The Rise of the Subscription Model with Ron Baker
Randy Crabtree welcomes Ron Baker back for Episode 82 of The Unique CPA. Ron discusses his new book, Time’s Up: The Subscription Business Model for Professional Firms, and the coming impact of the subscription model in the world of accounting. He reviews the reasons for making the switch in your own firm and makes the case for this metamorphosis through an evidence-based, data-driven approach.
Today’s guest is Ron Baker. I actually don’t think Ron really needs any introduction. Ron is a second time guest on the podcast, so I’m looking forward to our conversation today, but I will do a quick introduction. He is a top selling author and “author” is going to be a topic we’re going to talk about somewhat today. He’s hosted the radio show The Soul of Enterprise, he’s a perennial fixture on the Accounting Today’s “Top 100 Most Influential People,” landing in the top 10 for I think the last 10 years in a row, probably 11 years coming up here in another month or so I think is when they’ll release the list this year. He is in the CPA Practice Advisor Hall of Fame. And honestly, you know if I say the name Ron Baker, everybody thinks about pricing models, and really, that’s—he’s the go to when you want to know information on that.
And that’s what we’re going to be discussing today because he’s got a new book coming out called Time’s Up. It’s Time’s Up: The Subscription Business Model for Professional Firms. I’m really excited to talk about this. Ron and I teased it a little bit last time when he was on the show, we did a little bit of history of billing and how he got into the value pricing. But now we’re gonna today get into this subscription pricing model. Ron, welcome back to The Unique CPA.
Thank you so much, Randy. Delighted to be here.
And I’m thrilled to have you. I had the pleasure of meeting you in person, oh, a month ago or so, we were in San Diego, right?
Yeah, without rain. At Intuit. That’s right.
And that was, we got to hear you talk about the subscription pricing model, which just intrigues me. Most of the things you say, It takes me a few seconds to catch up. But you did a great job there, and I’m really looking forward to talking about this today.
You know, before we even get into anything, you know, I did mention you have this new book coming out. And I got the name right, correct?
Yep, you sure did. Time’s Up.
Alright. And when, and I think we’re going to be releasing this podcast right about the release date, but do we have a “kinda sorta” release date for the book?
We do. Amazon is saying, December 8th—that’s subject to change. But I think that’s going to be close. So I’ll go with December 8th.
Alright. Well, based on scheduling this podcast is going to be released December 13th, so the book should be out when you’re listening to this podcast. So go to Amazon or go to Soul of Enterprise, probably you can get the link there as well, I’m assuming.
And if it’s not out, on TheSoulofEnterprise.com/TimesUp, we still are making our preorder club available. So people who preordered the book and sent us the receipt, you’ll get some benefits. And you’ll be able to come to our virtual events with me and Paul Dunn, the co-author of Time’s Up. And of course, my co-host, Ed Kless, will be there as well. And we’ll talk about the book and we’ll take questions, and we’ll probably do a couple of those.
Nice. That’d be fun.
Alright, so let’s talk about this new model then somewhat. I mean, you, I don’t know how many years ago, 30 plus years ago?—
‘89? Alright, so 33 years ago. So you started with the “value of billing” model, which I think was awesome. As a firm, we as a specialty firm, we follow that now. We’re going to have to maybe offline, or even online, we’ll talk about how we can put the subscription pricing model onto our firm. And I think I asked you that last time, and I still don’t completely see it, but I’m sure you can convince me we can at some point.
Well, let’s talk about this. We had the value, and now just the world’s changed, professional services changed. Now what you’re saying is this subscription pricing model—dig deeper into that, what is that? And why do we need to do this?
Yeah, I mean, welcome to the subscription economy. It’s projected to grow to one and a half trillion dollars by 2025. It’s $650 billion in 2020. So this thing is just taking off and we’re trying to track it on my show The Soul of Enterprise, and I can’t keep up with it, Randy. I mean, every day there’s a new subscription offering, I can subscribe to a boat from Brunswick, I can subscribe to a home in over 40 countries with Rome. I can subscribe to a Porsche or a fleet of Porsches, which is kind of nice. I can subscribe to a vacuum cleaner, cleaning my home, all sorts of things.
So I think you know, I’m not saying that you’re never going to buy anything again. But what I am saying is you’re gonna have the option to subscribe to nearly everything. And even if your business—even if it ignores this completely, it’s going to be faced with it, because your competition is going to figure out how to do it.
Yeah, as you’re saying that, I was just in my head counting all the subscriptions I currently have. It’s a lot.
Especially on the business side, right?
Oh, yeah. Oh, for sure. I mean, yeah, we and we probably have had that for quite a while with some things. I mean, we’ve been subscribing to our, you know, tax research, you know, software for a while, we’ve been subscribing to other things.
And I know one thing that you mentioned, and I’m probably jumping ahead here, but that just made me think about that, is you mentioned when I saw you in San Diego. And again, I might be jumping ahead, but this “plussing” model that you kind of learned from Disney. It may not be the time to get in there, but when we’re talking about this, because I’ve heard you talk about this vacuum before—and it’s unbelievable what you get with that. It’s like, you don’t have to do anything. You own a vacuum now and you never even have to worry about vacuuming your house again. And so I’m guessing they’re always looking for new services to add and that kind of model?
