Two words have become nearly synonymous with professional pricing guru Ron Baker - value pricing. But now Ron is now recommending a completely new business model for accounting firms. Why is it important for accounting professionals to adopt this new model? And what exactly is it?
This week at the annual Scaling New Heights Conference, I had the opportunity to sit down and chat one-on-one with Ron Baker, the internationally respected speaker, teacher, and writer as well as a radio talk-show host on The Soul of Enterprise. Before the conversation, I couldn't decide how to introduce Ron in this article, so I asked him to describe himself. His answer was simple, "Intensely curious." And that curiosity is the driving force behind the intellectual capital that he so freely shares with accounting professionals.
The ongoing conversation includes vast amounts of intellectual capital, but as the conversation began, I was skeptical about the notion of an accounting pricing model other than value pricing. By the end of the conversation, I knew that he was absolutely right. Read on and decide if you agree.
The customer is the product.
Ron joined KPMG straight out of college in 1984. Even as early as college, he knew he wanted to author a book. When he left KPMG, Ron opened his own firm and began studying Total Quality Service; now you probably hear it referred to as Customer Experience. Ron decided he wanted his firm to offer the same level of "total quality service" as that offered by giants like Disney, Lexus, and the other leading companies at the time.
Through Ron's studies, he developed the idea of value pricing. Value pricing never was a matter of economics or marketing; instead, it was all about improving the customer experience. Ron realized that premium and uncommon customer experience is required to command premium prices.
Here is an equation for you. Common service = common prices. That is an equation no one wants to define their firm.
Why is there continuing resistance to value pricing?
According to Ron, the move to value pricing is difficult for a variety of reasons.
Although professionals may not like the billable hour, they get it. They are used to it and they understand it. Entire systems, particularly legacy systems, are built around the billable hour, making the move away from it challenging.
"Part of the challenge is that it is just in our DNA to look at time rather than outcomes," said Ron. There is also a lethargy - what economists call satisficing, the combination of satisfy and sufficient. In other words. hourly billing is just good enough; it is an available option and it remains satisfactory.
It isn't a matter of what clients want. When determining how to price services, clients' perceptions of pricing should not be considered. "(Pricing) should not be a customer-driven thing," according to Ron. "It needs to be supply side. When new innovations come out, they come out from the supply side, not the customer side." Customers may reject the innovation, but the innovation still should come from the supply side.
When asked if accounting professionals were beginning to understand and implement value pricing, Ron replied. "The tide has already turned. We've hit a tipping point with value pricing. Somewhere between 30-40% of firms are doing it."
However, now that accounting professionals are implementing value pricing in increasing numbers, why is The Ron Baker proposing a new business model for accounting firms?
There is a new economy.
There is no doubt that we have entered the era of the subscription economy - a business model that involves exchanging desired content, products, and services for recurring, scheduled payments. Take a look at your own life. How many subscriptions do you have, not only professionally, but at home? Probably quite a few, because subscriptions by their nature are designed to provide frictionless and recurring value.
According to the CEO of Zuora, we will no longer be buying anything, simply subscribing to everything, in only five years. That may not be completely true, but, according to Ron, it is highly probable that in five years you will have the option of subscribing to everything. Businesses, including accounting and bookkeeping businesses, need to prepare for that.
In our conversation, Ron predicted, "The business subscription model is going to upend and revolutionize value pricing." Here is how it works.
In hourly billing, pricing is made based on inputs. In fixed-fee pricing, the pricing is based on outputs. As a result, many accounting professionals still value volume and activity over the deep, meaningful transformations they can help clients make, which is why hourly billing and fixed-fee pricing are so common.
However, as a profession, we already help our clients do the things they want, such as build their businesses, retire sooner, and have a different lifestyle. We just are not accustomed to using the language describing how we help clients get from where they are to where they want to be. We typically don't use the language of transformation.
The value pricing model encourages the use of transformation language. In value pricing, or what Ron now calls Value Pricing 1.0, the customer is priced based on the value created for the client.
Now that the subscription economy is here, there is also a new business model - the subscription model. In this model, inputs, outputs, and the customer are no longer priced. Instead, the relationship is priced. The subscription model is based entirely on creating time savings, convenience and frictionless and recurring value for the client.
"The subscription model doesn't just demand value ... it demands what Walt Disney called 'plussing'," Ron explained. It requires ongoing value coupled with continuous innovation in what is offered. "The model is going to force the profession to rise to a higher level of customer experience and really be change agents, help guide our customers from where they are to where they want to be."
What does medicine have to do with subscription pricing for accounting firms?
In a pure subscription model, accountants will provide services more as a concierge doctor does. In concierge medicine, a doctor is paid a certain amount - a substantially premium amount - to provide whatever the individual or family needs, with one caveat - what they are able to do.
A concierge doctor may only serve 50 - 600 patients. When compared to a general practitioner who serves an average of 3,400 patients, it is easy to see that concierge doctors are far more capable of not just learning about their patients and their needs (i.e., value pricing 1.0) but also of creating, maintaining and nurturing relationships with their patients. The doctor has far fewer patients but has a much bigger impact on their lives.
The caveat mentioned above is an important one. Concierge doctors provide the care they are trained and qualified to give. But, when a concierge doctor's patient needs specialized care beyond the doctor's ability, the doctor facilitates the treatment, even to the point of attending specialist appointments with the patient.
Ron has, "always tried to get firms to have fewer customers. To have a true relationship, you have to have fewer customers." Concierge doctors understand that relationship, but accounting professionals often do not.
In the subscription model for accounting, you will care for your clients in any way they need - that you are capable of doing. There is no scope of work. If something comes up that you aren't able to do, you don't simply make a referral but you also facilitate the activity. This model, based on a premium level of service, allows you to charge a substantial premium for your services.
What are the benefits of transitioning to a subscription model?
According to the AICPA, it costs 11x more to acquire a new client than retain one. With the subscription model, data shows that if a member retains the membership and engagement for a year, there is a 90% chance they will be a member for life.
Interested in learning more from Ron Baker?
During our conversation, I asked a specific question. "If an accounting professional only has the bandwidth to read one of your seven books over the next six months, which book do you recommend?"
His answer, "Read the 8th!" The latest book, Time's Up!: The Subscription Model for Professional Firms, is due out this fall. In the Ron Baker and Paul Dunn collaboration, you will learn how to create and capture more value in your business, with a focus on relationships and lifetime customer value. Times Up! can be pre-ordered here and will be available this fall
Other books by Ron Baker include:
- Professional’s Guide to Value Pricing
- The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services, co-authored with Paul Dunn
- Pricing on Purpose: Creating and Capturing Value
- Measure What Matters to Customers: Using Key Predictive Indicators
- Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth
- Implementing Value Pricing: A Radical Business Model for Professional Firms
- The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, co-authored with Ed Kless
Another great resource from Ron is The Soul of Enterprise business podcast. You can subscribe to The Soul of Enterprise here.