not to praise it. For there is little to praise in the billable hour.
With apologies to Shakespeare, no one I know has unqualified praise for the billable hour. The best an accountant can say is, "It's easy. It's clear." There are some who say billable hours are fair, but even that's arguable today.
In fact, the billable hour may be one of the worst things that's ever happened to the CPA profession. I am not here to urge the profession to raise or set prices. But I am suggesting that faulty thinking about pricing is at the heart of many of the profession's business and economic issues.
And we're not just talking here about CPAs in public practice, it applies as much to financial executives and managers in private business ? you have a special responsibility to bring empirical thinking to the often fuzzy-headed thinking about pricing in most businesses.
Ron Baker would agree. In his new book, Pricing on Purpose, the international guru of "bury the billable hour" argues with erudition and a delightful sense of humor that professionals are failing to use all the skills at their disposal to properly analyze pricing policies and implement value-driven strategies. As a result, they've commoditized themselves and their businesses into a corner, have fed off scraps of profit margin and have taken to eating their young to survive.
Baker is nothing if not controversial. And his views, while widely listened to, are hardly ever fully embraced. But his is a voice crying out for truth and light and calling for transformation. And an increasing number of professionals are joining his following. "Some call it a cult," he quips.
Using economic theory and business case studies, Baker argues for a new awareness of the basic concept of price elasticity, something we all learned in Economics 101 and promptly forgot as soon as we entered the real world of business.
"There is no such thing as a commodity," he declared in a conversation with me. "Enron, if anything, should have taught the profession that the audit is not a commodity."
There are, in essence, three basic pricing methods:
1. Cost-based pricing.
Set your price as a multiple of cost, maybe three times what you'd pay a staffer to do the work. This is, by far, the most common method in accounting firms today, but rare in other industries.
2. Market-based pricing.
This is the most common and, many find, most realistic method of pricing for small and medium-sized business. If everyone else charges $24.95 for an oil change, you do too. The problem is that too many business owners, seeking a little more volume, try to charge a buck or two less, leading to a downward spiral of prices, tightening margins and market consolidation by a competitor who can adopt vale-based pricing.
3. Value-based pricing.
Price is an art, not a science; value is the eye of the beholder ? the client. Computer software, for example, is most often priced according to the time-savings and productivity gains, rather than direct cost. Airlines and hotels use value pricing, which you know if you've tried to compare ticket prices with fellow travelers ? no two passengers on the same flight, it seems to this frequent flier, pay the same price.
The discipline of value-pricing forces the provider to understand more completely the real benefits, if any, of their service, and to develop new products and enhancements with definable value propositions.
Failing to understand the value you're providing, or the value the customer really wants, is a recipe for obsolescence. CPAs can't let than happen ? not to the profession in public practice and not to the profession in private industry. Financial executives have a special and unique responsibility for working with operations, sales and marketing departments in determining value breakpoints if their businesses are to prosper and grow.
Pricing strategy simply must become part of the accountants' tool bag. Without it, the accountant cannot truly be a well-rounded business adviser.
Using economic theory and business case studies, Baker argues for a new awareness of the basic concept of price elasticity, something we all learned in Economics 101 and promptly forgot as soon as we entered the real world of business.
"There is no such thing as a commodity," he declared in a conversation with me. "Enron, if anything, should have taught the profession that the audit is not a commodity."
There are, in essence, three basic pricing methods:
1. Cost-based pricing.
Set your price as a multiple of cost, maybe three times what you'd pay a staffer to do the work. This is, by far, the most common method in accounting firms today, but rare in other industries.
2. Market-based pricing.
This is the most common and, many find, most realistic method of pricing for small and medium-sized business. If everyone else charges $24.95 for an oil change, you do too. The problem is that too many business owners, seeking a little more volume, try to charge a buck or two less, leading to a downward spiral of prices, tightening margins and market consolidation by a competitor who can adopt vale-based pricing.
3. Value-based pricing.
Price is an art, not a science; value is the eye of the beholder ? the client. Computer software, for example, is most often priced according to the time-savings and productivity gains, rather than direct cost. Airlines and hotels use value pricing, which you know if you've tried to compare ticket prices with fellow travelers ? no two passengers on the same flight, it seems to this frequent flier, pay the same price.
The discipline of value-pricing forces the provider to understand more completely the real benefits, if any, of their service, and to develop new products and enhancements with definable value propositions.
Failing to understand the value you're providing, or the value the customer really wants, is a recipe for obsolescence. CPAs can't let than happen ? not to the profession in public practice and not to the profession in private industry. Financial executives have a special and unique responsibility for working with operations, sales and marketing departments in determining value breakpoints if their businesses are to prosper and grow.
Pricing strategy simply must become part of the accountants' tool bag. Without it, the accountant cannot truly be a well-rounded business adviser.
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