Yeah, I mean, the innovation is baked in. And that’s exactly what Walt Disney meant by the term “plussing.” He said, “Unlike a movie that we do, you know, we put in a can and I can never change it,” he said, “We have to continuously plus the park—Disneyland—because it’s constantly growing and evolving. And we can change it, we can continue to delight our guests with new and wondrous things that they can discover with each visit.”
And so he was a big believer in just plussing. And of course that doesn’t have anything to do with the pricing. You know, he just wanted that innovation to be constantly there. And what got me started on this, Randy, was the question, what would happen if Disney started accounting firms?
And people kind of you know, twiddle with that? And I say, Well, wait a minute, I’m being serious.
You know, they would up the customer experience, wouldn’t they? They wouldn’t view it as a commodity. So they would charge premium prices, they would do a lot of things differently than what we do, because they bring a different paradigm to it.
And so I thought it’s time to up our game, because I think we talked about this before, but I think everybody—I think we compete against any organization that has the ability to raise our customers’ expectations. So right now, today, I believe that firms are being compared to—especially the digital experience to—Amazon. One click. That’s what you’re being compared to, like it or not. You’re being compared to Domino’s that can show you where the pizza is at every step of the process.
We need to up our game. And I just don’t think we’ve done a very good job, the average NPS score in the accounting industry is 25. You know, and Apple’s up at 80, and BMW and Porsche are in the 80s. And I just think we need to plus our offering, because if you go to the market with a common offering, you’re going to command common pricing. But if you go to the market with an uncommon offering, you’re going to command uncommon pricing.
I’ve heard you say that, and I love that—the uncommon offering, the uncommon pricing.
So let’s talk about this then for county first our professional services firms. I think it’s hard for people to put their mind around what this even means. And so, why don’t you define the subscription price—how that works in an accounting firm—and then what are these plussing offerings and everything else that goes into it? And then at some point, we’re gonna have to figure out how you implement this. So just define it first, if you can.
Sure, no, that’s a great place to start. Because, you know, I don’t even want to talk about hourly billing, because I think we’ve transcended that as a profession. I mean, maybe not across the board, but enough of us. We’re in that early majority category on the diffusion curve, you know?
So to me, mission accomplished, it’s time to move on, it’s time to move back to the left side of that curve.
But so when we started doing value pricing, we taught you, price the customer, because values are subjective, and each customer’s got different value preferences and what they’re willing to pay for things. So we said price the customer, not the services. And to a large part, I don’t think that’s gone very well, because when you look at how firms have implemented like three choice pricing, you know, you get three choices? The difference between the tiers is usually based on scope of services, so even with value pricing, to some extent, we’re still caught in this trading services for dollars, just like we were caught up in trading hours for dollars—which is a lot worse, by the way.
But I don’t think adding services brick by brick builds up any more value, I really don’t, because customers aren’t buying services. Services are a means to an end. And I think we should be pricing that end. So Michael Hammer has got my favorite definition all time of what it means to be a professional, and that is someone who is responsible for achieving a result rather than performing a task.
If I want a bunch of tasks done I hire a day laborer, you know—clean my gutters, walk my dog, mow my lawn, I hire a professional—a doctor, a lawyer, a CPA—I’m trying to get to some result, some outcome; better yet, transformation, which we’ll talk about. So I think that’s where we really need to focus, we need to focus on what the customer is buying. You know, I always like to say that when a loved one has a baby, you don’t want to hear about the labor pains. You want to see the baby, you know? I mean, that’s the end result.
So my definition of the subscription business model, and trust me, this is a suitcase sentence, so I’m gonna have a lot of unpacking, because each one of these words is doing a lot of lifting. But the subscription business model is a periodic recurring payment for frictionless, ever-increasing value and serial transformations.
So obviously, the recurring payment is the subscription model, whether that’s monthly, quarterly—we can talk about the pluses and minuses of having different rhythms for that, you know. Some subscription firms have weekly cadence on their payments, some monthly. I’ve kind of landed, I think monthly is the optimal, but you know, your mileage may vary. This is something you need to test.
But for frictionless, ever-increasing value, this is what I mean by plussing, and also plussing the customer experience. It needs to be frictionless. It needs to be convenient. It needs to offer peace of mind. So the customer feels like they’re always in good hands—they’re not going to be nickeled and dimed, not just for calling you or visiting with you, but even for some of the work that we produce for them, because that’s not the focus. The focus now is helping them do these transformations, which is when you take a customer from where they are, to some desired future state. And I should say, to be technically correct, we guide our customers.
They have to want to change, they have to be motivated. If they’re not, they shouldn’t be a customer. You know, if I go to a personal trainer’s, I want to lose weight and get my BMI here and blah, blah, and I don’t follow any of his advice, he should fire me, because I’m going to be a walking billboard. And that’s you just don’t want customers like that, that don’t value you or don’t take your advice.
So these transformations, when you move somebody or guide somebody from where they are to some desired future state, that’s a personal effectual transfer. You literally change the person. They’re not the same person when they get—just like when we get married, or we get our CPA certificate, or we graduate from college, you know, we have all these memorabilia to signify the big transformations in our life. Well, we can do the same thing with our customers—we can help them grow their business, make it more valuable, help them sell their business, help them retire, help them get their kids into college, help them plan their legacy. We do so many transformations, but we don’t use this language. We talk in terms of service, and scope of work. And you know, that needs to go away, because we’re responsible for the result. And to me, the result is creating a transformation.
