How to Properly Price Accounting Services
Have you ever wondered why one accounting firm is getting at least double the price for the same service as another firm, or why most firms successfully achieve “write offs” on high-value work yet achieve “write ons” on low-value work?
Moreover, have you ever wondered why most highly educated owners of accounting firms make little more (and sometimes a lot less) than less-educated business people in other businesses?
If you have thought about these types of questions, you may think that “client types” or “location” or “service offerings” may be some of the answers. I am going to suggest these factors play a part, but they are not the main reasons.
You see, I just don’t get it. Here is a profession that is the last trusted advisor. Here is a profession that has a limited labor market at the skilled end.
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Here is a profession that has loads of work to do. Here is a profession that has an enormous amount of client loyalty. Here is a profession that offers so much value to its client base.
Yet, with all of those things in your favor (and yes, a limited labor market is in your favor), the financial returns the industry achieves are not at all commensurate with the intellectual capacity of the firm or the value that the firm creates with its clients! Not even close.
So, why is it so? It comes down to two main reasons:
- The way the firm is managed or led.
- The systems adopted internally.
I have seen firms with the best systems money can buy, yet they still achieve lousy returns. You can buy good systems relatively inexpensively. So, go and buy them.
Get two screens on every desk. Buy a proper knowledge management and document management system. Buy electronic working papers, procedures, and checklists. Buy high-speed scanners and other suitable software tools.
Better systems … simple! Just buy the tools, implement successfully, and then train your team on the usage. But better management, that’s another story all together.
There are many factors to better management. Let’s explore one of them in detail: pricing. How do you price your services so the price you charge represents the value you create?
First, let me lay it on the table that “time-based billing” is not the way to do it. Time-based billing does not promote efficiency (it actually promotes inefficiencies), and to get the “right price,” it assumes the time to do the job is correct and the price per hour is correct. Rarely are both correct.
I did 41 years of research into the accounting profession (from 1964 to 2005) and found that profit per partner at the lower quartile increased by 19 percent and at the upper quartile increased by 40 percent. Not even one percentage point per year over CPI – at the upper quartile.
The profession effectively went backwards. Why? I think the main reason was because of time-based billing. The expenses increased, so charge rates went up. The salaries increased, so charge rates went up. However, margins did not.
I see heaps of firms every year that have grown by head count, yet the margins have not increased. Sometimes they go backwards.
Surely (after 41 years) with all of the advancements in technology and knowledge did that the firm was more efficient and the “time to do a job” reduced? If that is the case (and you used the time-based billing method), then doesn’t that mean the price per job reduced or you ended up doing more for the client for the same price? Interesting question to ponder!
Second, let me lay it on the table that (as one of my mentors, Jay Abraham, said to me) “it is arrogant in the extreme to dictate to the market place how much they will pay.” What does that mean?
It means (as I say) “if they keep saying yes, then the price is WRONG!” That’s right – if your clients are saying yes, then the price is incorrect. To get around that, you need to test different prices for a service until the market place determines the right price.
What is the right price? Just below where the clients start saying “no.”
I must point out – you are not in the commodity business. You sell intellectual property enhanced by relationships.
For example, if you go into any supermarket, you will see a wide variety of bottled water. They will all be priced at about $3 for a 600ml bottle. You do not see one for $5.
Water is a commodity. It’s very hard to “sex it up” so that you can get a higher price for it. I did, however, hear of some water in Los Angeles that is being sold for $40 per bottle. My guess is that it’ll sell, but not in any huge quantity.
The point is, the more you can strengthen your relationship with your clients and demonstrate the value you create with your intellectual property, the more you can charge. With those two premises in place:
- No time-based billing.
- Testing different prices – what is the answer?
The answer has to be value pricing and pre-priced packaged services. And test the price until the market place tells you when enough is enough.
Pre-packaged services is where you list down every type of thing that you do and then attach a price to each service. You do not publish your prices in marketing material because that gives you no room to move (aka, test).
