{"id":3773,"date":"2005-04-21T23:37:02","date_gmt":"2005-04-22T03:37:02","guid":{"rendered":"http:\/\/blogs.law.harvard.edu\/formerlyknownas\/ron-baker-price-sensitivity\/"},"modified":"2008-12-04T18:05:07","modified_gmt":"2008-12-04T23:05:07","slug":"ron-baker-price-sensitivity","status":"publish","type":"page","link":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/ron-baker-price-sensitivity\/","title":{"rendered":"ron baker &amp; price sensitivity"},"content":{"rendered":"<ul>\n<li><span style=\"font-family: Arial;font-size: x-small\">In an attempt to learn more about Ron Baker&#8217;s theory of value pricing, and its application, your Editor did a little reading.  (See our simultaneous post <em><a href=\"http:\/\/blogs.law.harvard.edu\/ethicalesq\/2005\/04\/21\/ron-baker-sensitive-guy\/\"><span style=\"color: black\">ron baker: sensitive guy?<\/span><\/a><\/em>, April 21, 2005). Below are excerpts from Ron&#8217;s writings about <a href=\"http:\/\/www.apoyo.com\/english\/pub_opinion\/sen_precios.asp\"><span style=\"color: black\">price sensitivty<\/span><\/a> or <a href=\"http:\/\/www.investopedia.com\/university\/economics\/economics4.asp\">elasticity<\/a>, premium pricing, Change Orders, and related topics:<\/span><\/li>\n<li><strong><em>Ed. Note<\/em><\/strong>: Baker has taken some of his most frank and troublesome phrases out of articles mentioned here at <em>f\/k\/a<\/em>.\u00a0 In some instances, the version quoted is no longer available online, and we&#8217;ve had to link to subsequent, scrubbed versions.<\/li>\n<\/ul>\n<p dir=\"ltr\"><span style=\"font-size: x-small\"><span style=\"font-family: Geneva,Arial,Sans-Serif\"><span><span><span><span><img decoding=\"async\" src=\"http:\/\/media-cyber.law.harvard.edu\/blogs\/static\/ethicalesq\/RonBaker.gif\" alt=\"RonBaker\" \/><\/span><\/span><\/span><\/span><\/span><\/span><span style=\"font-size: x-small\"><span style=\"font-family: Geneva,Arial,Sans-Serif\"><span><span> <\/span><\/span><\/span><\/span><span style=\"font-family: Arial;font-size: x-small\">In the article &#8220;<\/span><a href=\"http:\/\/accounting.smartpros.com\/x8806.xml\"><span style=\"font-family: Arial;font-size: x-small\">Hourly Billing Limits Profitabilty<\/span><\/a><span style=\"font-family: Arial;font-size: x-small\">&#8221; (<em>SmartPros<\/em>, Jan. 2000; originally published in 1999, Harcourt Brace) Ron Baker says:<\/span><\/p>\n<blockquote><p><span style=\"font-family: Arial;font-size: x-small\">&#8220;This leads into price psychology, which has two components: (1) price leverage and (2) pricing <\/span><span style=\"font-family: Arial;font-size: x-small\">emotions. Regarding price leverage, the important point to remember is that you want to set prices <\/span><span style=\"font-family: Arial;font-size: x-small\">when you possess the leverage. Leverage does not imply an advantage possessed by one party<\/span><span style=\"font-family: Arial;font-size: x-small\"> over the other; it is more a question of who has the most (or least) price sensitivity at a given point<\/span><span style=\"font-family: Arial;font-size: x-small\"> in time. Professionals possess the leverage at the beginning of the engagement, before they have <\/span><span style=\"font-family: Arial;font-size: x-small\">done any work. Therefore, that is the point in time when we can command the highest price. After<\/span><span style=\"font-family: Arial;font-size: x-small\"> the work begins, the leverage begins to shift to the customers. Once the work is completed, <\/span><span style=\"font-family: Arial;font-size: x-small\">customers possess all of the leverage, and the professionals are left begging to get paid (ever the <\/span><span style=\"font-family: Arial;font-size: x-small\">hourly rate).&#8221; <\/span><\/p><\/blockquote>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">In &#8220;<\/span><a href=\"http:\/\/accounting.smartpros.com\/x8815.xml\"><span style=\"font-family: Arial;font-size: x-small\">Pricing Strategies<\/span><\/a><span style=\"font-family: Arial;font-size: x-small\">&#8221; he explains:<\/span><\/p>\n<blockquote>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">&#8220;Price leverage is basically the question of who has the most price sensitivity at a given point<\/span><span style=\"font-family: Arial;font-size: x-small\"> in time. Before any services are rendered, the professional possesses the leverage. <\/span><\/p>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">&#8220;. . . If you cannot conquer price resistance through educating the customer, then I would seriously<\/span><span style=\"font-family: Arial;font-size: x-small\"> suggest you not take the engagement. Never decrease your price in order to acquire a customer suffering from price resistance &#8211; that cheats your firm&#8217;s best customers, those who value what you<\/span><span style=\"font-family: Arial;font-size: x-small\"> provide, and subsidizes your worst customers, those drawn to you by price considerations alone.