Alright, so transformation. So there was a lot in there. And I don’t know if you unpacked the whole thing yet, but there were some questions I have there. Because okay, so we are in a relationship we’re building, and we’re helping, we’re transforming. But we still can’t be—I mean, we have an expertise. And there may be something out of that expertise that they need help with that we just can’t provide. How do we build that in? Or is that built on the subscription? Or that’s just, you know, “I can’t do that. I’ll refer you out?” Or how’s that come into play?
This is a fantastic question. This is not a pricing issue. This is exactly a strategy and positioning issue. So first off, you need to figure out, are you a Morton’s? Are you a McDonald’s? Or are you vegan? Right? I mean, you can’t be all three under the same roof. The narrower your focus and your positioning is, the better off you’re going to be.
So when I talk to firms that, you know, have customers that might pay ‘em $1,000 a year and then they have others that pay 100 grand or 50 grand a year because they get audited, or because they have an auditor or whatever, I think, “This is no way to run a business. This is like selling Rolls Royces and Chevys out of the same dealership.” It doesn’t make sense. And that’s not a pricing issue. That’s a strategy positioning issue. So that’s the first thing you really need to hone in on what it is that your firm is and who its ideal customer is.
And then you need to ask yourself, “What do we want our customers to pay us for?” This is known as the revenue model question—not the pricing question. The pricing is how much do we want our customers to pay. The revenue model question is what do we want our customers to pay for? So you brought up the vacuum cleaner. If I subscribe to the Roomba vacuum cleaner, 30 bucks a month, I’m not buying a vacuum cleaner and the IoT connection and the fact that they send me a new, you know, trash bag when it’s ready to empty and little brushes that need to be replaced. I’m not buying any of that—I’m buying clean floors.
Without any hassle, without even thinking about it. Once I set the thing up and it tracks my house, I don’t have to think. It just goes out, when I set it to come out and vacuum when I’m not home or whatever. And I’m buying cleaning floors. So the subscription model forces us to think about, what is it the customers paying you for? It’s not services, it’s not a tax return. It’s not even tax savings. I know we get caught up in tax savings, and I’m all for finding every loophole and paying, you know, the least possible. But I’ll tell you, Randy, I think we’re missing a huge opportunity.
And I borrow heavily here from my colleague, Paul Byrne, who is a chartered accountant in the UK, and he likes to sit down when he boards a customer, a new customer, and says “One of my KPIs is you’re going to pay more taxes if you work with me—period—because I’m going to grow your wealth beyond belief.”
I mean, and there’s just, you know, past a certain point, it’s really hard to shelter income. So anyway, all I’m saying is that, that that’s more transformation language than just, “Hey, we’re going to solve problems.” I think if all we’re doing for our customers is solving problems, we’re just reverting back to the status quo. We’re not advancing them. Transformations advance people, because they change. It’s like, you can never step in the same river twice, because the river’s changed, but so have you.
So how are you going to get—because I love what you’re saying there. I think there’s a mindset where you’re, that’s a huge mindset that has to change. Because just, I mean, I’ve been talking a lot lately, and you and I were at this conference where it was about tax advisory, and just getting people to start changing to a tax advisory model, rather than a tax reporting model, is an issue. And now all of a sudden, we’re not just going from tax reporting to a tax advisory, we’re going to this transformation of this entire family or this, entire business, or this entire organization. I mean, that’s going to be huge, just that mindset change. How are you going to accomplish that?
It is. I mean, and I didn’t mean to dodge your specialization question either, because, as you know, because you heard this, but my model, the model I want to see emulated in our profession, is exactly what the concierge doctors and the direct primary care doctors are doing—which is when you pay them, you subscribe to their practice. And it’s not a fee for service model, they don’t take insurance, they don’t take Medicare, anything like that. You pay directly. And they’re a general physician—most of these docs—and they say to you, “Whatever you need, that we can do,” which automatically draws a scope around it, because you’re not going to go to them for oncology, or cardiac surgery or knee replacement, but for whatever they can do, you’re covered. If you know you plunge a knife in your hand three times during the year, you’re covered.
You shouldn’t do that.
We’re not going to trade services for dollars. We’re going to give you coverage on anything that happens, we’re going to give you same day appointments, we’re going to come to your house if you need it, your office if you need it, we’re going to FaceTime you or you can text us, you have access to your health records. And when you come in and see us, you’ll probably be the only person in the office, because we don’t even have a waiting room, and we’ll spend about an hour to two hours with you.
Now, that’s so they can go deeper, get a better medical history, learn more about you, and actually not just cure you when you’re sick, which is like “We’re going to minimize your taxes,” they’re going to keep you healthy.
You’re making an investment in your health, which is really important. And these doctors have have plussed the offering. And the way they did it was rather than having 3,200 patients—average general physician in the United States—they have a cap out at 500 to 600, some even less. MD Squared, which started this whole movement caps out at 50 families per doctor.
That’s it. It’s like having a personal doctor. So I think that’s the model. Because when you ask people why they entered the profession, most of them will say “to help people.” You can’t help people if you’ve got a thousand, two thousand customers—I’m sorry—because relationships don’t scale.
I think that helps me a lot. Hopefully it helps others just with that, that mindset of how to look at this overall.
A couple things that came out of that. I mean, this is unbelievable. I just love this stuff, and every time you say something, I’m like, “Okay, I gotta get more information on that.” So you mentioned scope. And so there still is a scope—scope isn’t gone, we are this full service or whatever, but there’s still things we can do and can’t do—so we just have to look internally at ourselves and look at what’s our expertise, what are we going to offer. And does this somehow minimize scope creep still? I mean it because it’s so well defined that this is what we do. And this is not what we do. I guess that’s an individual basis. But how do we deal with that scope and scope creep potential?
