Art Of Value

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The Who, What and Why of Value with Ed Kless – 118

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In this episode, Ed Kless and I discuss his recent trip to Australia. He was in Melbourne to present a strategy workshop and speak at Sage Summit 2017. We explore the strategy framework of Why, Who, What and How. Then, we review his sessions from Sage Summit, Healing Leadership and Innovation Beyond Technology.

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The Legacy of Value and Pricing with Paul Kennedy – 105

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Paul Kennedy is a co-founder and partner at O'Byrne & Kennedy (OBK), a chartered accounting firm in the United Kingdom. He is also a Practicing Fellow at VeraSage. In this episode, we explore the OBK journey to value pricing. In the first segment, Paul explains how OBK transitioned to value pricing over a 5-6 year period. During the second segment, Paul discusses the influence of value pricing on their customers and services.

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The Switch to Value Pricing

What is the most important thing you can share about pricing?

Pricing is worthy of the attention of every business owner. Even a small change in price can have a disproportionate impact on profitability. However, few service professionals give it the consideration it deserves. This is the pricing paradox.

What was your first exposure to value pricing?

Paul Kenney went to an Accounting Bootcamp taught by Paul Dunn and Rick Payne. They taught that accountants could offer more value if they simply did what their clients needed. Paul K. came back and started focusing on creating value for clients.

Later his business partner, Paul O'Byrne, went on a speaking tour with Ron Baker. Due to Ron's influence, O'Byrne & Kennedy stopped tracking time in their accounting practice. They came to refer to their business as the “Ron Baker laboratory”.

O'Byrne & Kennedy learned value pricing in three stages.

  1. Start pricing in advance.
  2. Offer the customer options.
  3. Stop pricing your own work.

What advice would you give to a firm that is ready to make the transition?

  • Determine how you create value.
  • Determine for whom you create it.
  • Select your strongest value proposition.
  • Write a proposal and price on purpose.
  • Believe you create value and experiment.

How has the CitizenM Hotel avoided the commodity trap?

The hotel selected a target market they call “mobile.” They tailored the value they create specifically for those travelers. The room key is delivered from a kiosk. The rooms are small, with high-quality mattresses, blackout shades, and free wifi. The lobby is a large open area with a 24-hour coffee bar. They only offer services their guests truly want. (Disruptive Business Models by Paul K.)

The Practice of Value Pricing

Why do you advocate firing the customer every year?

At the end of each contract, the client is technically no longer a customer. OBK asks the client if they delivered the value that was expected. They also ask the client what they could do better in the future. OBK does not assume the client will remain a customer.

What is the OBK MBA?

OBK targets business owners who believe they can do something extraordinary with their business. OBK found these individuals were very aware of their personal development. They created an educational framework to teach their customers what they need to operate a successful business called the OBK MBA.

How do you approach the value conversation with a customer?

Paul has a very candid conversation with the customer about their goals and how OBK can help achieve them. Occasionally, he has to be sensitive that now is not the right time for a conversation. Ultimately, he wants to provide the services the client truly needs and those can only be uncovered through a value conversation.

What is the state of value pricing in the United Kingdom?

It is common for professional firms to offer fixed prices. However, it is market driven. Value pricing is not very well understood.

What is one of your best stories about creating value for a customer?

If you help two customers create 1-million dollars in value, their perception of the value is not the same. It depends on the context of each customer and their view of your contribution to creating the value. The customer is always the hero in the collaboration.

About Paul Kennedy

Discover Impact, Meaning and Feeling with Matthew Tol – 098

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At times, value pricing can seem complex. However, if you boil it down to the core elements it is listening to the customer, discovering the impact and then creating options. Matthew Tol is passionate about the fundamentals and believes you should expand discovery to include the meaning and feeling to the customer to fully understand the value landscape.

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Listen to the Customer

  • What is the most important thing you can share about pricing?
    • You are never going to get it right.
      • Be approximately right, rather than precisely wrong. – Ron Baker
    • It's about the customer and what he values.
      • If you can articulate that, then he will get more involved in the engagement.
    • There is a different price for everyone.
    • You have to help the customer discover the value, letting him put it into his day-to-day work.
    • Accounting looks backward telling you what happened.
      • Value pricing looks forward.
    • Be less prescriptive and more open to variables when you are pricing.
    • It is a future-based process, to help the customer discover the value.
  • How do you help a customer see the hidden value?
    • The questions that you ask that start with “what” and “why” help the customer reframe the problem.
    • Prescription without diagnosis is malpractice.
    • Many times the customer doesn't know what the problem is.
    • You are a guide to help the customer diagnose, which is when you can help them discover the value.
    • Challenge the customer's answers to your questions and reframe them in a different context to take the conversation to a higher level.
      • If you aren't challenging a customer's thinking, you are just a robot.
    • Listen to what the customer is really saying.
      • Stop rushing to conclusions.
    • It's better to have the humility to tell a customer that you will work with them to solve the problem, rather than being a solutionist.
    • Listen to respond, rather than listen to react.
  • Can a professional learn to ask probing questions?
    • Recruit specifically for people who have the potential to learn the skill and then train them.
    • Each person has to develop his own style, but it is about the outcome you want to deliver.
    • Don't forget to allow for silence.
      • In a vacant space, most people will start blurting out the real issue.
      • You get a far better outcome by letting silence be your friend.