<\/span><\/p>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">&#8220;. . . By understanding price psychology, you will be in a better position to negotiate and command<\/span><span style=\"font-family: Arial;font-size: x-small\"> prices at the high end of the market.&#8221; <\/span><\/p>\n<blockquote>\n<p dir=\"ltr\"><span style=\"font-family: Times New Roman,Times,Serif;font-size: x-small\">[<em>Editor&#8217;s note<\/em>: Apparently, lowering a price for a price-sensitive client is unfair to other<\/span><span style=\"font-family: Times New Roman,Times,Serif\"><span style=\"font-size: x-small\"> clients, <\/span><span style=\"font-size: x-small\">but letting the price-insensitive client pay two or three or ten times as much <\/span><\/span><span style=\"font-family: Times New Roman,Times,Serif\"><span style=\"font-size: x-small\">as you might have <\/span><span style=\"font-size: x-small\">charged another client is just fine.  Go figure.]<\/span><\/span><\/p>\n<\/blockquote>\n<\/blockquote>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">In another article, Baker is quoted:<\/span><\/p>\n<blockquote><p><span style=\"font-family: Arial;font-size: x-small\">&#8220;We are advocating the CPA firm should charge commensurate <\/span><span style=\"font-family: Arial;font-size: x-small\">with the value to<\/span><span style=\"font-family: Arial;font-size: x-small\"> the customer, which has no relation to the <\/span><span style=\"font-family: Arial;font-size: x-small\">internal hours that it takes.  . . . You have <\/span><span style=\"font-family: Arial;font-size: x-small\"> to gauge the client&#8217;s <\/span><span style=\"font-family: Arial;font-size: x-small\">price sensitivity one at a time. &#8220;<\/span><\/p><\/blockquote>\n<p dir=\"ltr\"><span><span style=\"font-family: Arial;font-size: x-small\">In the Introduction to Baker&#8217;s <\/span><a href=\"http:\/\/www.amazon.com\/exec\/obidos\/ASIN\/0471264245\/ref=sib_rdr_dp\/104-1569557-1267912\"><em><span style=\"font-family: Arial;font-size: x-small\">The Firm of the Future<\/span><\/em><\/a><\/span><span><span style=\"font-family: Arial;font-size: x-small\">, a chart showing price sensitivity is &#8220;affectionately&#8221; <\/span><\/span><span style=\"font-size: x-small\"><span style=\"font-family: Arial\"><span>called &#8220;The Beloved Value Curve.&#8221; [at 4]  Here&#8217;s <\/span><span>what Baker says about the beloved chart<\/span><span> [at 5]:<\/span><\/span><\/span><\/p>\n<blockquote>\n<p dir=\"ltr\"><span><span style=\"font-family: Arial;font-size: x-small\">&#8220;The curve shows the relative value added by the professional has an inverse relationship <\/span><\/span><span style=\"font-size: x-small\"><span style=\"font-family: Arial\"><span>to the price sensitivity of the customer . . .<\/span><span> <\/span><span>For now, it is important to understand your firm <\/span><\/span><\/span><span style=\"font-size: x-small\"><span style=\"font-family: Arial\"><span>is all over this curve for any one given <\/span><span>customer, at any one point in time. The major mistake <\/span><\/span><\/span><span style=\"font-size: x-small\"><span style=\"font-family: Arial\"><span>professionals make is in treating <\/span><span>all customers equally by pricing their services with one hourly rate method, no matter <\/span><span>where they are on the curve.  The old practice theory has no mechanism<\/span><\/span><\/span><span style=\"font-size: x-small\"><span style=\"font-family: Arial\"><span> for capturing &#8211; <\/span><span>with innovative pricing policies &#8211; varying levels of value provided by the firm. One <\/span><\/span><\/span><span style=\"font-size: x-small\"><span style=\"font-family: Arial\"><span>of the <\/span><span>main objectives of this book is to help you understand where, exactly, you are.&#8221;<\/span><\/span><\/span><\/p>\n<\/blockquote>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">In another article, &#8220;<\/span><a href=\"http:\/\/accounting.smartpros.com\/x8800.xml\"><span style=\"font-family: Arial;font-size: x-small\">Change Orders: What a Concept!<\/span><\/a><span style=\"font-family: Arial;font-size: x-small\">&#8221; Baker tells his CPA audience: (emphasis in original) <\/span><\/p>\n<blockquote>\n<blockquote>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">&#8220;<strong>The moral<\/strong>:  Always set your price when you possess the leverage.&#8221; <\/span><\/p>\n<\/blockquote>\n<\/blockquote>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">Baker then suggests <\/span><span style=\"font-family: Arial;font-size: x-small\">ways in which the<\/span><span style=\"font-family: Arial;font-size: x-small\"> client can be maneuvered so that &#8220;a premium price&#8221; can be charged: <\/span><\/p>\n<p style=\"padding-left: 30px\" dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\"> &#8220;A <\/span><span style=\"font-family: Arial;font-size: x-small\">favorite way to make the client <\/span><span style=\"font-family: Arial;font-size: x-small\">insensitive to premium fees is the use of Change Orders <\/span><span style=\"font-family: Arial;font-size: x-small\">when services are needed beyond those covered in<\/span><span style=\"font-family: Arial;font-size: x-small\"> the initial fixed-price arrangement [no kiddies, pricing can&#8217;t really all be done up front].