Right. And this is another great question. And this, and I’ll tell you, a big part of this business model change, as in any change, is linguistics. So the vocabulary we use. And I no longer talk about “scope creep,” “out of scope,” “in scope.” To me that’s obsolete in this model.
What matters in this model is “covered / not covered.” So if I go to a DPC doctor, and, you know, I’m not going to be covered for any cancer treatment, or some type of surgery that they don’t do, or any other procedure that they might not do—I’m not covered, because that’s not what he offers. And since I believe all businesses are defined by the customers they don’t have, and the products and services they don’t provide—I think that’s how, that’s a true strategy is when you start cutting things off, and you say, “No, we’re not going to try and be all things to all people,” which I think too many firms try and do.
In fact, I don’t know if you remember, but when we were in San Diego, I got a question from a guy who said, “Well, what about the, you know, the $50 million company that you know, is kind of the one-off?” And I’m like, “You shouldn’t have them.” If most of your companies are between $2-5 million, you have no business having them. First off, you have a due care responsibility, which says you need to have expertise and deep experience before you take on anything.
Because the first principle is do no harm. So due care is written right into our principles from the AICPA of what it means to be in the profession, to be a professional. And so I think a lot of the work that we do that’s kind of one-off, or it doesn’t necessarily fit, I think that’s a big problem. That’s where usually most of our risk is, that’s how we get sued.
Because we’re playing, you know, it’s like going to a doctor, and he says, “Well, I dabble in heart surgery on the weekends.” Sorry, I got the wrong guy, I want the the person who’s done it a thousand, two thousand, ten thousand times. I don’t want a dabbler in this, you know, somebody with two or three customers.
So that whole due care and specialization and strategy, and also positioning, you know, being there for a certain segment of customers—that’s what defines your firm. Now, if you want to diversify and have, you know, big clients, small clients, or different industries or whatever, set up separate firms. Do it under separate brands.
But don’t try and be a Mexican restaurant, a Chinese restaurant, a Japanese restaurant, you know, under one roof, because all the meals will taste like crap.
Alright, so as this relationship, transformation-relationship we have going and I’ve defined my—say it again, that the do’s and the… what was the not the scope but…
Oh, covered / not covered?
Covered / not covered.
Alright. But I’m still the relationship, I’m still the go to I’m still the, you know, whenever they have something, they’re gonna come to me. And this is not in the things I’m able to do for them, do I as the relationship holder, want to have relationships with people outside that I can say, “I can’t do this, but here, I’m going to send you to this person, who can help you with your LIFO? Or who can help you with this setting up your estate plan, or who can help you with whatever else it is.” Is that a good way to look at this?
Absolutely. I mean, you know, we’ve interviewed Dr. Paul Thomas, who’s a direct primary care physician in Detroit. And he kind of explains what he does when a patient comes in that he knows has a problem that requires a specialist—whether it’s a dermatologist, a surgeon, an oncologist, whatever. And the first thing he does is he’s linked into a database of specialists where he can go post questions and get answers and guidance. And then he knows all those different specialties within his area. And he’ll say, “I will set you up.”
So he acts—and I love this—like a train conductor. He says, “I’m trying to get the medical care that the patient needs when they need it, and safely.” So he will actually come to the appointments with you.
To the specialist and sit there, and they will work together, just like CPAs work with the lawyers when they’re doing estate planning, or the financial planner, or banker, or whatever. So yeah, I think that’s an integral part of every firm—social capital. And we should refer more like that. I mean, doctors are masters at this, and we can easily have a sphere of influence with a bunch of different specialists that we can say, “Hey, I know a guy who does this, or I know several, you know, take your pick,” type of thing. But yeah, we should still be quarterbacking the relationship.
And that’s what’s meant by concierge. Right?
Yep. Okay, that makes sense. I like that—quarterback, and concierge, too—but I am learning today. This is nice. I appreciate this.
Alright, so in general, and I’m always a big proponent of this, I’ve talked about this all the time, I’ve heard you say it too. And you’ve already alluded to it in our discussion. But having a niche, I think is important for this, I think you probably agree. I mean, the stronger I am in whatever it is—an industry or a type of service, or whatever—it’s going to help define the things you can and can’t do for this client. And so are you a proponent of niching, then, and does that fall well into this?
Big time, big time. It makes everything easier, it makes your marketing, your communication, your messaging, your value proposition, talent recruitment—it makes everything easier. As opposed to trying to learn about a new industry, you know, every time you bring on a new customer. And I know that’s why a lot of us got into public accounting, because we say, “Well, I didn’t want to just work in one company and do the same thing over and over. I wanted to be, you know, stimulated by having these different industries that I could learn about.” Well, okay, that’s wonderful for your intellectual curiosity. It’s a crappy business model.
You know? If you look at the most focused companies in the world, they’re the most profitable and have the highest market cap. And I mean, Apple is a classic example. HP has 15,000 SKUs last time I looked, Apple has less than 100.
And Apple’s worth two and a half trillion, is it? I forget. You know,
I can’t even comprehend the number, yeah.
So it’s all about focus, yeah.