Discover Impact, Meaning, and Feeling

  • How did you make the transition to value pricing?
    • In 2006, he made the switch, after discovering Ron Baker.
    • In a traditional accounting firm, you have to record your life in 6-minute increments.
    • He was always the last to do his time sheets, even though he was a partner.
      • He felt recording your time and multiplying by an arbitrary rate was a waste of time.
    • One thing that he found offensive about time-based billing system is the flashes fo brilliance you get are not billed.
      • When you get the 30-second flash of brilliance in the shower or while fishing, and how do you charge that customer?
    • It doesn't value the professional.
    • They no longer have toxic relationships with their customers since unexpected bills are no longer sent.
    • Engineers and accountants created the billable hour system, trying to make everyone extra efficient, without considering effectiveness.
    • Adding value makes a difference.
    • Recording time you spend on a file doesn't matter; the decision you make as a consequence is what matters.
    • Pricing on the result rewards the professional if he can do it faster.
    • You can only flourish if you have time to “chase the rabbit down the hall”, which a time-based business does not allow.
  • How do you approach having a value conversation with a customer?
    • First, discover the real issue the customer needs to solve.
    • Take the customer through questions in 3 major areas:
      • Impact
      • Meaning
      • Feeling
    • Take the conversation from external to internal to understand the value of undertaking the project.
    • Once the value is discovered, the price doesn't matter as much.
    • It's not about you; it's about the customer.
    • If you've walked them through this process correctly, you will leave them wanting the value you are planning to create.

Create Your Best Option First

  • What is one of your favorite ways to offer options to a customer?
    • Start with the Works Burger – everything.
    • Pare things out from that starting point.
    • Place the highest value option first and then strip things out until you get to the base model, understanding what is missing.
    • Try to repeat back to the customer what he wanted through the options, using his language.
    • Communicate with the customer the way he wants to communicate.
  • How can a counselor who helps men overcome porn addiction offer options?
    • The Art of Value Society has a member who coaches men to overcome their porn addictions.
    • He asked how to price it, and we made a commitment to discuss the question on the show.
    • You're dealing with people on a personal level who understand they have an issue.
    • You might need to go through a discovery process with them, to root out the deep-seeded issues.
    • Take them through the impact/meaning/feeling steps before putting them into the program.
    • The highest value should be shown first, rather than last.
    • Talk to them about what the value is to get rid of their addiction, working with them to set the price.
    • If you are using the same price for everyone, you are not making it about the individual.
    • Some of the prices will be social service, and some will be far more profitable.
    • Spend more time with the customer before you engage them.
    • The quicker you engage the customer, the more likely you will have a toxic relationship.
    • Putting the top package first should be the focus of what you're doing; if you aren't willing to go with it first, ask yourself why.
    • Not having prices on the website is good.
    • It is arrogant to productize knowledge-based, high-value items by putting a standard price on them.
    • Don't be average: The average is where the best of the worst meets the worst of the best.
  • What is one of your best stories about creating value for a customer?
    • From a quantitative point of view, in reviewing a customer's tax return they discovered they could get $125K plus interest back from the government.
      • The customer was happy, and they got a percentage of the refund.
      • On an hourly rate, the customer's bill would have been about $300, but this enabled them to get substantially more.
    • From a qualitative point of view, there was a company ready to fire two people with 40 years of experience between them, due to staffing issues.
      • Once the problem was solved, they were able to keep the people.
      • One was promoted into management and was able to create a substantial 6-figure product.
      • It was a huge turnaround based on how to identify the person to put in charge of the project.
    • Consider that the value you add isn't only quantitative.

About Matthew Tol

Matthew is the founder of MTA Optima. He's a chartered accountant and a fellow Fellow at VeraSage. His most proud accomplishment is that he is a husband and the father of a pre-teen daughter. He loves competitive rowing, competing when he was younger and is now a coach. He is also a sports car enthusiast.

Compensating Your Team Based on Value with Christopher Marston – 089

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For over a decade, Chris Marston has been paying his team based on the value they create for the law firm. Each employee can choose how to serve a customer in an engagement from five different roles. The contribution of the role, the lifecycle of the project and the importance of the customer to the firm determine the compensation paid. His “value” model aligns how the company prices customers to how it compensates the team.

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Creating Authentic Relationships

  • What is the most important thing you can share about pricing?
    • Invest in authentic relationships.
    • Being able to price on value starts with caring, a mindset of being fully engaged with whom you are meeting.
    • If you walk in with that mindset, you are usually met with that same mindset.
    • It is one step beyond being present.
    • There are joys you cannot open up until you are fully there and invested in a prospect.
  • Why is it challenging for a lawyer to use his judgment to price?
    • Jay Shepherd talked about this idea.
    • Lawyers think they have the answers to everything.
    • There is a trust in one's abilities.
    • The billable hour can have people spend decades thinking of value as an internal metric, as the value of their time.
    • By mentoring professionals through this change, you learn that you have to take a leap.
    • Pessimists seem to perform the best in law, so the ability to identify value is a genuine challenge.

[clickToTweet tweet=”Being able to price on value starts with investing in authentic relationships.” quote=”Being able to price on value starts with investing in authentic relationships.”]