&#8221; <\/span><span style=\"font-family: Arial;font-size: x-small\"> <\/span><\/p>\n<p dir=\"ltr\"><span style=\"font-family: Arial;font-size: x-small\">In a subsection titled <\/span><span style=\"font-family: Arial;font-size: x-small\">&#8220;<em>Change Orders Indicate a Climb up the Value Curve<\/em>,&#8221; <\/span><span style=\"font-family: Arial;font-size: x-small\">Ron gleefully <\/span><span style=\"font-family: Arial;font-size: x-small\">points out that &#8220;One of the greatest<\/span><span style=\"font-family: Arial;font-size: x-small\"> advantages in using a change-order policy for all scope <\/span><span style=\"font-family: Arial;font-size: x-small\">changes <\/span><span style=\"font-family: Arial;font-size: x-small\">is that they point out value pricing opportunities.&#8221; <\/span><span style=\"font-family: Arial;font-size: x-small\">Baker&#8217;s parting wisdom: &#8220;change orders have &#8216;value <\/span><span style=\"font-family: Arial;font-size: x-small\">pricing&#8217; written all over them and <\/span><span style=\"font-family: Arial;font-size: x-small\">should be priced accordingly.&#8221; <\/span><\/p>\n<p dir=\"ltr\"><img decoding=\"async\" src=\"http:\/\/blogs.law.harvard.edu\/ethicalesq\/files\/2007\/09\/tinyredcheck.gif\" alt=\"\" \/><span style=\"font-family: Geneva,Arial,Sans-Serif;font-size: x-small\"> <\/span><span style=\"font-family: Arial;font-size: x-small\">Finally, if you&#8217;d like to see some of the results Ron suggests can be had using his value pricing <\/span><span style=\"font-family: Arial;font-size: x-small\">techniques,<\/span><span style=\"font-family: Arial;font-size: x-small\"> strategies, and psychology, see &#8220;<\/span><a href=\"http:\/\/accounting.smartpros.com\/x8797.xml\"><span style=\"font-family: Arial;font-size: x-small\">Change Orders and Innovative Pricing Methods<\/span><\/a><span style=\"font-family: Arial;font-size: x-small\">,&#8221; <\/span><span style=\"font-family: Arial;font-size: x-small\">(<em>SmartPros<\/em>, Jan 24, 2000). <\/span><span style=\"font-family: Arial;font-size: x-small\">It seems that clients, properly &#8220;leveraged,&#8221; will offer to pay two <\/span><span style=\"font-family: Arial;font-size: x-small\">or three times as much (sometimes ten times as <\/span><span style=\"font-family: Arial;font-size: x-small\">much) as a professional&#8217;s regular fees, and the <\/span><span style=\"font-family: Arial;font-size: x-small\">professional can sit back and rake it in, righteously smoting the <\/span><span style=\"font-family: Arial;font-size: x-small\">evil hourly billing system <\/span><span style=\"font-family: Arial;font-size: x-small\">and increasing the client&#8217;s perceived value.  (The shrewd professional will even give the <\/span><span style=\"font-family: Arial;font-size: x-small\">client <\/span><span style=\"font-family: Arial;font-size: x-small\">a discount off the 200% or 300% premium fee the client has offered to pay &#8212; earning both merits <\/span><span style=\"font-family: Arial;font-size: x-small\">points in <\/span><span style=\"font-family: Arial;font-size: x-small\">ethical-code heaven and the client&#8217;s trust and loyalty.)<\/span><\/p>\n<ul>\n<li><span style=\"font-family: Arial;font-size: x-small\">Find further response to Ron Baker&#8217;s approach to value billing in his Comment and my reply <a href=\"http:\/\/blogs.law.harvard.edu\/ethicalesq\/2005\/04\/08\/ethics-aside\/\">here<\/a>.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>In an attempt to learn more about Ron Baker&#8217;s theory of value pricing, and its application, your Editor did a little reading. (See our simultaneous post ron baker: sensitive guy?, April 21, 2005). Below are excerpts from Ron&#8217;s writings about price sensitivty or elasticity, premium pricing, Change Orders, and related topics: Ed. Note: Baker has [&hellip;]<\/p>\n","protected":false},"author":94,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"class_list":["post-3773","page","type-page","status-publish","hentry"],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/P6kP1R-YR","_links":{"self":[{"href":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/wp-json\/wp\/v2\/pages\/3773","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/wp-json\/wp\/v2\/users\/94"}],"replies":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/wp-json\/wp\/v2\/comments?post=3773"}],"version-history":[{"count":0,"href":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/wp-json\/wp\/v2\/pages\/3773\/revisions"}],"wp:attachment":[{"href":"https:\/\/archive.blogs.harvard.edu\/ethicalesq\/wp-json\/wp\/v2\/media?parent=3773"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}