A growing number of industry pricing experts are urging CPA firms to jettison the long-standing practice of hourly billing and replace it with a fixed-pricing model, or even the more optimal model of "value pricing." Few public accounting topics spark as much controversy as this one.
To give members additional insight into this topic, the JofA sat down for a Q&A session with author and consultant Ron Baker, an unabashed value-pricing champion. This conversation provided an in-depth look at why firms should offer different pricing options.
Why does value pricing include different pricing options?
Baker: There are lots of reasons behind it from a research standpoint, but the big one is consumers love choice.
What we're willing to pay for something is insanely dependent upon what we compare it to. So if I say, "Would you like to buy my unicorn?" you have no idea what to pay because you've probably never bought a unicorn before. Offering three choices to the customer puts your product in context. It's why most businesses offer three of everything: small, medium, large. This is a well-known strategy because it comports with how consumers make choices and buy things.
How many options should CPAs offer clients? Is three the best number?
Baker: Yes. It seems to be the optimal number of options. Two is not enough, and I can give you a specific example why. When you put two options in front of consumers, normally they pick the lower-priced one. When you put three options in front of them, the majority of the time they'll pick the one in the middle. And it's because of a mental shortcut that we all use. It's a bias kind of built into our brain when we look at three of anything. You have to do at least three, and now once you get more sophisticated, then we've seen some firms do four options and sometimes even five, but that's very advanced. You can actually paralyze a customer by giving them too many choices.
So would a lower-price option mean that a CPA would produce a lower-quality work product?
Baker: No, not at all. Think about an airline. An airline offers first class, business class, coach, but they have to land that plane safely for everybody. As a CPA, you differentiate based on the service options that you're providing the client, things like turnaround time, payment terms, and how you are going to deliver your knowledge to your client.
Can you talk a little bit more about some of the service options CPAs can offer?
Baker: We have a model called "the six T's" for helping firms do this. One way to do it--and a very popular way--is timing. How fast will the work be turned around to the customer?
So the theory here is like FedEx. You can send something FedEx...