Stop Billing and Ducking, Start Pricing With Options

"Bill and duck" is a term I coined a few years ago.

In the case of CPA firms, billing and ducking is the process of proposing a price (as with an audit), and later billing an extra amount that the client didn't preapprove. The "bill and duck" practice is acting on a temptation to capture result of scope creep combined with a lack of communication.

The scope creep can take a couple forms. Either the original (usually time-based) budget for the work was higher than the price a firm proposed (to get in the door, the firm reduced their price to some amount below budget—probably a number close to the prior-year auditor's fee), or else "other issues arose."

Most commonly, these "other issues" are pinned on the client for not being ready when the job starts. And further blamed on "staff not telling partners before proceeding with the work." (These are actually both the firm's fault, which I discuss in "Retraining Clients When You've Taught Them to Abuse You.")

Billing and ducking is just ugly. So are write-offs. There are better ways.

When a firm wants to get in the door, a low price will often do it. But do yourself a favor and make sure of two things:

1. Scope better. Be very, very, very, very clear about the scope of work—both with the client and with your team.
2. Offer options. By offering options, you can show your lowest (walk-away) price, but you can also move most buyers up.

The scope needs to be the specific definition of what is included your work at each price. And even what isn't.

The typical hours budget is internal and inadequate for scoping. What we're looking for in pricing is scope definition that matters to the buyer. The generic "scope" or "approach" section found in most firm's proposals is so canned and vague that it is usually inadequate. Clarity is important, and by presenting options side by side, buyers can easily see what is not part of your lower prices. 

This perspective was challenged in a post on Accounting Today written by Edwin Kliegman called "Value Billing versus Low-balling Your Competitors." In it, he refers to an example in a prior article I was quoted in called "What Price is Right?" 

In the context of what I've written above about better scoping and offering options, I'm sharing a clarification of the example mentioned in the "What Price is Right?" piece. It expands on detail that space didn't permit in the article. I also posted this as a comment to Mr Kliegman's piece:

My point in the article is that firms are presently just proposing (for example) a $19K fee knowing that, internally, their budget for the audit will be $24K. They are presently low-balling and fully intend to do the $24K (or more) of work. Or worse, they are bidding the work at $19K to get in the door, and then later turning around and billing the client extra for scope creep (partners often say they don't even know about it until they see it on the WIP).

This happens more often than not. I call this "billing and ducking," which significantly destroys your client's trust in you (even when they do pay the surprise bill) and, in many cases, is downright unethical because clients should approve the work before it's done or not be billed for it.

Instead of the firm going in knowing they will be losing money on that work, or practicing a bill-and-duck method of attempted cost recovery, what I am recommending is that firms more wisely scope and price their work--to not take a loss, yet still be able to offer an in-the-door price.

When stripping out value from the original scope (in other words, create an economy-class offering), the firm can prevent a loss on the low-cost work. Value stripped might not even mean less auditing, it might be the timing or the method of payment (pay in advance, for instance, and receive the lower fee).

The firm, side by side with that, can also offer other options. The original scope and terms might become the midrange option, and a premium option might be added as well.

I assure you, clients never "laugh their heads off" at choices. They like them. It puts them in control which is right where they belong. Further, it changes your conversation with them from "will I do business with XYZ firm?" to "how will I do business with XYZ firm?"

And behavioral economics shows that people tend to go with the middle option or up. That's why three options are better than two.

As an aside, in my comment on Edwin's article, I also clarified two other common misunderstandings that I observed reflected in the articles. One is the difference between a "fixed price" and a "value-based price." The other is the use of the term "value billing" which needs to cease because there's no such thing. Here's why: 

It's important to note that none of this approach is "value pricing" at all. It's merely "fixed pricing."

Fixed pricing is when you commit to a certain price for a certain scope of work. A "value price" is never based on the seller's inputs that include time, efforts, or costs.

Value prices are based on the tangible and intangible results or outcomes for the buyer, and should only be employed when the buyer agrees that the worth is there for them to pay that price and when the seller agrees that the worth is there for them to do the promised work.

Lastly, some consider this semantics, but we (at VeraSage Institute) never call it "value billing" because billing is done in arrears whereas "pricing" always occurs in advance and is quite intentional.

We believe these definitions provide important distinctions that are helpful in clarifying the obvious confusion surrounding pricing practices.