Pricing Models for Lawyers

  • What is the pricing model of concentric circles?
    • Ron Baker put this model in his book.
    • It is a pricing tool that helps professionals understand what the customer wants to buy.
    • Value pricing litigation does not mean you are not scoping.
    • The Four Circles:
      • The inner circle is the “Yes” work, that you will absolutely do.
      • There is “Likely” work, which is the next ring out of the circle, which the customer may or may not want to pay for today.
      • Outside of that circle is the work that is “Maybe”, which the customer could either include or is not interested in buying.
      • “Who the hell knows” (WHK) is the widest circle, which can be included in a price as an insurance policy.
    • Calling something a premium is gutsy because you are telling the customer to their face they are paying a premium price.
    • This tool becomes part of the relationship process with their customers.
    • A customer can buy peace of mind or can budget for the next 3 months.
    • You can determine which they want by showing up and giving a hoot.
    • Look for social queues and ask questions to understand where the customer fits into the tool.
  • What is the pricing model of the airline fuselage?
    • The concentric circles tool helps to define the amount of work that needs to be accomplished.
    • The airline fuselage is an excellent example of value pricing.
    • When you pass the first class cabin on your way to coach, you realize that many people paid up to 20 times more than what you paid for your ticket.
    • There is a margin of service improvement with each upgrade in cabin selection.
    • It raises the question of, “How do you act and serve better to create more value?”
    • Don't forget the reason you are here: to serve.
    • If you don't want to serve, get out of the market.
    • Think of how can you serve in ways that are unique to the specific customer.
    • Thousands of professionals dip their toe in the value pricing waters and fail because they only do fixed pricing.
    • Value pricing creates a win-win.
    • Create a disruption in your industry to stand out.

[clickToTweet tweet=”Calling something a ‘premium' is gutsy. It tells the customer it is a premium price. #pricing” quote=”Calling something a ‘premium' is gutsy. It tells the customer it is a premium price.”]

Compensation in a Value Economy

  • How do you compensate your employees on value?
    • Authenticity is really important.
    • Value pricing inherently means you understand value.
    • If you then have your employees paid on labor theory, you are not creating value alignment.
    • The employees are not, then, incented to create value.
    • Professional knowledge firms employ smart people who are able to increase the size of your pie.
    • In effect, Exemplar created an S&P Index of Value, which acknowledges the value contributions that every employee makes to the organization.
  • What are the roles in your value economy?
    • The roles are likely not that different in any business.
    • Good to Great doesn't have any law or accounting firms in it, for a reason.
    • The five roles (or hats) are:
      • Opener – an originator, who qualifies a new relationship
      • Closer – a knowledge expert, who is relevant to the particular prospect to turn him into a customer
      • Relationship Manager – an account executive
      • Project Managers – responsible for quality work and on time delivery
      • Delegatees – anyone who works under a project manager or who is delegated a task
    • Traditional firms do not differentiate roles and it creates:
      • Infighting
      • Failure to cross-sell
      • Hoarding
    • The employees can gravitate toward their strengths.
    • In a value economy, you tell the team what is valuable and ask them to maximize it.
    • The employees self-organize into their own categories, and they can cross roles when appropriate.
  • How can an owner apply value compensation to his company?
    • Value-based compensation applies to every organization.
    • Not all roles are created equally.
    • A dollar from an annoying customer is not equal to one that you love serving.
    • You can reward success for bringing excellence to the role.
    • A percentage is assigned to each of the roles, which might vary depending on the customer.
    • Understanding what you are worth to a customer is rewarding to an employee.
    • You can look in the mirror at the value you are creating for your customer over time.
  • How has value compensation impacted your company culture?
    • In value theory, you look at how the customer wants you to approach something.
    • Understand what the customer wants and execute on that.
    • You pay a premium for insurance, knowing that they make a bunch of money off you.
    • Routinely you pay for things you value that have no correlation to the cost of production.
    • Value pricing reflects the value in the price.
    • The increase in value reflects an increase in compensation to the team members who create the value.
    • Making more by doing less helps with innovation in your business.
  • What is one of the challenges of practicing value compensation?
    • Not everyone is good at creating value.
    • Self-confidence and your ability to form meaningful relationships are examples of character traits that can create challenges.
    • Sometimes you are right; sometimes you are wrong.
    • Jack Welch spoke about how at the height of his career he was only right 80% of the time.
    • In general, the best originators are not the best technicians and the best technicians are not the best salespeople.
    • You can still create tremendous value through teamwork.
    • Professionals get caught up in creating value and don't bother to communicate it, which is a fatal step regardless of your business model.
  • What was the reaction of your team to value compensation?
    • If an employee is coming to Exemplar from a traditional organization, they usually have read an innovation article and are interested in trying it.
    • The first 6 months, they take their queues by letting others guide them through the process.
    • They are offered training on the method, which helps with loyalty.
    • If they didn't understand that this method is the future, they probably would never be hired.
    • Chris believes it's the responsibility of Exemplar to change the industry.
    • Chris believes if he can change things, he must, because it is a calling.
    • They are in a broken profession (law) and people, who deserve to be happy, are miserable.
    • He is restoring a spiritual bottom line to an industry that has had the life sucked out of it.
    • You are not only creating value for innovative customers; you are creating a profession that honors and trains its people.
    • They can have meaningful long careers with a family they can keep close.
    • The human impact you make on your industry is stronger than any force.
  • What is one of your best stories about creating value for a customer?
    • A customer was scaling a private school model, taking the best curriculums and teaching methodologies from around the world, to a nationally branded concept, which was 50% more affordable than traditional private schools.
    • They engaged Exemplar for business consulting, where they explored the economic model the school needed to operate under to provide the most value to its investors.
    • The result was a deep authentic relationship with the founders and a price insensitivity that allowed the engagement to enter into 6-digits, which none of the peer firms would have been able to command.
    • It crossed all the different areas of the firm and allowed them to bring the whole picture, authentically.

About Christopher Marston

Christopher Marston is the founder and CEO of Exemplar, a holistic knowledge firm, specializing in law, tax, investment banking and business advisory. They have offices in Boston, New York, Chicago, Los Angeles and Silicon Valley. Chris also is a Practicing Fellow at the VeraSage Institute.