The firms I work with in my consulting capacity or coaching clubs tend to use a 13-page menu of service with pre-determined prices. The document is for internal purposes only and my clients tell me it makes pricing so easy. They also get write-ups on the jobs because the price is not based on time.
When it comes to value pricing (charging for what the job is worth and not what is on the time-cost system), it essentially comes down to two key areas:
- Self-belief, guts, and courage.
- Communication in advance (about the value and price) with the client before you start the project.
Throw in an effective sales process, sales training, using templates, and being proactive, and you can get started. The big thing is how do you determine the price?
If you can determine the value you are about to create to the client before you start a job, then it is relatively easy. Say to the client: “Based on our research, we know we can save you/make you $X by implementing some new strategies in your business. It’s going to take a fair bit of work from our team, and our fee for doing that will be $X. Is that OK with you?”
With any pricing, you should always have a fee quote/engagement letter in advance and on every job. The price/terms and what you do for the client should be communicated before you start.
The amount you charge is just a number. Pick any number that you think is feasible. There is no right or wrong number. However, remember, if they say yes, then the price was wrong!
What if you cannot determine the value to the client before you start? What you can do here is “make the invisible visible.” You need to communicate what you are going to do, when you are going to do it, and how you are going to do it. You need to keep communicating what you have done along the way.
The price? Pick one – it’ll be wrong!
What about the situation when you know you have been undercharging your client for quite some time? This might be a client where you constantly get write-offs, or one that the average hourly rate charged is well-below the rest of your clients.
What you have to do here is, first, have a conversation with the clients. You have to be brutally honest with the client and let them know that you cannot continue to do their work at the current price. You need to nominate a new price, communicate the value, and then be prepared to lose the client. You may not lose the client by the way!
What about when there is a blowout on a job? This may be a time-based billing job that was normally $3,000, and all of a sudden, it has a work-in-progress balance of $4,500 – and it’s not yet finished. If it ends up at $5,000 and you have not communicated the problem, then there is going to be pain either way. Either you’re going to write it down and get pain, or you’re going to bill it and the client will feel pain.
Solution? Simple. Communication during the work in progress. You need to monitor the work in progress, and if there are any problems, get onto it right away. Explain the problem and move on.
What if you have a new potential client who is looking to change accountants? They may be referred to you and they may be interviewing a number of firms.
They will be asking you all sorts of questions, and you need to answer those. However, many firms fall into the trap of answering questions rather than asking questions. You need to ask many questions of the potential new client so that they know you really do care about them.
Why don’t you try asking the following questions next time you meet a potential new client:
- Why were you referred to us?
- What did you like about your current accountant?
- What didn’t you like about your current accountant?
- What services are you looking for in an accounting firm?
- What are your expectations of customer service?
- How fast would you like telephone calls returned, emails replied to, your work turned around, etc.?
- Where would you like to take your business in the next five years?
- What are the biggest issues in your business right now?
- Where would you like your net worth to be in the next five years?
- If you could wave a magic wand, what would be the ideal role your accounting firm would play in your business and your life?
Once you have those answers, turn every negative comment into a positive. Make sure you can deliver on the requests, and do not lie. You need to clearly demonstrate why your firm should be chosen over every other firm.
You need to explain the way you work with your clients and what services you offer. You need to tell them that every service has a price, that you do not charge by the hour, and the client will always be told if there is any variation in the service offering or the price quoted.
The subject of pricing will come up at some point in time. When your new potential client asks “how much,” you need to tell them that you are NOT the cheapest accounting firm around.
In fact, you can tell them that it seems you are the most expensive – however, based on the service you provide and what you do for clients, your price is relatively inexpensive compared to others.
As you start thinking about a price, make sure you never give a price range (e.g., it’ll be between $6,000 and $10,000). What number are they thinking? Somewhere less than $8,000. More than likely $7,000.
If you say, “I am not exactly sure; however, I don’t think it will be any more than $10,000.” What are they now thinking? Around $10,000. Then give them a price. If they say yes, you’ll know it was wrong.