A Heretic Speaks Out Against Value Billing

Value billing, as I understand it, is the concept that service providers should bill clients based on the client’s perceived value of the work completed. Across

Image courtesy of Stuart Miles / FreeDigitalPhotos.net
Image courtesy of Stuart Miles / FreeDigitalPhotos.net

the web, one will find plenty of articles about the wonders of value billing, sometimes even in the AICPA’s “Journal of Accountancy.”

Search “value billing” on Google and you’ll see nary a negative word about value billing. (Except in the archives of this law blog.) The few times a contrary word is written, defenders of value billing will rush in to strike down the heretic.

I’ve never been afraid of voicing my opinion on this blog, even if it’s contrary to what everyone else thinks. So here’s my opinion of value billing:

True value billing, where you bill a client based purely on the client’s “perceived value,” is BS.

Yep, I’m a value billing heretic in a world of true believers.

Areas of Agreement

I agree with proponents of value billing when they say that hourly billing is not the way to go (though I do bill by the hour sometimes).

I also agree with them that it’s important to be able to quote a firm price to the client up-front — something that’s hard to do when billing by the hour.

In my own practice, I use a “kinda-sorta” form of value billing, I guess. For tax work, I use a price menu where each form or attachment has a certain fixed price. For ongoing accounting work, I use flat-fee billing where the client pays a pre-determined, set amount each month for the services provided (but the flat fee is determined by an estimate of the ongoing time commitment.)

Determining prices is the hardest thing I do. It may be THE thing that I struggle with the most as a solo operator.

But I’m firm in my heretical conviction that true “value billing” is all wrong.

Example of Why I Think Value Billing is a Bunch of Hocus-Pocus

Let’s say I’ve got two tax clients, the Smiths and the Joneses. Both are married couples with kids. They both itemize deductions and have some daycare expenses. They come to me for tax preparation.

Value billing says I should bill each client based on how much the client “values” the work I’m doing. Meaning, the Smiths might pay $200 but the Joneses might pay $350 if I perceive that I’m providing that much more value to the Joneses.

Where does the extra $150 of value come from? How does one determine that? How did I decide it was $150 more instead of $100 more, or $50 more, or $10,000 more?

Image courtesy of iosphere / FreeDigitalPhotos.net
Image courtesy of iosphere / FreeDigitalPhotos.net

An article in the Journal of Accountancy says firms should appoint a “Chief Value Officer” and a “Pricing Council.”

The author opines that the “Pricing Council” should determine 3 price points: “Reservation” (where you turn a “normal profit”), “Hope For” (where you generate a “supernormal” profit”) and “Fist Pump” (where you “generate a windfall profit”).

Sure sounds to me like the service provider’s goal in “value billing” should be to jack up fees as much as possible, and hope that the client falls for the “Fist Pump” price.

Which leads me to this harsh conclusion — in order to value bill, a service provider should ask two questions:

  1. Is the client rich?
  2. Is the client naive about typical fees for the services they seek?

If the answer to these two questions is yes, then you’ve hit a home run and can jack up the fee while telling yourself that it’s okay because of the client’s “perceived value” — which is seemingly grabbed out of the sky.

So there you have it from this heretic on value pricing. I welcome commentary from any of the True Believers out there who want to save me from damnation for my failure to see the light of value billing.