How Accountants Can Implement Value Pricing

Background

Price may sound like a simple concept, but it has become a key topic on many executive agendas. Research has found that pricing alone can determine a firm’s performance as 1% improvement in price, assuming everything else constant, could increase margin dollars by 12.5% (R. Dolan, “How Do You Know When the Price is Right?” Harvard Business Review, Sept/Oct 1995, https://tinyurl.com/avmjjnxv). Setting a fair price may also impact customer loyalty, as price perception directly influences customer satisfaction and often indicates something about the quality or benefits of a product or service (A. Herrmann, F. Huber, A. Shao, and Y. Bao, “Building Brand Equity Via Product Quality,” Total Quality Management, vol. 18, no. 5, pp. 531–544, 2007).

Pricing methodologies can be broken into three groups:

• ▪ Cost-plus pricing: This is perhaps the oldest pricing methodology and consists of setting a price to provide a fair return over all costs incurred. Its simplicity is the greatest advantage. Determining costs can be a challenge, however, especially when demand changes. As a result, a cost-plus pricing may result in overpricing in weak markets and underpricing in strong markets.
• ▪ Competitive pricing: This methodology consists in setting prices relative to competitors’ prices. Although this methodology may make strategic sense, it entails the risk of a company’s prices not covering its costs. In addition, competitive pricing assumes that competitors have priced their products and services correctly.
• ▪ Value pricing: This methodology consists of grouping services into packages or bundles for which a fixed price will be set based on the perceived value by the customer. As a result, it requires understanding customers’ needs so that value can be assessed. Costs and competitors’ prices are disregarded.

Benefits of Value Pricing

There are many advantages to using value pricing:

• ▪ Value pricing allows determination of the highest possible price that can be charged without impacting demand. This makes it possible to achieve profit maximization.
• ▪ CPAs often charge for their services based on hourly rates, which means their billing will ultimately depend on the number of hours charged to their clients. Value pricing attempts to set a price for a bundle of services that clients are likely to purchase. Cash flow can thus be managed with more certainty.
• ▪ Value pricing requires an understanding of what clients need. The services provided to clients should be in line with their expectations.
• ▪ CPAs can focus more on providing value to their clients rather than charging more hours. This in turn should improve collaboration with clients and increase customer loyalty.

The downside of value pricing is that it requires more work. The first step is to identify the attributes of services that are valued by clients, and the second step is to measure that value. The perception of value could become a challenging task, the measurement of which may require specialized skills and training or the engagement of consultants.

Identification of Value Elements

Value is a subjective topic, as the amount and nature of value of a particular product or service can be defined differently by each client. Bain, in partnership with Harvard Business Review, conducted research at a very broad level whereby a comprehensive list of value elements was identified. This framework can assist CPA firms in tackling the challenge of understanding what attributes from their services may be valuable for their clients. Value elements have been listed in the shape of a pyramid and classified into categories, such as: functional value, ease of doing business value, individual value, and inspirational value. The study was conducted in both consumer and B2B settings. Full reports can be accessed at: https://bain.com/insights/the-elements-of-value-hbr and https://bain.com/insights/the-b2b-elements-of-value-hbr.

When narrowing the elements of value specific to an accounting firm, CPAs may want to examine the services they currently offer and what features are considered valuable or even allow them to differentiate from other firms. CPAs can also perform a competitive analysis to understand what competitors are offering and their specific attributes. Exhibit 1 illustrates a sample competitive analysis. Industry research can also provide insights regarding elements of value being offered by the different market participants.

It is important to note that segmentation is critical, as it allows the prediction of the portion of a market that may prefer a specific service or attribute. As CPAs increasingly focus their practice into specific niche markets, there may be specific elements of value that must be emphasized to create a more appealing proposition for clients. Segmentation also allows one to better define a firm’s client personas: for example, what kind of business or accounting challenges do they face; what is their background and their goals; and what is the typical size and legal formation of their businesses? Exhibit 2 shows a sample of client personas CPAs may encounter among their clients.

Design of Packages or Bundles

Once the elements of value have been identified, packages or bundles must be designed by combining services catered to the needs of the identified client personas. Conventional wisdom suggests each client persona should have a package. CPAs may find convenient to follow a “good-better-best” (GBB) approach, which consists of offering variably priced bundles targeted to clients who value features differently. The GBB approach allows CPA firms to:

• ▪ Increase margins by offering a high-end version that persuades clients to spend more or attracts those clients who are seeking the best service package;
• ▪ Offer a low-priced version for those clients who are budget constrained; and
• ▪ Offer a moderately priced version for those clients who may not know exactly which option to pick.

For example, CPAs may find most clients are seeking compliance services, which could be the basic package (good). Other clients may be expecting some sort of advisory service, such as cash flow management and business planning, and that could represent the middle-tier package (better). Finally, some clients may be looking for fractional CFO services and this could represent the high-end package (best).

Measurement of Value Elements

Once CPAs have identified value elements and defined their service packages, survey techniques and statistical analysis can be used to determine how much their clients truly value such attributes. There are several procedures to measure price sensitivity and, more specifically, customer preferences and intentions. One procedure is simulated purchase experiments, which consists of creating the purchase environment, placing customers, and documenting their responses under different choices and prices.

Another procedure, which has become quite popular in the past few years, is conjoint analysis. Also known as trade-off analysis, conjoint analysis is a statistical marketing research technique that measures what customers value most about a given product or service. It allows a firm to disaggregate the price into values that clients attach to each attribute. As a result, conjoint analysis can help CPAs understand how much of the value is derived from the attributes their clients are willing to pay for as well as how much they are likely to pay for the entire service bundle. In conjoint analysis, attributes represent the different features or factors that can influence the choice of a service, while levels are the different options for each attribute.