The Impact of Really Smart People with Kirk Bowman – 071

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This episode is a summary of two conferences Kirk Bowman attended this quarter. The ideas from these events challenged his thinking and influenced how he will do business in the future. The conferences were the VeraSage Symposium in Boston and Regency Mastermind in Phoenix.

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VeraSage Symposium

Asking Great Questions – Ed Kless with Sage

  • Shut Up and Eat Your French Fries from The Soul of Enterprise
  • To be great consultants, we have to ask great questions.
  • Examples of great questions include:
    • Would it be appropriate at this time to ask you a few questions?
    • What is the story that you keep telling yourself about the problems you face?
    • MOAQ (mother of all questions, from Peter Drucker) – What is the question, that if you had the answer to it, would set you free?

High Value Software Projects – Kirk Bowman with Art of Value

  • Software projects for efficiency only are low value and not worth doing.
    • Conversations with customers were not having the enough impact.
    • What question can you ask in the first conversation that would bring the impact to light?
    • How does this impact revenue? Profit? Income?
      • The person will know the information and share it.
      • The person will not know; you will need to talk to someone else.
      • The person is not willing to have the conversation because of lack of trust or relevancy.
      • Revenue without an impact on profit is not worth it.
      • Profit seems more private.
      • For a small business, an increase in revenue can translate to a rise in profit, leading to a boost in personal income.
    • What is the MOAQ for each customer segment?
    • If your business is based on value pricing, you cannot make a living from low-impact projects.
    • Developing and implementing custom software must have a substantial impact on the organization.

Value Compensation – Chris Marston with Exemplar

  • Internal value culture or value economy says that if you are going to price customers on value, you should compensate employees based on value.
  • Art of Value Society on Facebook had a discussion on this topic recently.
  • Identify 5 key roles that create value in the organization:
    • Opener – Begins a conversation with a customer and connects them with the company.
    • Closer – Continues that relationship and reaches a signed agreement, so the company makes revenue from that relationship.
    • Relationship Manager – Maintains the relationship between the customer and the company.
    • Project Manager – Is required for successful value pricing.
    • Do-er – The person that does the work (writes the contract, designs the software, etc.)
    • A percentage is assigned to each role, and it changes depending on the project lifecycle.

Fire Each Customer Every Year – Paul Kennedy with O'Byrne & Kennedy

  • This idea resonated with the attendees.
  • Traditionally, in accounting, every 4th quarter, accountants are focused on renewing business for the next year.
  • Paul wants to customers who every year make the choice to do business with him.
  • They earn their business again, every year.
  • When he tries to pull away from his customers, they pull closer.
  • For customers who have been through the process for 4-5 years, the process becomes a very quick conversation at the end of the year.
  • Products and services are available to help firms implement value pricing.
    • Timeless Legal Network by Beth Carmichael offers products for lawyers to increase their revenue and improve their profitability.

Baker's Dozen: Best Books – Ron Baker with VeraSage

Regency Mastermind

  • Regency Mastermind was founded by Ray Edwards.
  • Focus on your customer avatar, making it as specific as you can.
  • Refine the language you use with your customer; eliminating jargon so your market can understand what you are saying.
    • For example, watch Shark Tank to better understand business language.
  • Learn how to write great copy (copywriting) to improve your communication skills.
  • The power of the Mastermind has changed the way business will be conducted in 2016.

Transfarency by Southwest Airlines

  • Transfarency – Philosophy created by Southwest Airlines in which Customers are treated honestly and fairly, and low fares actually stay low – no unexpected bag fees, change fees, or hidden fees. Created and practiced exclusively by Southwest Airlines.
  • Be unique to be perceived as the expert.

Making the Transition to Value Pricing with Adrian Simmons – 070

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Adrian Simmons is the Chief Creative Designer at Elements CPA. He also is the director of Thriveal Laboratory, which encourages innovation in the accounting profession. Adrian worked at KPMG for two years before joining his father's accounting firm. In 2013, he had the honor and privilege to re-imagine the firm.

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How to Switch to Value Pricing

  • What is the most important thing you can share about pricing?
    • Pricing is dynamic and linked to value, which is also dynamic.
    • Do not lock yourself into a fixed number.
    • Stay in sync with value.
    • Get comfortable with the flexibility.
    • There is no mathematical formula; think in organic, human terms.
    • Different people have different expectations, opportunities, and impact.
    • Do not focus the product; focus on the customer.
    • Pricing is human.
    • The writings of Ron Baker had a lot of resonance when Adrian got out of school.
    • In 2011, he moved into a leadership role and became involved with Ron Baker and Thriveal.
  • What is the first step to implementing value pricing?
    • You have to be convinced yourself.
    • Soak yourself in it by reading Implementing Value Pricing; talk to others who value price.
    • Study until you reach a saturation point where you have to start doing it.
    • Start with new prospects and apply the new process to them.
    • Approach top-tier customers with whom you have a good rapport.
    • Ask customers to self-select into levels.
    • He worked with the top-tier customers first and then with new prospects.
    • He constantly revised his approach through multiple iterations.
    • It takes time to get to get comfortable with it.
  • What was easy and hard about switching to value pricing?
    • The conversation with the right customers became more natural.
    • Rooting out assumptions and modifying the systems was more difficult.
    • Having the confidence not to react emotionally when the approach does not work for a particular customer was tough.
  • What are some beliefs or assumptions you have to challenge?
    • Value is tied to time is an assumption you have to break; you have to let go of the security blanket.
    • Self-doubt is one of the challenges you have to overcome.
    • Other beliefs to overcome:
      • The revenue will not be there.
      • You will not be able to find the value.
      • You have to know everything beforehand.
    • Hourly billing is a suboptimal tool to deal with uncertainty.
    • Tracking hours prevents us from innovating as quickly as we can.
    • Value pricing is a set of tools that is more agile and adaptable.
    • Going on a value quest with customers led to changing the product mix.
  • What are some techniques you use to manage uncertainty?
    • Ask great questions to uncover the unknown.
    • Create different tiers to allow the customer to choose.
    • You and your customer should mutually build value together.
    • Give up the security of the knowledge upfront, but gain confidence in the process to discover value.
  • What is the underlying motivation to pursue value pricing?
    • Your self-value is usually a good motivator.
    • If you treat yourself as an hourly worker, it degrades your self-worth.
    • Treat your team better and be honest with your customer.
    • Free yourself to charge what you really are worth.
    • Your customer will naturally evolve because you will pay attention along the way.
    • Financial and emotional motivations are not the same for different people.
    • Create more value than you consume.
    • Adrian's company had small increases while shrinking the customer base by 30% and increasing their quality of life.
    • There is a balance between turning the ship at a slow pace, but keeping the ship turning.
    • The company is stronger and more able to address the market.

