I do a lot of work with professional firms who charge by the hour. Solicitors, Architects and even the occasional Accountancy firm. A lot of my thinking comes from that experience, but also David Maister who wrote about managing the professional service firm, and Ron Baker, who wrote about Value Pricing.
My copies are over 20 years old, well thumbed, yellowed with age.
In this essay I comment on Ron’s work on value pricing - hence the title “What are you really charging for?”
A window cleaner I know once told me, with great gloom, that his was “a commodity business - anyone can clean a window, so it all comes down to price.”
Six months later, having changed nothing about the actual cleaning of windows, he had nearly doubled his prices and lost not a single customer. Well that’s apart from me - You know I think I might have saved £6,000!
What changed was not the windows. What changed was that he stopped believing he was a commodity.
I have spent more than thirty years helping people buy and sell businesses and look at their strategy. I have watched a particular tragedy play out again and again.
A skilled person builds a genuinely good service business. Their clients adore them. And yet they make a fraction of what they should, work themselves into the ground, and arrive at the point of selling with a business worth far less than the quality of their work deserves.
When I sit down to understand why, the answer is almost never a lack of talent or effort. It is pricing.
I am a third-generation accountant. Grandad (Cecil)… he preferred his middle name of Cecil to John, then my father now me, but I stayed away from the family firm. Probably far cleverer than me. Yet they let clients delay paying their fees until they brought their books in the following year. And my father would check that the adding machine had worked properly!
THE HAMMER, AND THE BILL
There is an old, likely apocryphal story that contains nearly everything you need to know about pricing a service.
A factory’s great machine grinds to a halt, costing the owner a fortune for every hour it stays silent. Nobody can fix it. In desperation, an old, retired specialist is called in. He walks slowly around the machine, listens to it, lays a hand on it here and there. Then he takes out a small hammer and gives it a single, precise tap. The machine roars back into life.
A few days later the bill arrives: one thousand pounds. Outraged, the owner demands it be itemised. Back comes the new bill:
“Tapping with hammer: £1. Knowing where to tap: £999.”
That small story demolishes the assumption on which most service businesses unconsciously price themselves. We believe we are charging for the tapping - the visible activity, the hours, the effort. But what the client actually values is the knowing where to tap: the expertise, the judgement, the years of skill that let you do in one tap what others could not do at all.
The tapping is worth a pound. The knowing is worth everything. And if you price the tap, you will starve, while the value of the knowing pours away unbilled.
THE TYRANNY OF THE HOUR
Consider how thoroughly the hourly rate gets this backwards.
If that old specialist had charged by the hour, his bill would have been pitiful - he was there twenty minutes. The faster and more skilful he was, the less he would have earned. A fumbling novice who achieved nothing over two days would have billed sixteen hours; the master who fixed it in one tap would have billed for twenty minutes.
The hourly rate, taken to its logical end, pays incompetence more than mastery. Which ought to strike you, stated plainly, as completely mad. And yet it is how most service businesses charge.
The American thinker Ronald Baker - who has done more than anyone to champion this idea, and whose work I draw on heavily here - has spent a career trying to abolish the timesheet from professional life. His argument, once you see it, is hard to un-see. Billing by the hour punishes efficiency, rewards padding, pits you against your own client (every hour you save is money out of your pocket), and caps your income at the ceiling of your own endurance.
Worst of all, it fixes your attention on your inputs - your time, your effort - when the only thing your client cares about is the output: the result, the problem solved, the worry lifted.
WHAT YOU MEASURE YOU CAN MANAGE
However, I feel strongly that managing professional time is important, and so 34 years after starting to do so, I still record my time in 5-minute units so that I know where my time is going.
I understand my productivity and my recoverability. But I never bill on the basis of time unless a client wants me to.
I encourage professional firms to do the same and monitor the “Practice Equation” of leverage & number of people; billable hours; rate per hour; productivity; and recoverability.
VALUE IS A FEELING, NOT A NUMBER
Why is water, without which we die, almost free - while diamonds, which we do not need at all, cost a fortune? Adam Smith wrestled with this and couldn’t crack it.
