The type of pricing model you choose for your accounting firm has a considerable impact on how much money you’ll ultimately make. The industry standard for a long time was hourly billing – which is still a popular choice – but as you’ll see in the following paragraphs, there are other compelling alternatives. Accountants no longer have to charge an hourly rate.
What’s interesting is how the market for accounting services has changed, but many practitioners keep their pricing strategies the same. Customers want peace of mind and to escape the wrath of the taxman and trust you to protect them. There’s massive value in the services that accountants offer, and yet many do not use pricing models which reflect this. It’s why some accountants with less education and experience can outperform those who’ve been in the market for twenty years or more.
The fundamental reason for this has to do with what accountancy firms are really selling. For most customers, accountancy is not about making sure that the number add up (unless you’re dealing with a robotically-managed business). It’s about taking care of the regulatory and tax threats that they face. You might spend all day with a calculator and a spreadsheet balancing financial statements, but your real product is relaxation. Accountancy firms and spas have more in common than is traditionally accepted.
The pricing model you choose, therefore, should reflect the type of product you give your customers. Don’t confuse a product for a service. A service is the stuff you do – the adding, subtracting, tabulating and so on. A product is how you make your customers feel: relieved, overjoyed, confident, and peaceful. Never forget that when deciding on how to charge your customers.
Hourly billing
Hourly billing is where you calculate the number of hours you spent working on a client project and multiply that figure by your hourly rate. You’re an accountant, so we don’t need to work through an example. What perhaps isn’t clear is how to choose your hourly rate and the advantages and disadvantages that it brings.
The main advantage of hourly billing is that it makes your pricing administration simple. There’s no guesswork involved. It’s the sort of thing that practically any secretary can do for you, or you can do yourself in a few minutes on a Friday evening.
The chief problem accountants face is how to choose an hourly rate that makes sense. The amount you charge will depend on your experience, education and possibly the prestige of your firm. It’ll also depend to a degree on your location. The hourly rate for accountancy services in New York tends to be much higher than in Illinois.
There’s no easy solution here – you’ll have to make a judgment. Are your services worth more than the accountancy firm down the road? Do you offer a higher-quality or more reliable service? The answers depend on what your customers think about you and your firm. If you’ve got a reputation for being the best in town, they’ll pay more. If your reputation is bad, they’ll pay less.
Hourly billing, though simple, has some distinct disadvantages. The main gripe is that your customers fundamentally don’t care about the “services” that you offer. They’re not interested in how long it takes you to scan receipts or calculate their tax position – that’s all incidental to them. What they want is the finished article: the completed tax return ready to send off the taxman and all the peace of mind that comes with it.
When you send your client an invoice showing how many hours you’ve worked producing this service, the question is often “how?” Clients see the bill and the total hours worked and wonder just how it was that you managed to spend ten hours filing their accounts. From their perspective, things seemed a lot more straightforward.
Transparency is key here, but the hourly pricing model is fundamentally broken. It’s not consumer-friendly. You wouldn’t walk into a fast-food restaurant and order a meal with prices quoted by the hour. Your meal might cost the restaurant $80 per hour to prepare, but they would quote that. You don’t care about their labor costs; the product is what matters to you. The restaurant, therefore, charges a fixed price, maybe $8, and you walk off happy. It would be awful if they charged you by the hour. It wouldn’t make sense.
Fixed fee
Unhappy with hourly billing, some accountants are moving over to the fixed-fee model, sometimes called a fixed-price agreement. The fact that the accounting industry has separate nomenclature for what the rest of the world called “pricing” is revealing. Fixed fee pricing is what you find in practically every consumer industry.
The way fixed fee pricing works is simple. You and the client sit down (or talk on the telephone) about how much the services will cost in advance. You set out things like the payment terms, “deliverables,” and the scope of the work.
At the end of the negotiation, both you and the client should be happy with the terms and cost. Once you’re both clear on what you’re going to do, you’re ready to proceed.
Customers like fixed fee pricing because it lets them see upfront how much they need to pay. What’s more, you don’t have to introduce them to the minutiae of how you spend your time. Ultimately, you have a product to deliver – not hours in the day to fill.
There are risks, however, to the fixed pricing fee model. The main concern is the dreaded “scope creep.” It goes something like this: in the initial consultation, you set out precisely what you’d do for your client and how much you thought it would cost. The client agreed to that but later came back to you, asking for additional services, increasing your scope.
More often than not, the client doesn’t realise that this is what they’re doing. What they might see as the same as what you’re already doing for them could be a significant add-on. The trick here is to compartmentalise your work into chunks. The moment a client steps outside of the bounds of the agreement, you need to renegotiate.
Your team needs to understand this too. You need to train everyone to identify when a client is asking for work that falls outside of the original agreement. A simple pricing menu can help direct your people and let them know if the client has paid for a particular service or not.
Value pricing
The fixed fee model is, in many respects, just hourly billing in disguise. The client tells you the services that they want, and then you figure out in your head how many hours it will take and price it accordingly. You don’t introduce your customers to the minutiae of how you spend your time – you just tell them, through the fixed fee, how much time you’ll need for their work. You’re carrying out the same robotic pricing method as the hourly rate, but with a few psychological perks for the customer.
Value pricing, however, is a different animal. In value pricing, you finally accept that you’re not an accountancy service at all, but an agency containing a bunch of math whizzes who use their skills to sell relaxation. You’ve transcended to spa status. The crux of value pricing is this: you charge as much as your customer is willing to pay.
When you think about it, charging in this way makes a lot of sense. Bookkeeping is a service, but only the buyer can place a value on their peace of mind. You are their knight in shining armour, ready to whisk them away from the dangers of the taxman and regulatory authorities and help them and their business live happily ever after.
Value pricing, like fixed fees, relies on discussions in advance with your client, but the internal calculus is more complicated. Instead of just using a menu of prices to calculate a fixed fee based on how long a particular job will take, you’re looking for signals that the client is in pain and needs your help: the higher the pain, the higher your fee.
Value pricing can be exceptionally lucrative. By productizing what you do rather than selling services, you suddenly tap into a wealth of consumer surplus – the true value that people place on what you do. It’s a win-win.
One common objection to value pricing is that it’s price gouging. And, in a sense, it is: instead of robotically charging the “going rate,” you’re figuring out who you can benefit most. But this is a good thing: you’re helping those who would be lost without you.
Another common objection is that people will switch to another, “cheaper” accounting firm. But when you think about it, people are already free to switch because anyone can find out the hourly rate of the firm down the road.
The value pricing model actually makes your pricing less transparent and easy to compare. Each client is an individual and unique, you say, and so they pay different prices.