How to Practice Value Pricing

  • What do you say to a customer who is resistant to value pricing?
    • Explain the package levels to the customers clearly.
    • Let customers get comfortable; give them some time to come around.
    • Some customers were not happy, and they parted ways.
    • Be prepared; there will be hitches and separations.
    • Unemotionally state that you are no longer a good fit, and help the customer find a new partner.
  • Where did you get the inspiration for your “Are we a good fit?” page?
    • A lot of value pricing is about saying, “For whom are we the right fit?”
    • Simon Sinek talked about “What is your puzzle piece?” on a Left-Sider Call.
    • Hold your puzzle piece as high over your head as you can, so others can recognize your puzzle piece.
    • It is a story, but also an onboarding page.
    • Everyone is helping each other, which makes the community grow stronger.
  • What are the two most important numbers not on your income statement?
    • The two most important numbers are:
      • Your customer's imagination.
      • Your imagination.
    • Do not get locked into the income statement.
    • The more powerful economic reality is what is not on the income statement.
    • Customer's Imagination: The customer profit is the difference between the value being created and the price charged.
    • Your Imagination: Opportunity loss is the difference between what we are not imaging vs. what we could.
    • Address the customer's imagination limitations through marketing.
    • Address your imagination limitations through innovation.
    • See things with new eyes!
  • Why does an entrepreneur need to experiment in his business?
    • Without having some degree of experimentation, it is hard to be an entrepreneur.
    • Entrepreneurs are identifying and visualizing a specific pocket of value.
    • Discovery, creativity, and innovation are necessarily part of that process.
    • Business models were the first topics tackled by Thriveal Laboratory.
    • The need to think strategically about business models was a conversation that needed to happen.
    • The Business Model Generation is a book on creating new business models.
    • Value pricing, as a dynamic system, gives you a model that helps you continue to evolve.
  • What is one of your best stories about creating value for a customer?
    • A customer connected with them and they thought they were a good fit.
    • After a few months, they ended up stepping away.
    • They held true to what they were about, by stepping away.
    • A customer was going through a life transition and opted for the highest package.
    • Over several years, they have helped her build out her plan to retirement.
    • It would not have been possible if they had not adopted this new form of business.

About Adrian Simmons

VeraSage State of the Union 2015 with Baker, Kless & Chisholm – 069

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This episode of the Art of Value Show is a live recording from the bi-annual VeraSage Symposium, which was in Boston, MA. The distinguished panelists or VeraSagi are Ron Baker, Ed Kless, John Chisholm and Kirk Bowman. This episode will be rebroadcast on The Soul of Enterprise with Ron & Ed and Pricing Power by Steve Major.