To conduct a conjoint analysis, a survey collects participants’ preferences amongst a variety of combinations of the different attribute levels. The combinations are designed to vary in attributes with the corresponding price. Participants’ responses express their preference for certain attributes as well as an estimate of the price elasticity. Data can be analyzed by running a regression analysis where participants’ responses represent the dependent variable and the attributes the independent variable. The regression coefficients related to the independent variables represent the part-worth utilities or participants’ preferences for the attributes. This analysis allows one to determine the value (or utility) that each participant attaches to each service attribute and the relative importance that each attribute plays in the participant’s purchase decision. The data allows one to predict at what prices customers will most likely purchase the services bundle and the corresponding combination of attributes.

Hypothetical Illustration

There are numerous tools that can assist CPAs in conducting a conjoint analysis. Even with a simple scenario, this task can be quite complex, as running a multiple regression analysis is required. For illustration purposes assume that a CPA firm offers accounting services under four attributes: support, engagement, reporting, and price. Two levels are available for each attribute: advisory and executive. The table below summarizes the attributes and levels for a hypothetical CPA firm:

For the purposes of this illustration, assume survey responses have already been collected. A regression analysis is then conducted where the raw regression coefficients represent the relative importance of each attribute in the decision-making process. These scores are typically calculated by taking the range of utilities for each attribute (i.e., the difference between the maximum and minimum utilities) and expressing these ranges as proportions of the sum of all ranges. The importance scores reflected in Exhibit 3 total 100%, indicating that they account for all the preference variation explained by the attributes included in the conjoint study.

The importance scores illustrated in Exhibit 3 suggest the following:

• ▪ Price (17% importance): Price has a significance of 17%, indicating that it’s a fairly important factor in decision making. It is not, however, the most important one. The negative coefficient suggests that as price increases, utility or satisfaction decreases, which is a typical relationship.
• ▪ Reporting (13% importance): Reporting is somewhat less important than price, accounting for 13% of the decision-making. Again, the negative coefficient suggests that utility decreases as the level of the reporting attribute increases, perhaps indicating a preference for simpler or less frequent reports.
• ▪ Engagement (3% importance): Engagement only accounts for 3% of the decision-making, suggesting that it is not a significant driver of preference for respondents. The negative coefficient indicates that, as the level of engagement increases, utility decreases.
• ▪ Support (67% importance): Support is the most important attribute, driving 67% of the decision-making. The positive coefficient suggests that as the level of support increases, so does utility or satisfaction. This might be an area where improvements or differentiation could have a big impact.

Preference scores are also determined from these raw regression coefficients for each level of each attribute. They indicate how much utility or value respondents derive from each level of an attribute. The sign of the coefficient indicates the direction of the preference (positive for preference and negative for aversion), and the magnitude indicates the strength of the preference.

The preference scores illustrated in Exhibit 4 can be interpreted as follows:

• ▪ Price, $500.00 (8%): The preference score for a price of $500 is positive, indicating that respondents generally see a lower price as a positive attribute.
• ▪ Price, $900.00 (–8%): The preference score for a price of $900 is negative, which means that respondents generally see a higher price as a less attractive attribute.
• ▪ Reporting, actuals (7%): Reporting using actual numbers has a positive preference score, suggesting respondents generally find this type of reporting to be a positive attribute.
• ▪ Reporting, analytics (–7%): Reporting based on analytics has a negative preference score, suggesting respondents generally find this type of reporting to be a less attractive attribute.
• ▪ Engagement, online (1%): The preference score for online engagement is slightly positive, indicating respondents find this form of engagement slightly more attractive.
• ▪ Engagement, Face-to-face (F2F) (–1%): Face-to-face engagement has a slightly negative preference score, indicating respondents find this form of engagement slightly less attractive. However, the difference between online and F2F is quite small, suggesting that the form of engagement isn’t a major driver of respondents’ preferences.
• ▪ Support, advisory (–34%): Advisory support has a large negative preference score, which indicates that respondents generally see this as a less attractive attribute.
• ▪ Support, executive (34%): Executive support has a large positive preference score, indicating respondents generally see this as a positive attribute.

An interpretation of this data provides an indication of how respondents view different levels of the attributes. The data show a preference for a lower price ($500), actuals in reporting, online engagement, and executive support. For example, knowing that customers perceive support as the most important attribute and, to be more specific, executive support as the preferred level, a decision could be made to position this service at a higher price point without impacting demand much—whereas the advisory level could be priced lower, since it is not valued highly, and pricing is the second most important driver. This information can be useful in designing products or packages that better meet customer preferences.

No One-Size-First-All Solution

Implementing value pricing can be done by CPA firms. As discussed above, the first step is to identify the value elements or attributes offered with a firm’s services. Then, CPAs must carefully think how to package their services so that clients can find a bundle that supports their needs. Conjoint analysis can help assess which attributes are valued by clients. This is a more robust process that requires some discipline, as careful thought must be put into what accountants are offering to their clients.

Value pricing is nonetheless subjective and more art than science. If anything, a combination of different pricing methodologies could represent a safe approach as value pricing may require some judgement. There is no one-size-fits-all approach, because an ideal pricing strategy will also depend on factors like cost structure, business objectives, and the competitive environment. In addition, any price changes should be monitored closely to ensure that the desired effect is being achieved and that adjustments can be made based on actual customer behavior and market conditions. Finally, CPAs are advised that value pricing may be more challenging in a sector subject to strong competitive pressures or highly commoditized.