The merits of value pricing compared with the traditional billable hour have been debated within the accounting industry for many years. But according to today’s guest, Lee Frederiksen, managing partner of Hinge in Reston, Va., the coronavirus has increased the attractiveness of charging on value rather than time.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

There have long been industry-wide discussions about the merits of value pricing versus the traditional billable hour. However, according to today's guest, Lee Frederiksen, managing partner of Hinge in Reston, Va., the onset of the coronavirus may have increased the appeal of charging based on value rather than time.

What would you say are the benefits in general of value pricing over the more traditional strategies that we've seen?

[Frederiksen] One of the obvious things that comes to mind is that you can get paid for the value you deliver rather than the time that it takes you to do it. The fundamental flaw, of course, with time pricing is that it really doesn't reward people who work quickly, efficiently, and have higher levels of expertise. As a matter of fact, it can punish them. That's what people see on the outside, but, really, when you dig deeper, it's the alignment of expectations and the communication around what you're going to accomplish and the value of that that most people, when they experience value pricing, think are the big benefits. It helps you understand what the client really wants and what they really value.

How did the onset of the coronavirus pandemic increase the attractiveness of the value pricing model?

[Frederiksen] The biggest thing is I believe it exposed everyone to the digital model of professional services. That is, that you do not need to be face-to-face or even in the same city with a client to be able to provide services. Now, that's been in the marketplace and that has been a trend that has been building for many years, but I believe what has happened is it's really accelerated that trend. The good news is that allows you, if you have a very specialized service, to offer that service really anywhere you could legally offer it. Anywhere in the country and internationally as well because, all of a sudden, the constraint of geography has melted away quickly. That's the upside of it.

The downside of it is that you've just got a whole bunch of new competitors that you didn't realize you had, and that is firms from other parts of the country or even other parts of the world.

The Hinge Research Institute did a study on this topic and more in an effort to understand what clients want from their CPA firms in this, sort of, new normal. What did that study reveal to you about the value of value pricing and the drawbacks of the traditional models?

[Frederiksen] I think the most fundamental thing it showed us is that there is a great opportunity for accounting firms to offer advisory services along with more traditional accounting services. That clients really value that sense of perspective and planning that they get from firms. As a matter of fact, it showed that when you compare it to not offering advisory services as part of a package, you could increase the amount of your package by as much as 50% or more by adding that sort of advisory overlay. This is particularly important because so many services these days are becoming automated. If you're charging by the hour and you're automating your services, you're really missing the opportunity to add value. I think the big opportunity is to remove some of the drudgery by automation, but capture some of the value by adding advisory.

We talked about it a little bit there, but is there any extra or any more on this particular piece? What did your report reveal about the client need for consulting services versus those firms that are currently providing them? Is there opportunity there for firms?

[Frederiksen] There certainly is. As a matter of fact, one of the things we asked is, what are the areas where you would like advisory services? What are the types of services? This, of course, is helpful in planning services around revenue growth and business modeling. How do I model a business? What's the model for developing more revenue? About two-thirds of clients, 65% of them, said that's the type of advisory service they would like. Almost half, 46%, said they would like help in budgeting. Then, another almost 40% said tax planning and pretty much risk management. Interestingly, cashflow was also at roughly about a third of clients and advanced reporting on analytics and performance indicators. All of these things are really at the heart of what an accounting firm can provide, many firms can provide, and there's really a need that clients have. I believe that value pricing may be the way to really address that unmet need of clients

Are there tried-and-true, traditional ways CPA firms can go about increasing their value? Are there ways that are emerging?

[Frederiksen] I think that there are two ways that you can think about increasing your value. One of those is by bundling services together in a way that is easy for clients to understand and easy for them to use. This is what I would call like the packaging of services, putting together. So that is one task to do it. There is another path. It's a little bit softer to many people's thoughts, but it's perhaps as effective. That is understanding what your clients value and connecting the dots, if you will, about how your services address that.

I'll give you one small example of that. I was working with a decent-size regional firm that was focusing on a market that was heavily oriented toward growth. They were a venture capital or private equity funded company that needed to grow quickly. I remember one of the partners, their first remark was, "I don't see how we can help them. We're an accounting firm. We don't do marketing or sales support. How can we help them grow?" Of course, just take a moment, you stop and you think, "Well, does budgeting help you grow? Does cashflow improvement help you grow? Does a valuation of your firm help you grow?" There's many things you can do to help them grow, but you have to make the connection for your prospect and show them how the services you offer can help them achieve the goals that they're trying to achieve.

One interesting part of what you're saying there: CPA firms, they don't automatically have all the answers, right? So, what tips would you offer for firms that are starting out on building a successful value pricing approach? What do they have to do first?

[Frederiksen] I think the first thing is look for and try to understand where your clients are getting valued. There is some research that's out, and the study that the Hinge Research Institute did with Bill.com and CPA.com, all three organizations participated in this study. This is an example that will give you some information about the types of services that clients value, what sort of fees they're used to paying for, those types of services, and so forth. That's one step, doing your research, assembling the facts and information about what clients value.

Another thing is to consider asking your clients in your conversations, “What would you like more of? What are the kinds of services that you would like?” I think that simple act sometimes can open up opportunities that you don't have just by ... it starts the conversation and gets you thinking about what else you might do because, ultimately, you need to make a plan for what sort of services you're going to offer and how you're going to put those together in ways that are convenient for your clients to purchase.

What do you think it is that stops CPA firms from exploring the possibility of a value pricing approach? Are there possible drawbacks there? Is there a fear of the new? Are they too comfortable in what they do? What do you think about that?

[Frederiksen] I think a lot of it has to do with people who go into accounting, they don't go into it because they're seeking a high risk, high innovative kind of activity. Many people, they go into it because they're comfortable with the kind of work. So, changing things and approaching it in a new way and going into an area where you don't know the answers necessarily, I think that people can easily find reasons why they don't think that's a good idea. The data shows that clients accept it. Clients like it because it gives greater predictability in their fees. They understand more what you're doing and why you're doing it and the value that they might get out of it. For most clients, it's a win, but I think there's just that reluctance to change and not quite knowing how to do it, where to start. I think those are the things that tend to get in the way.