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  • What is the future of value pricing?
    • Ron Baker – It is incredibly bright and optimistic.
    • Pricing is now a profession and a C-Suite function.
    • Professional Pricing Society conferences are global with the US leading the way.
    • Because pricing is becoming so specialized, it is too focused.
    • The death of the billable hour is not within reach, but it is within sight.
    • Hourly billing has no enemies but is intensely disliked by its friends.
    • Ed Kless – There are a lot of people trying to make pricing too much science, rather than art.
    • John Chisholm – Pricing has to be a core competency in business school.
    • Law firms are still challenged by value pricing and it is the exception rather than the rule.
    • Value pricing changes everything about your business.
    • It is a management innovation, not a just a business model.
    • In technology, there is a group that is ready for something different, but they do not think business should be that hard.
    • Change is occurring with the firms who are receptive.
    • Ed Kless – Value pricing can end project management as it is known today.
    • Earned value is a 9-step process to compute value that is being taught to project managers.
    • The predictive market is an idea where people “gamble” on when a project ends.
    • Project management is being made too complex.
    • ROWE is a results-only work environment: Every position in an organization is defined by the results that are expected to be achieved.
    • Leaders do not want to define roles by results because it is too hard.
    • Measuring the input is an illusion of control.
  • Thomas Bowden – Is pricing art or science?
    • Tim's Vermeer used scientific techniques to create art.
    • Ed Kless – The real concern is that once you input numbers, people believe then that it must be scientific.
    • Ron Baker – It is not 100% art. You need some numbers behind it, but you still need judgment.
  • Wes Higbee – What is the connection between price and purpose?
    • There is a level of competitiveness involving purpose.
    • John Chisholm – There is something more important than money.
    • The big corporations are starting to tap into social responsibility.
    • Ron Baker –  Wealth gives us the freedom to be more purpose driven.
    • It is more prevalent for knowledge workers to look for a purpose now.
    • Conscious Capitalism, by John Mackey, CEO of Whole Foods, has an analogy for profit: it is like red blood cells in your body.
    • Ed Kless – Corporate responsibility seems to be more marketing hype rather than reality.
    • In the professional sector, most people come to their profession for a purpose, not for profit.
    • Ed Kless – It is astrology to measure profit per year and offer discounts at the end of a month.
    • The market pays you what you think you are worth.
  • Andrew Belack – How can we price complex financial planning?
    • He is going to offer more robust financial pricing and asked for help.
    • Ed Kless – Be sure to offer choices.
    • Kirk Bowman – Show his pricing to others and get their feedback.
    • You never get paid a price you did not quote.
    • Ron Baker – Everyone sucks at pricing themselves.
  • Chris Farmand – How can we recruit the next generation of knowledge workers?
    • Ed Kless – The nay-sayers cannot be ignored to save the next generation.
    • John Chisholm – Asks his trainees why they did law in the first place; half answer that they do it for justice and the other half do it for profit.
    • He sees them being manipulated by the system, but if their sole purpose is to make money, probably no one can help them.
    • If they want something greater, then they can be helped.
    • Ron Baker – The generalization by age is bunk; it is not an age thing.
    • The Millenials understand they are knowledge workers, not service workers and see no connection between inputs and value.
    • Do not discount laziness as a reason not to embrace value pricing.
    • Once someone experiences a value pricing firm, the employee is not going to want to leave.
  • Andrew Robertson – What are some misconceptions about value pricing?
    • Many believe that value pricing is about charging more, or is about a fixed-price agreement.
    • Now is the time to look for new ways because of the disruption that is happening in Australia.
    • Technology, automation, and outsourcing are hammering future profits.
  • What is your favorite takeaway from the VeraSage Symposium?
    • John Chisholm – Aligning compensation models with the value you are creating.
    • Do not complain about being shackled by the billable hour, while enabling the behavior by continuing to accept bills that exceed the estimate or fixed fees that are not fixed.
    • Ed Kless – The only thing he underlined in his notes is the word, flourishment: we want people to live their dreams.
    • Ed Kless – Time is not money, but money is time: it represents our discretionary time and how we can choose to use it.
    • Ron Baker – Proud that you can have a discussion about the link between digestive problems and time sheets.
    • Kirk Bowman – The idea of how your business is a value economy; i.e., how do you compensate your team when they see how you price your customers?

The History of the Theory of Value with Baker & Kless – 067

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The history of economic thought regarding the concept of value is “a tale of two theories”. The Labor Theory of Value states that value is equal to the sum of the labor and materials to create something. The Subjective Theory of value states that value is the perception in the mind of the customer. Ron Baker and Ed Kless discuss these theories from chapter 8 of Ron's book Pricing on Purpose.

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Early Theories of Value

  • What was Adam Smith's paradox?
    • In The Wealth of Nations, published in 1776, Adam laid out the Diamond-Water Paradox.
      • Nothing is more useful than water, but it will purchase scarce anything.
      • Diamonds have scarce any value in use, but quite a few other goods may be had in exchange for it.
    • Smith's answer was diamonds are scarce, but he was incorrect.
    • Scarcity does not create value.
    • Your kids drawings are scarce, but that does not mean they are valuable.
    • Value is in the perception of the customer.
    • Adam struggled with this philosophy his whole life.
    • David Ricardo provided the theory of comparative advantage.
    • On his deathbed, he struggled with why wine is more valuable over time.
      • The lump of coal found behind the diamond is not worth as much as the diamond, despite the same amount of work to retrieve it.
      • Undeveloped land should have no value if there is no labor in it.
      • Finding a diamond should make it worth less.
      • Labor on a movie is the same, so everyone should like it the same.
    • David's theory affects knowledge work like commodities.
  • Who were the French Physiocrats?
    • They thought the labor theory of value was wrong, and the only thing with value was land.
    • For example, if you raised sheep and got the wool, that was OK.
    • However, if you took the wool, knitted it into a cap and then tried to sell it, you were exploiting the shepherd.
    • Jean-Baptiste Say named them The Physiocrats.
    • It is is the most-wrong theory of value.
    • Fewer people are working in manufacturing, but we produce twice as much.
    • Inputs do not measure the value; the outputs do.
    • Some believe marketing does not create value, but that engineering does.
    • Rory Sutherland talks about how intangible value was used to create a marketing campaign that saved Shreddies.
  • What was the contribution of Karl Marx?
    • He was the first to put a theoretical framework around the labor theory of value.
    • He wrote Value, Price and Profit, saying that a product has value because it is a crystallization of social labor.
    • In 1871, a group of economists demolished the theory once and for all.
    • Many believe the labor theory of value is poor for pricing.
    • However, to use a time sheet to determine your cost also uses the labor theory of value.
    • How you allocate an hour is irrelevant.