And so because you had mentioned that the doctor is going to go to the special appointment with you. And so what does this do to us as practitioners? If that’s a level of service we’re bringing, now we’re there—I mean, I don’t know if I would say this, but—24/7? I mean, because we’re already overworked, are we really supposed to be on call 24/7? Or is it the fact that now we have so many less customers? Because we get so much more profitability out of the fewer customers we have, that we have more time to go to these things?
I guess the question is twofold. Are we going to reduce our stress and burnout with this? And are we going to increase our profitability by doing that?
Right, great question. And again, the DPCs have already pioneered the path for us, because they went from a fee-for-service model that had them have about 3,200 patients as the average—and that’s why they spent five minutes with every patient, because they’re running from one room to another.
The DPC doc, like Dr. Paul, has like 550 patients. So he’s cut his capacity by a huge chunk. And he has capacity to go to those meetings with you, to see you same day, to handle an emergency, to FaceTime with you, have a chat with you, have longer appointments, those types of things. And yeah, it’s done exactly that in the DPC practice—there’s less Doctor burnout, the patients get better care, they have less ER visits, less hospital admissions, they take less drugs. Because usually some of these docs can do away with some comorbidities, which you know, which is phenomenal.
So they have all these metrics that they look at, from the patient’s perspective, about “Have we reduced comorbidities? Have we reduced weight, BMI, for those patients that want that?” And they track the health of their patients, even down to mortality, which of course they have to deal with as well. So, yeah, I think it’s a great way to increase capacity for a reduced number of customers.
But Randy, you can also get a three, four or five times price premium, because it’s an uncommon offering.
When somebody’s shopping for CPA firms say, and they go and they get maybe a couple bids, maybe one firm will show them three options, you know, all divided by scope of work, and blah, blah, blah. And then somebody else might give them an hourly rate with an estimated range or something. And then they come to you and they say, “Well, if you sign up for this tier, and you want us to do tax, you’re covered for anything that we’re capable of doing in tax, which means if you get audited, we represent you. If you go to tax court, if you do that, we’ll take you there, too.” That’s what commands a three or four price premium.
It’s not by how many services you can stack up. It’s by—and what my buddy Paul Kennedy does about “If you work with us, you’re gonna pay more taxes. That’s my first KPI.” That jars people when they hear that because they come to an accountant, they want tax savings, right? He’s like, “Yeah, sure, we’ll do that. But we’re also going to get you more wealth.” And boy, that lights a fire under people like you wouldn’t believe.
And it makes you different from all the other offerings. So there’s that whole common versus uncommon offering.
Yep. Alright, and you just mentioned tier in there. And that’s a common pricing, you know, now three tier pricing. Is this “one price fits all” or how is—I assume there’s still a, you know, some metrics that you look at to determine how ABC Company is gonna pay compared to XYZ company.
Right. And this again goes right back to the strategy and the positioning. So, like I have a buddy whose CPA firm does nothing but dentists, and only dentists of a certain size. He won’t take like a national chain or franchise, he’ll only take maybe a dentist with one to two offerings within a certain prescribed gross revenue range, because he knows everything about them. He seemed everything, every possible life maneuver from womb to tomb, with a dentist, you know, partner leaving, partners coming onboard, whatever, he’s seen it all. Divorce, you name it. Disability. So he offers one price to all of them. And I think ultimately, if you’re niched well enough, or if you’re, if your strategy and positioning—you can have one price for everybody, because you know who your ideal client is.
And when you talk about this issue, just like in San Diego, the guy said, “Well, what about the $50 million companies I have?” You shouldn’t have them.
I’m sorry, but you’re trying to be all things to all people. And it just doesn’t work. It complicates your business, it complicates your marketing. You know, I remember, I have a colleague, Dan Morrison, in San Jose, and he was really starting to become a big name within the tech companies, Apple and Google, you know, these engineers with stock options, really complicated tax situations. And he’d sit in front of an engineer and propose, you know, a $100,000 price, and the guy would look at them and go, “Don’t you do my brother in law’s taxes for 500 bucks?” He did. Because when he started out, he took everybody.
Well, you can’t sell $500 tax returns and $100,000 tax planning strategy engagements out of the same firm, so he took “the back of his airplane,” as we like to say, and moved it across the street branded in “Express Tax,” put an old agent in charge of it, and never saw those customers again—until or unless, they needed a CPA firm.
Right. Okay, so let’s talk about that then. Because, you know, people are gonna hear this and they’re gonna go, “Okay, well, I am just—my client base is way too diversified to be able to figure this out now, do you have a plan, or do you have a recommendation, how do you get started?” I mean, I can’t imagine that this is going to be you’re going to flip the switch and everybody’s subscription pricing tomorrow? Is it, let’s start with this is the industry, this is the client sighs You know, in the dentist, scenario, “Hey, we’ve got $5 million dental offices, that’s our strength. Let’s switch that first one. Let’s switch the next. Let’s grow the dental business. Let’s diversify these other, that don’t fit into this niche, and let’s go send them elsewhere, or start this other business?” How do you recommend people get going with this,
And I do address this in the book. There are three different models that are used to pivot to a new business model. And this doesn’t apply to subscription, though we have some empirical data on this now. And because it’s very hard for any business to disrupt itself, as you know, right? This is why you’re taken out by the tinkerer in the garage, and, you know, Steve Jobs looking at something that Xerox PARC did, you know, the interface and the mouse, and he’s like, he’s drooling. And Xerox is sitting here like “Yeah, it’s nice, but we don’t know what to do with it, because we sell pages. And we can’t put a meter on a computer.” So they were so stuck in their business model mindset, that they couldn’t see the opportunity in the potential of a new technology. And so most businesses find it very, very difficult to disrupt themselves.
