Greetings! We are still in Wisconsin … still a few miles from the Mississippi … still at my in-laws … and still working on the interior RV furbishings and modifications.
I hope you found my last video about 10x-ing (not 2 or 3x-ing) your goals to be useful. Because for the intelligent, sophisticated, experienced, nuanced business appraisers and advisors we’re supposed to be, we are kind of stuck in our ways! #differentiationthroughinnovation
On to this week. This is a conversation about pricing. And why do we struggle to price the value of a business valuation? Or a forensic accounting assignment? Or the mother of all unknowns, a litigation support engagement?
And if you’re new to the blog, welcome aboard. This is what we do!
Though this post will allude to value pricing, here is a NextGen accounting firm’s podcast that discusses the subject head on: Pricing Creativity.
My prediction: Timesheets and the billable hour will be dead by 2020. It’s only a matter of “time” until you decide to raise your white flag and embrace the change.
So all of you BVFLS experts out there … what makes a $10,000 business valuation worth $10,000? Let me tell you why it’s not worth $10,000.
Your hours worked
It’s not worth $10,000 if you base your price/client cost on the number of hours you estimate it will take to complete. When a mother gives birth, no one cares (for long) about the number of hours of labor … we just want to see the baby and count fingers and toes. If you are more effective and efficient than a colleague, your price will be lower all other things equal. If you are less so, your price will be higher all other things equal.
But the valuation is worth what it is worth regardless of your hours worked.
Your hourly rate
It’s not worth $10,000 if you base your price/client cost on your standard or effective (or desired) hourly rate. Question: Who decides your hourly rate? Answer: You do. Sure, you can argue that “the market” decides. But which market, exactly, are you talking about?
- The market for your years of experience?
- The market for the type of service rendered?
- The market for where you practice?
- The market for where the work will be performed?
But the valuation is worth what it is worth regardless of your hourly rate.
So if it’s not the hours or the rate, what is it? What makes the price/client cost of a valuation equal to its value?
The value of the problem
Now I am not saying hours and hourly rates mightn’t influence your price. But hours times rate IS a price, NOT a value … and we should know the difference. So it’s up to you to divine and communicate the value of the problem you are solving and reflect that in your pricing.
If your client has a $1 million dollar problem, your $10,000 fee is a no-brainer. But it’s up to you to demonstrate (or confirm) to the client that s/he has a $1 million dollar problem.
Here’s a stretch example – as in ok, Rod, I get it, but it’s a stretch. Your next client also has a $1 million dollar problem. Your hourly rate is $300. And you solve the problem in five hours because of your on-point knowledge/experience/resources. Will you only charge $1,500?
Because you can’t say hours times rate equals $10,000 to the first client and not say hours times rate equals $1,500 to the second client. And really, neither fee is priced correctly in those two scenarios.
One more example. If your client has a $10,000 problem, your hours times rate equals $10,000 fee is a tough sell. And you must decide the problem-to-fee ratio where s/he will bite.
You’re writing an engagement letter. You determine the scope of work based on a discussion with the client (and face it, many times we’re telling the client what we think they need), and then you price it out.
What if, instead, you had a conversation with the client to scope out the actual problem? Then lead with the value of the problem you’re solving, not with your cost to do the work.
Our fees should be based on the value our client receives (the pain relieved). We need to get comfortable with some projects that yield $1,000 an hour AND those that yield $100. AND position ourselves to get more of the former and less of the latter!
[Idea for a marketing tagline: I solve million dollar problems.]
Note also that the same service could have different values to different clients. That’s why one of the mantras of value pricing experts is to price the client, not the service. Otherwise, if the service will take you 40 hours and your hourly rate is $250, you will be leading with $10,000 as the price for the client with the $1 million problem AND the $10,000 problem.
In real life
Back in the day, I (along with many others) charged $10,000 for a $10,000 problem (when the annual gifting exemption was $10,000). But actually, the problem was half that – the tax saved on the gift. Frankly, I’m embarrassed.
But clients are smarter today. And there are more provider alternatives – more appraisers and more options like BizEquity.
We have little or no reality check for our fees – just anecdotal evidence we’ve gathered about what someone else charges or what “the market” will bear (and distorted by confirmation bias). We have to offer our clients something better.
Reading that can help
I have recommended this book many times on this blog: Implementing Value Pricing: A Radical Business Model for Professional Firms by Ron Baker.