The Subjective Theory of Value

  • Why are theories of value a “gray area”?
    • Economic ideas do not drop out of the sky.
    • Ron believes he was the first to make the link between the Marxist theory of value and the billable hour.
    • Steven Landsburg is an economist that Ron and Ed respect.
    • The labor theory of value is cost-plus pricing and is a table stake of higher education.
    • Earned Value is an attempt to understand the value by further convoluting the labor theory of value, developed by government accountants.
    • A customer does not buy a bundle of assigned costs; they buy a finished product.
    • Marx completely ignored the customer, as did the other philosophers, until the subjective theory of value was developed.
    • Your first shot of tequila is worth more than the 19th, just like your first ice cream cone is more valuable than the 5th.
  • What was the Marginalist Revolution?
    • Between 1871 and 1874, three economists helped debunk the labor theory of value:
    • They each published books that said Marx was wrong, and that value is subjective.
    • In Principles of Economics, Menger says that value is a judgment that a man makes about the importance of the goods at his disposal.
    • Nothing, except human life, has intrinsic value.
    • The subjective theory of value looks at it from the customer's perspective.
    • A bottle of water in the desert is priceless.
    • If you are home washing the dog, it has less value.
    • If you are flooded in your basement with water, it has a negative value.
    • The cost of getting the water to each place is about the same.
    • The subjective theory of value changed economic theories tremendously, but business people are stuck in the labor theory of value.
    • Philip Wicksteed, in 1884, wrote that a coat is not worth 8 times as much as a hat because it takes 8 times as long to make it, but rather that the maker is willing to put 8 times as much effort into making it because of its value.
    • Alfred Marshall in the 1890s drew the supply and demand curves, which confused the issue as well.
    • Most economists who came afterward spent the majority of their time measuring things to create economic math.
    • You have to dismiss the economic math if you believe the subjective theory of value because it does not matter.
    • If you go to a restaurant, you cannot separate the value of the experience from the chef and the janitor.

Business and the Theory of Value

  • Why does “business” not accept the Subjective Theory of Value?
    • Perhaps, business schools are failing to education in this area.
    • Intuitively and logically, the subjective theory of value is easy to grasp.
    • It is extraordinarily difficult to put into practice.
    • You can be 100% efficient at the wrong thing and make the situation worse.
    • Alan Weiss said that all the theoretical books were written for economists, not businesses.
    • For decades, cost plus accounting has been good enough.
    • The labor theory of value requires a calculator; subjective theory of value requires courage and judgment.
    • Attorneys are paid to apply their judgment, but are afraid to use that judgment to price.
    • Ad agencies are another example of providing customers with excellent pricing power, but they commoditize their work through an hourly rate.
    • Offering options can eliminate negotiation completely, or make it very specific.
  • What is the future of the Subjective Theory of Value?
    • Ed says that the future is irrelevant, because of The Great Enrichment.
    • Everything will be value-less; the Star Trek universe is coming.
    • Ron says that the subjective theory of value has made inroads.
    • You have to convert one mind at a time.
    • We do not have to understand aerodynamics to fly. We do not need to understand it the theory of value to act on it every day.
    • The Answer to the Diamond Water Paradox is:
      • The water in the desert is highly valued because it can save your life.
      • The marginal gallons become less valuable.
      • Gossen's Law says that the market price is determined by what the last unit of a product is worth to people.
      • The water companies do not know if you are dying in the desert or flooding your basement.
      • The marginal value of a second diamond is high because you can store it for later.
      • The airlines understand the paradox.
    • Price the customer, not the product or service.

About Ron Baker & Ed Kless

Ed Kless was a guest on Episode 2, The Value of Project Management,  and Ron Baker on Episode 13, Value is Subjective, Pricing is Contextual. Ron and Ed are co-hosts of The Soul of Enterprise radio talk show.

The Funniest Thing About Value Pricing with Greg Kyte – 048

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Greg Kyte is a CPA and comedian. He teaches ethics and fraud courses for accountants with a comedic edge at ComedyCPE.com. He is also the G. Robert Newhart Non-Value-Added Fellow at Versage Institute.

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The Real Context of  Value

  • What is the most important thing you can share about pricing?
    • You need to price your services like you know magic.
    • The Labor Theory of Value says that the value of something is equal to the materials and labor it takes to create it. It is a fallacy.
    • Dan Ariely, the author of Predictably Irrational, says you have to realize that people will determine the value of your product/service by inserting their context.
    • All value is subjective.
    • When people have no context for the work you are doing, they will create a context for themselves.
    • You must talk to your customer upfront about what they need/want from a transaction before doing the work.
    • Collect the money upfront.
    • People are afraid of talking to their customers.
  • What is the funniest thing about value pricing?
    • When accountants talk to Greg about upfront payment plans, they worry about negative accounts receivable.
    • According to accounting theory, it is unearned revenue.
  • What is the funniest thing about hourly billing?
    • As an accountant in a firm, when you have to ask yourself, “Do I stop my time billing software when I have to go to the restroom?”
    • It raises an ethical question about going pee-pee.
    • What if it your bathroom visit was longer than 6 minutes?