Now there are anomalies to that. I can point you to Intel, I can point you to Charles Schwab Online, I can point you to Target, which was an incredibly disruptive move by them in the 70s, when they said, “Hey, we’re getting squeezed from the high end and the low end department stores—let’s create a brand new entity.” They called it Target, and eventually that entity cannibalized Dayton Hudson. That was a Dayton Hudson Corporation, so they changed their name to Target.
So the first model is when you create a new entity, and you put everything over there, the subscription model, the subscription accounting, by the way, which is completely different, the subscription pricing is different, the subscription KPIs are all different. And I think that requires a new, fresh mindset. You can’t have billable hours, can’t have timesheets. I mean, when we say “Time’s up,” we mean time’s up on that level as well. And so create a new model.
Model B is like when what you were saying, “Oh, we’re going to slowly test this. So maybe we’re going to take a few clients and put them on subscription,” or worse, I think, “we’re going to take the CAS department, and we’re going to put CAS on subscription.” The problem with that is the subscription is a business model change. It’s not a service line change. So that means everything about the business changes: innovation, plussing, all of that kind of stuff.
The third model is when you do what Adobe did, and to some extent Intuit and Sage and all the other software publishers, is when you say, “Okay, we’re going to stop selling software in a box. Everything’s going to be in the cloud. You’re gonna have to move over to the cloud. We’re not going to support the box software, it’s not going to be upgraded anymore. And on this date, this is when this all transpires.”
Now Adobe did this, they announced it, the investors went nuts, their stock tanked, their costs went up, because they had to put on this cloud infrastructure together, their revenue declined, because people on the cloud that signed up for it, were paying a monthly now rather than buying, you know, big box software costs. And there’s a name for that cashflow cycle, but it’s called “swallowing the fish,” because your costs are going up, but your revenue’s decreasing until it plateaus back up the other way. But anyway, so Adobe made that decision. And then they eventually, they transformed just like Target did, you know, the whole business was transformed.
So those three models. Create a new business. Eh, put your toe in the water with Model B and test it. Or do what Adobe did and just go all in on a certain date. Of those three models—and we have empirical evidence on this beyond belief—which one do you think is the most effective? I’ll ask you that.
Well, I’m guessing it’s the third model.
It’s actually model A.
Yes. By far. By far.
Now, the third model requires unbelievable managerial talent.
Oh, yeah. That’s what I was thinking!
Apple right now has got about a quarter of its revenue based on recurring subscription. You know, Apple Music, iCloud, you know, there’s various services that they offer, Apple TV. But my question is, why can’t I subscribe to Apple, and just get you know—
—every three years and new phone every year and new watch whenever, you know, they can have different packages, they can have the road warrior package, and the family package and the college student package. You know, they could figure that out. But I’m tired of buying SKUs from Apple. Because that’s not what I care about. I care about having a relationship with Apple. And if something goes wrong, they just, “Here’s a new computer,” you know, whatever. So but they are slowly trying to, I think gravitate to that model.
I was gonna ask.
Yeah. But that’s been the speculation, in fact, it was speculated that they were going to announce it this year when they rolled out the new phone and stuff, Tim Cook would make an announcement about being able to subscribe to the company. But I think that’s in their future.
But whether it is or not, when you look at a company like Apple, or Disney is starting to play with subscription. Obviously, they have Disney+, and they have ESPN, but you can even subscribe to the parks now. And some vacation packages. But my point is, most CPA firms don’t have the managerial talent of an Adobe or an Apple or a Disney, you know? So it’s better to spin off a new entity with a whole new mindset. And that way, it’s a true test. Because if you do Model B—and by the way, that’s the surest path to failure. We see the most failures with people that say, “Well, we’re going to test it.”
“I’m gonna dabble,” yeah.
Well, if you dabble, you’re not committed.
So as soon as you face the first challenge, go, “See, it didn’t work. I knew it. I knew it. I knew it wouldn’t work. I knew our customers wouldn’t go for it,” and whatever. No, because you’re not committed. You gotta have skin in the game. It’s like, Cortés, you know, burning the ships, “Hey, guys, you’re gonna fight and win, or you’re gonna die on this island.” So, you know, he went out and burned the ships. That’s the same attitude that model A is, and I think that’s what’s needed.
Alright, so I have to stop. I’ve been telling people with tax advisory, “Take a client, switch ‘em, build this model out, build that model out.” No, this is obviously different than with the subscription model is, but we’re gonna have to, you know, maybe it’s that new entity—you put everything over there, and that’s the way to go. I’m just gonna say, “Don’t listen to me and just go talk to Ron Baker about the way to get things going.” So that’s the way to do it.
Well, you know, you could do this with, for example, the transition from hourly billing to value pricing? That was one customer at a time. That you could do incrementally, because you know, and then you could just, “Okay, for every customer that goes on value pricing, we just stop running timesheets on that engagement. And then eventually, when we get 99% of our revenue, we’ll be there,” and you transform the firm. That’s kind of like the Model B approach. But I don’t think it works that way with subscription, because remember, with subscription, you gotta come out of the gate into the market with a plussed offering.
And a legacy firm is going to have trouble with that. There’s just going to have trouble with that. That’s why the fee for service doctors kind of look at the concierge doctors and go “What the hell are they doing? 32 grand a year? Nobody’s going to pay for that.” And of course they do.