The answer is that value does not live in things. It lives in the mind of the person doing the valuing. A glass of water is nearly worthless by a tap in England and worth more than diamonds to a man dying of thirst in a desert. The water hasn’t changed. The wanting has.
Baker puts it simply: value is subjective. It is a feeling, not a number.
This is the key to the whole vault. If value lived in your service - so many hours, so much cost - you could price it by adding up the inputs. But value lives in the client, in how much they want the outcome you provide. So, the price you can command is not set by your costs. It is set by your client’s sense of what the outcome is worth to them.
Find a client a legitimate £40,000 tax saving and it does not matter whether it took you an hour or a week. The value is £40,000 in their pocket - and a fee that captures a fair share of that will feel like a bargain, while being many times what your hours would have “justified.”
WHY SERVICES, ESPECIALLY
A product can be reduced, by a determined buyer, to a commodity bought on price. A service is a far more wonderful thing. Two lawyers can do nominally the same work and deliver wildly different value. Two firms can offer the same service and be worlds apart in the experience, the confidence, and the outcome.
Services are, by their nature, easier to differentiate than products - which makes them ideally suited to being priced on value, if only their owners have the wit and the nerve to do it.
Wit, nerve? Or perhaps client perception. In our second year a client thanked me and put through a dividend for half of the profit and asked me to put in a bill equal to the other half to his company.
There is, as Baker insists, no such thing as a commodity. Only commodity thinking. And commodity thinking is a self-inflicted wound.
A FEW THINGS YOU CAN ACTUALLY DO
1. Have the value conversation before you quote. Resist the question “what do you charge?” with a better one: “let me understand what solving this would mean for you.” Ask about the problem beneath the problem, what it’s costing, what solving it would unlock. Listen far more than you talk. Baker calls this the hardest step in value pricing, and the most important. Get it right and the price almost sets itself.
2. Offer three options, not one. Give a client a single price and the decision is yes or no. Give them three - good, better, best - and the decision becomes “which one?” The dearest option makes the middle look sensible, and many clients choose up. You move from adversary to guide.
3. Name your price, then stop talking. The silence after a price is excruciating, and the temptation is to fill it by talking the price down. Don’t. The person who speaks first usually concedes - and it should not be you.
4. Stop discounting. A “small” 10% discount off a job with a 40% margin is a 25% cut to your profit. Worse, it tells the client your first price was never real and teaches them to haggle forever. If a client can’t meet your price, offer less work for less money - never the same work for less.
5. And don’t call your own baby ugly. The deadliest version of disparaging your work is when the owner does it himself - flinching at his own price, apologising for his fee. If you don’t believe your work is worth it, why should the client?
THE PART THAT INTERESTS ME MOST
I am, when all is said and done, an accountant specialising in corporate finance and strategy. So here is the part that matters most to me.
The way you price doesn’t just determine what you earn while you own the business. It determines what your business is worth when you sell it.
A business is valued, broadly, as a multiple of its sustainable profit - and the multiple reflects how reliable, defensible, and attractive that profit is. Value pricing improves every one of those things. It raises profit directly. It makes profit steadier. It makes the business genuinely differentiated, which is what protects it from competition. And it fills the business with loyal, quality-seeking clients instead of disloyal price-shoppers.
Two service firms of the same size - one billing by the hour and discounting to win work, the other pricing on value with a loyal client base - are not remotely the same proposition to a buyer. The first sells, if it sells at all, for a low multiple of a thin profit. The second sells for a high multiple of a healthy one. The gap, in real money on completion day, can be enormous.
The small, daily, often frightening decisions about what to charge are not small at all. They compound, over a career, into the difference between a poor business and a rich one - and, at the very end, between a business you can sell for a fortune and one you can barely give away.
Price is not a detail. Price is the business, distilled into a number.
There is no such thing as a commodity. There never was. Go and price as though you believe it.
If this struck a chord, I’ve written a longer piece applying Ronald Baker’s value-pricing ideas specifically to service businesses - and I’m always glad to have the conversation about value, whether it’s about your business or ours. Do get in touch.
Adrian Barker FCA | Managing Director | CBSL Accountants