Value Pricing in Accounting

  • What is the state of value pricing in the accounting profession?
    • By and large, the average person in the accounting profession would say, “That seems like a great thing, but we cannot do it.”
    • The billable hour has too much inertia.
    • Joe Manzelli was a partner in a firm and was left alone to do his value pricing “thing”.
    • His realization rates were off the charts compared to his colleagues.
    • Ask your customers if they like how you are billing.
    • Do some experiments; do not be a weenie!
    • Some people are angry about value pricing and seem to have a weird idea of what it is.
    • The fear of people “shopping” accountants is one of the arguments against value pricing.
    • Accountants are not selling a commodity.
    • Everyone hates the billable hour.
    • The customer has no idea what the bill is going to be.
    • The firm is “billing and ducking.”
    • The employee feels his subjective well-being is being torn down.
  • What was your first exposure to value pricing?
    • In a previous life, Greg was a middle school math teacher.
    • He knew he was 10 years behind the other CPAs.
    • He was working hard to catch up with everyone.
    • He read Pricing on Purpose by Ron Baker in the Journal of Accountancy.
    • Greg was shocked to learn it was even a possibility.
    • He hated the environment in which he worked.
  • What is the funniest thing the IRS did for the 2014 tax year?
    • They were dealing with budget cuts, and the Affordable Care Act added workload.
    • They understaffed their phone lines.
    • On the website, the IRS posted that a caller might be subject to a “courtesy disconnect“.
    • Greg went to a one-hour presentation for the Affordable Care Act to learn how to calculate the credit.
    • Even though he learned how to calculate it, he also knew he would never be able to remember the complex calculation.

Creating Comedy About Ethics

  • Can you explain the irony between comedy and ethics?
    • The things that are the driest and most mundane are the easiest source material.
    • He looks at ethics per the Code of Professional Conduct from the American Institute of CPAs.
    • Any legal document is easy to pick apart.
    • There is a code that says that there is an ethical responsibility to follow the Code of Professional Conduct.
    • Ethic-hacks (similar to Lifehack) combine behavioral psychology and economics to increase the level of professional ethics.
    • Cheating is contagious.
  • What is one of your best stories about creating value for a customer?
    • John Shaver from Aries Technology Group hired him to do a funny video to explain fixed pricing called Bob's Barbecue.
    • Performing comedy in a club or during a CE presentation, when all cylinders are hitting, and everyone is having a great time. He is creating value for the participants as well as for himself.

About Greg Kyte

Lawyers Can Switch to Value Pricing with John Chisholm – 042

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John Chisholm helps law firms move from hourly billing to value pricing. A 25-year lawyer turned business consultant, he says the problem with the cost of legal services is not the amount. It is the unpredictability. Customers prefer the experience of and will pay more for price certainty. John shares how this single change can inspire a spirit of innovation and entrepreneurship in lawyers.

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Value Pricing in Law Firms

  • What is the most important thing you can share about pricing?
    • No form of pricing is perfect. Pricing is an art.
    • Just do it – give it a crack.
    • There is no perfect price.
  • Why are attorneys reluctant to apply their judgment skills to pricing?
    • They are issues when it comes to negotiating their price.
    • They want it to be right and they fear having a pricing discussion.
    • They hide behind cost agreements and estimated hours.
  • Why is value pricing a better business model as the law becomes more complex?
    • Global financial crisis made customers more cost conscious.
    • The cost of legal services isn't the problem.
    • The unpredictability and bill shock are the issues.
    • Having more certainty around price is important to the customer.
    • The knowledge that lawyers used to sell is now available for free on the internet.
    • Making informed judgments adds value to their client's business.

Innovation in Legal Firms

  • What are some ways attorneys can create more value for the customer?
    • The better firms are not waiting for problems to arise, but are involved in the client's business.
    • They are helping them to avoid problems arising.
    • Innovation in the legal profession bears little resemblance to what occurs in other industries.
    • Customers do not want their law firms to be risk takers.
    • How you deliver the solution is where the innovation can occur.
    • The leaders of some Australian law firms are bringing more of an entrepreneurial spirit to the firm.
    • If you can get people with other skills involved in legal and medical, it helps the firms and their clients.
    • Legal firms in the States are one of the few professions where the business must be run by lawyers.
  • Is the practice of value pricing in law similar or different to other professions?
    • Many law firms benchmark against what other law firms are doing.
    • Firms say they want to be different, but in reality, they want safety in numbers.
    • The better firms now are looking at what other companies are doing to help them improve, rather than their competitors.
    • Lawyers are not entrepreneurs. The field did not traditionally attract that type of person.
    • The entrepreneurial spirit is now moving into law in Australia.
    • Right now, the most popular form of alternative fee arrangement is discounting.
    • Under the time billing model, you can give a discount, but it is illusionary. Time sheets will just show you have worked more hours.

Switching to Value Pricing

  • How do you start a conversation with someone who may switch to value pricing?
    • The firms who have experienced the most success have an internal champion.
    • He makes sure they are serious about the conversion by asking questions.
    • The firms who have been more successful have set a date to get rid of time sheets.
    • Time sheets alone are a huge limiter on innovation.
    • The obsession with efficiency and cost allocation leads to bad effects, including the lack of collaboration.
  • How do you have a value conversation with someone who is switching to value pricing?
    • What does the client want out of it?
    • How much involvement do they want from John?
    • John's why is to influence motivated professionals to make a difference.
    • He needs to find an internal champion who he can influence.
    • After Action Reviews are held with his clients.
    • John needs to be satisfied that the client's why and his why are aligned.
    • Many want to jump to the how; John brings them back to the why.
    • Changing people overnight is unrealistic.
    • The bigger firms are still improving their time-recording practices.
    • There are individuals who do not need a consultant to understand they want to change; John can help them with the how.
    • Jay Shepherd, Matthew Burgess and this interview make a good trilogy on value pricing in the legal industry.
  • What is one of your best stories about creating value for a customer?
    • A customer once paid him double his fee.
    • They said thank you, wrote a nice letter and paid him more.

About John Chisholm

John Chisholm is a recovering third generation lawyer. He billed by the hour for 25 years and then started his own consultancy, Chisholm Consulting, in 2005. He specializes in strategy and pricing, primarily for law firms. He is also a Senior Fellow at the VeraSage Institute.