So do you see this then as a—I mean, I assume you see this, that every firm size could do this. But do you see a sweet spot where this is easier to make the switch or are more willing to make the switch?
More willing, easier, is definitely the smaller firms.
All the action in this model transformation is going to take place at the small firm level. Probably starting with the sole proprietors, bookkeepers—bookkeepers are a natural fit for this, because they’re already relationship-driven anyway. They’re usually out there with the customer, and they kind of are the concierge, usually the go to person even before the CPA. The customer will ask the bookkeeper before they call the CPA, which is very interesting, if you think about it from a relational standpoint.
Yeah, I’m surprised.
And of course, the CPA is part of the bookkeeper’s social capital, too. So they, “Yeah, I know a couple CPAs who are really good,” whatever.
So I think it’s going to be the small firms, the big firms, just like with value pricing, they’re going to be the last dogs hanging at the party. I mean, they’re, you know, they’re going to, and I’ll just throw one more complication in here, because this one drives me crazy, but there’s nothing I can do about it: I’m told that if your firm does any type of a test work, that you need independence, you can not have a subscription model.
Because that impairs independence. And in my mind, Randy, that’s a feature, not a bug,
Right. Yeah, no, for sure. Although, now with that, with Private Equity coming in and separating the test work from the other work, maybe that won’t be an issue.
Exactly. And I think we’ll see more of that, too. No matter what business model Private Equity wants to put in, and they’re big believers in subscription, because they’re doing it all over with car washes. I don’t know if you’ve noticed this, but most car washes, now you can subscribe to.
Thirty bucks a month, you get a special lane, and you get right in front, and you can wash your car as much as you want.
And the mom and pops who brought in the PE people? “What do you mean when somebody comes, you know, every day two times a day?” And the PE people were like, “Great, let them because that’s delivering early value. You’re going to hook them for life.”
Right? Yeah, that’s nice. Alright. Well, anything that I missed, we want to wrap up before we close it up here?
There is one thing I should probably talk about a little bit because it goes to this outlier, this “What about the ones that don’t fit my normal position? You know that I’m a Mexican restaurant, but they want a little bit of Tex Mex or they want you know, whatever?” Well, there are strategies you can use for one off engagements.
So for example, you could have like, I’m thinking specifically, if you have a big cleanup, you know, maybe you have your bookkeeping cleanup, accounting cleanup that you have to do, maybe it’s multi-year, maybe there’s a bunch of tax returns you have to file, you know, to get somebody caught up, before you can start taking over their CAS work. You could put an upfront price on that just say, “Look, this is going to be X number of dollars, 10 grand or whatever, and then we’ll put you on subscription, and you can pick the package, what you want covered.”
And when I say covered, with tiers, what I mean is like, say you had a firm that had CAS, tax, and advisory. Well, if you wanted to, you could say “You can just subscribe to the CAS side of the firm. And you’re covered, though, for everything that we do within CAS. You’re covered for everything. Same thing in tax—if you step up to the tax, now you’re covered for everything that we do in tax. And if you want some advisory, you want some of these transformations, you’ve got to step up to the third tier, and that will get you transformations. And by the way, if you only want one or two transformations, we’ll guide you through those even go back to the middle tier until you want another.”
So you make it very easy for people to move around, just like Netflix does—make it really easy for them to cancel. So you could charge an upfront price for these one offs. Or you could say, “We’ll give you, we’ll make you sign a long term commitment.” Now, I think that violates everything about the subscription. None of us like being locked into our cell phone plan and being penalized when we leave early and all that.
I mean, that’s just, that violates convenience, that violates frictionless hurdles, and making everything easy. You could also—and I kind of like this one because I love the way this architecture works—say it’s a $10,000 cleanup job. Build that into your price, add it to the subscription, and then you know run the numbers on what that monthly payment is, but then let it decrease every month. So every month they see that price going down until that ten grand is paid off and they’re back on that regular subscription. I think that’s really interesting.
The other thing you could do, and people freak out when I say this, but I’m gonna say it—is you could trust your value. And you could say, “Okay, we’re going to do the cleanup job. But you have to subscribe—but we’re going to do the cleanup job. And we’re just going to take a bet, a risk, that the lifetime annuity that we are creating is going to be greater than the cost of acquisition, and it’s going to pay off in long-term customer value.”
Because the thing that I think people don’t take into account when they think about subscription versus say even value pricing, is there’s a big difference when your firm goes to sell. The buyer is going to look at, take your revenue, and he’s going to put it into two buckets: recurring revenue, and recurring revenue. And there’s a huge difference. Because recurring is kind of like a rash. It’s not predictable. We don’t know when it’s coming. We don’t know if it’s coming back. I mean, I know some of our compliance work is fairly predictable, but not all of it. And certainly not a lot of one-off projects. So that’s usually valued at one, one and a half times revenue.
The recurring revenues, the subscription that’s predictable, it’s got a predictable churn track record, lost customers—we’re seeing multiples of five to fifteen on this.
That’s a big deal!
So that’s gotta be part of the calculus. And you know what, that’s not part of the calculus in value pricing. Value pricing, you’re trying to maximize everything you can in the math of the moment. The subscription looks at the lifetime value, and it’s gonna get you a higher business price when you go to sell. No doubt about it.
Nope, makes sense.
