- In an attempt to learn more about Ron Baker’s theory of value pricing, and its application, your Editor did a little reading. (See our simultaneous post ron baker: sensitive guy?, April 21, 2005). Below are excerpts from Ron’s writings about price sensitivty or elasticity, premium pricing, Change Orders, and related topics:
- Ed. Note: Baker has taken some of his most frank and troublesome phrases out of articles mentioned here at f/k/a. In some instances, the version quoted is no longer available online, and we’ve had to link to subsequent, scrubbed versions.
In the article “Hourly Billing Limits Profitabilty” (SmartPros, Jan. 2000; originally published in 1999, Harcourt Brace) Ron Baker says:
“This leads into price psychology, which has two components: (1) price leverage and (2) pricing emotions. Regarding price leverage, the important point to remember is that you want to set prices when you possess the leverage. Leverage does not imply an advantage possessed by one party over the other; it is more a question of who has the most (or least) price sensitivity at a given point in time. Professionals possess the leverage at the beginning of the engagement, before they have done any work. Therefore, that is the point in time when we can command the highest price. After the work begins, the leverage begins to shift to the customers. Once the work is completed, customers possess all of the leverage, and the professionals are left begging to get paid (ever the hourly rate).”
In “Pricing Strategies” he explains:
“Price leverage is basically the question of who has the most price sensitivity at a given point in time. Before any services are rendered, the professional possesses the leverage.
“. . . If you cannot conquer price resistance through educating the customer, then I would seriously suggest you not take the engagement. Never decrease your price in order to acquire a customer suffering from price resistance – that cheats your firm’s best customers, those who value what you provide, and subsidizes your worst customers, those drawn to you by price considerations alone.
“. . . By understanding price psychology, you will be in a better position to negotiate and command prices at the high end of the market.”
[Editor's note: Apparently, lowering a price for a price-sensitive client is unfair to other clients, but letting the price-insensitive client pay two or three or ten times as much as you might have charged another client is just fine. Go figure.]
In another article, Baker is quoted:
“We are advocating the CPA firm should charge commensurate with the value to the customer, which has no relation to the internal hours that it takes. . . . You have to gauge the client’s price sensitivity one at a time. “
In the Introduction to Baker’s The Firm of the Future, a chart showing price sensitivity is “affectionately” called “The Beloved Value Curve.” [at 4] Here’s what Baker says about the beloved chart [at 5]:
“The curve shows the relative value added by the professional has an inverse relationship to the price sensitivity of the customer . . . For now, it is important to understand your firm is all over this curve for any one given customer, at any one point in time. The major mistake professionals make is in treating all customers equally by pricing their services with one hourly rate method, no matter where they are on the curve. The old practice theory has no mechanism for capturing – with innovative pricing policies – varying levels of value provided by the firm. One of the main objectives of this book is to help you understand where, exactly, you are.”
In another article, “Change Orders: What a Concept!” Baker tells his CPA audience: (emphasis in original)
“The moral: Always set your price when you possess the leverage.”
Baker then suggests ways in which the client can be maneuvered so that “a premium price” can be charged:
“A favorite way to make the client insensitive to premium fees is the use of Change Orders when services are needed beyond those covered in the initial fixed-price arrangement [no kiddies, pricing can't really all be done up front].”
In a subsection titled “Change Orders Indicate a Climb up the Value Curve,” Ron gleefully points out that “One of the greatest advantages in using a change-order policy for all scope changes is that they point out value pricing opportunities.” Baker’s parting wisdom: “change orders have ‘value pricing’ written all over them and should be priced accordingly.”
Finally, if you’d like to see some of the results Ron suggests can be had using his value pricing techniques, strategies, and psychology, see “Change Orders and Innovative Pricing Methods,” (SmartPros, Jan 24, 2000). It seems that clients, properly “leveraged,” will offer to pay two or three times as much (sometimes ten times as much) as a professional’s regular fees, and the professional can sit back and rake it in, righteously smoting the evil hourly billing system and increasing the client’s perceived value. (The shrewd professional will even give the client a discount off the 200% or 300% premium fee the client has offered to pay — earning both merits points in ethical-code heaven and the client’s trust and loyalty.)
- Find further response to Ron Baker’s approach to value billing in his Comment and my reply here.