Alright, before we wrap up, and I asked you this last time, and I’ll ask for some final thoughts in a second, because I asked you this last time, I don’t remember the answer. But this is something I like to do at the end of every show. And it’s important today, because I have John Garrett here with me today, and he’s always about “What’s your ‘And?’”, so I want to ask you, because John is here today, I’ll use his words. What’s your ‘And’? What do you do when you’re not out evangelizing on pricing?
Wow, I have a lot of Ands. I’m a big reader, so I love to read all different—history and big political junkie too. So you can imagine elections become like the Super Bowl, or at least the playoffs, you know, in the midterms. So that’s always interesting. I love to travel. I used to golf a lot, but not so much anymore.
Yeah, that it’s just, it’s such a time suck, you know? It’s so hard to find a day or it just shoots all day. Those would be some of the big ones. And of course, my radio show is a big And for me. It’s not work. You know, I don’t count on it for to live. But it’s a blast, because I get to talk to these really intelligent authors and people that I’ve admired for a long time, either from their books or just their work in general. And we’ve done four hundred and twenty shows, and I’ve gotten to talk to some really amazing people. And that’s just been, I can’t tell you what the joy that is, to be able to do that.
Oh, believe me. I know. I just got to do this for the last hour. So believe me, I agree.
Yeah. So those would be my Ands. I’m not sure what I told John, when he asked me, I think. I was on his podcast. Once he asked me, I have to go back and listen to what I said.
Yeah, I think I changed my mind quite a bit. I got some key ones that I keep going through, these four or five Ands.
Alright, well, let’s give everybody some more information on the book, where they can get it, and how to get ahold of you or find more information about you as well.
The best place for me—of course, I’m on LinkedIn, so you can find me there. I’m one of the LinkedIn influencers so you can follow me and I’ve got over 100 posts on my LinkedIn page. I’m also on Twitter, @RonaldBaker until Elon Musk kicks me off or makes me pay for a blue check. I’m also at TheSoulofEnterprise.com, where you can listen to all 420 shows, see our show notes, with links to additional resources and readings.
We do a show every year on our favorite books, which is really, really popular. So because we’re constantly—Ed and I are constant readers, so we’re always reading something, and we try and recap our top five books or so for the year. And you can also learn about Time’s Up at thesoulofenterprise.com/timesup.
I just recorded a series of discussions with Ed Kless, my co-host on the show, about each chapter in the book. It’s not an audiobook. What we did is we sat down and we talked about the highlights and the topic of each chapter, and I gave some material that wasn’t in the book, and all that. So we’ll be dribbling that out. And then we’re going to have virtual events with me and Paul Dunn, my co-author and Ed Kless. And we’re going to do one of those on December 12th. So right around, right after the book comes out. And we’ll talk about the book, and we’ll talk about, we’ll take questions. And then we’ll do another one in Q1 of 2023, after people have had a chance to read it and then it’ll probably be mostly Q&A I’m imagining. We might do other things in the future as well with it.
I’m gonna go preorder mine now so that I can get to be part of these events. I look forward to the reading, and I am so thrilled that I have actually access to the author if I do have further questions, which is nice.
Anytime. Happy to do it!
Well, Ron, I appreciate you being on the show today. It was a thrill again for me and I’m sure everybody listening.
Awesome. Thank you, Randy.
About the Guest
Ron Baker is the founder of VeraSage Institute, the leading think tank dedicated to educating professionals internationally. His mission is “To, once and for all, bury the billable hour and timesheet in the professions”. He also hosts the radio talk-show The Soul of Enterprise: Business in the Knowledge Economy on www.VoiceAmerica.com.
Ron has toured the world, spreading his message on pricing models to over 250,000 professionals. He has been named on Accounting Today’s Top 100 Most Influential People in the profession between 2001—2007 and 2011—2022; he was voted among the Top Ten Most Influential People in the profession from 2012—2022; he was selected as one of LinkedIn’s Influencers, inducted into the CPA Practice Advisor Hall of Fame in 2018, and received the 2003 Award for Instructor Excellence from the California CPA Education Foundation.
Ron’s latest book, Time’s Up: The Subscription Business Model for Professional Firms, was released in December of 2022, and is available from all major retailers.
Meet the Host
Randy Crabtree, CPA
Randy Crabtree, co-founder and partner of Tri-Merit Specialty Tax Professionals, is a widely followed author, lecturer and podcast host for the accounting profession.
Since 2019, he has hosted the bi-weekly “The Unique CPA,” podcast, which ranks among the world’s 5% most popular programs (Source: Listen Score). You can find articles from Randy in Accounting Today’s Voices column, the AICPA Tax Adviser (Tax-saving opportunities for the housing and construction industries) and he is a regular presenter at conferences and virtual training events hosted by CPAmerica, Prime Global, Leading Edge Alliance (LEA), Allinial Global and several state CPA societies. Crabtree also provides continuing professional education to top 100 CPA firms across the country.
Schaumberg, Illinois-based Tri-Merit is a niche professional services firm that specializes in helping CPAs and their clients benefit from R&D tax credits, cost segregation, the energy efficient commercial buildings deduction (179D), the energy efficient home credit (45L) and the employee retention credit (ERC).
Prior to joining Tri-Merit, Crabtree was managing partner of a CPA firm in the greater Chicago area. He has more than 30 years of public accounting and tax consulting experience in a wide variety of industries, and has worked closely with top executives to help them optimize their tax planning strategies.