fine-tuning the subscription fee model

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with steven sacks
the new fundamentals: thriving in disruption

jamie lopiccolo, the managing member of a small midwest firm, has been employing a subscription-based model for more than four years to invoice clients for services rendered. in addition to positioning the cpa as the client’s partner for success, it also encourages those who employ the system to provide maximum value in each client interaction, rather than focusing on getting as much money or billable hours as possible. catch another conversation with lopiccolo here: sell service, not hours.

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the approach is to both manage expectations by the client and ensure a normalized cash flow for the firm. additional benefits include a more strategic approach to dealing with new clients because they are getting the full picture of their business’s needs.

more takeaways:

• make sure the client onboarding process is consistent from one client to the next with certain necessary customization during the initial client meeting and cpa research.
• there will be more competition for client accounting services and advisory services and more revenue opportunities, which is why firms should reduce the amount of time allocated to administrative functions.
• the subscription model also helps to determine which clients are not profitable, potentially leading to the firing of clients.
• more strategic planning can be offered to clients so they understand and better appreciate the services they are going to get.

james (jamie) n. lopiccolo, cpa, cgma is the founder and managing member of capocore professional advisors, a local cpa firm in lake orion, mich. he leads the firm’s advisory practice,  providing a proactive approach to the firm’s business and individual clients. he has leveraged the use of technology and cloud computing to stay competitive and relevant to the changing business environment.

transcript

steven sacks  00:01
hello, i’m steven sacks owner of solutions to results, llc, a consultancy that helps service firms and professional membership associations in the areas of communication, culture, education and training. today, my guest is jamie lopiccolo. jamie is the founder and managing member of capicore professional advisors in lake orion, michigan. he leads the firm’s professional advisory services, and in his way of doing it, he and i’ve had discussions many a time, and he did a webcast last year that we’re going to talk about it a little bit as we jump into today. but he takes a proactive approach in how he runs his firm, and how he manages the relationships with his clients. so welcome, jamie.

jamie lopiccolo  00:59
thanks, steve. glad to be back again.

steven sacks  01:02
so, it was around, i think, thanksgiving 2020, when you and i did a webcast entitled, the cpa profession: is it stuck in a rut. and we talked a little bit about some of the things that we found, may have had the profession sort of spinning its wheels. you had implemented, i guess, a minimum level of service agreement with your clients to help manage your cash flow and help manage their expectations. now, we’ve been hearing that the subscription model as another way of talking about this agreement is now becoming more popular within the accounting profession. but you’ve been doing it for quite some time. what are your — what have been your initial impressions? and how has it been working for you?

jamie lopiccolo  01:59
oh, it’s we started out by using it for all new clients coming onboard. and we’ve been over the last four years been rolling it out to every new client. and then as we go through, we’ve been introducing it to our existing clients. and we’re still probably — we’re the fourth year of a five- year plan of really trying to make our firm completely subscription-based model, including the individual returns. and so, it’s been — it’s been good. so far, we’ve gotten a lot of positive feedback from our clients. what the good thing was, is what we did is we established a level of service that we will not go beyond or go below, if you will. so, for example, we will no longer just do a tax return. we’ll do a tax return with tax planning, with several meetings a year and, individual returns and anything related to that. and then we’ll figure out an annual fee for that. and then we’ll divide it into monthly installments with our clients. and the client seems to like it, because it gives him a little bit of expectations of what the fees are going to be. so, there’s no surprises there. it provides us with a great monthly cash flow. and then also allows the client to budget exactly what they need to for their accounting services. in a way also, it allows us to be proactive with our clients. because now there’s no longer a guess of what our services are going to be, and what we’re going to be able to do for them or be available for them. so, for example, in every one of our service agreements, we include at least two and up to four meetings a year with the owners to go over various set of topics. we don’t necessarily always have an agenda. but there’s always a check-in where we’re checking in with the client. and those meetings could be an hour, they could be three hours, whatever. but the clients understand that there’s no fee associated with having that meeting with us. so, it really allows them to be more proactive, allows us to be more proactive, find out what’s going on with their business. and then maybe that leads to other engagements or something else. and maybe it doesn’t. maybe we work out the problem in that meeting, and we move on. so, it really gives them the sense of you know what? there are no surprises anymore, and i can really count on my accountant or my cpa to be my trusted advisor.

steven sacks  04:10
would you say that it’s your expectation that once you’re in a discussion with the client to have that agreement, be the result of your initial meeting? or is there a sense that they would prefer and it makes more sense to have a different type of agreement?

jamie lopiccolo  04:33
on new clients we don’t really give them the option, but we do sense that when we talk with them, a good portion of the class we do talk to give us positive feedback relative to the fact that it is a monthly subscription model. most companies nowadays are renting their software on a monthly basis. microsoft 365 for example, is is a subscription base. if you’re using quickbooks, quickbooks online is subscription-based. they’re already used to this level of service in their normal vendors and in normal operations, for the most part. that this is just one more service, and again, allows them to smooth out their cash flow. so, not a lot of them are pushing, pushing back. if i get pushback, if anything, is maybe because they feel that they’re, they’re getting services that they don’t feel they need. however, for me being their advisor, those are services that they need, whether they think they need it or not.

steven sacks  05:27
so that that must be a little bit of a challenge to overcome to convince them of something because in their mind, maybe some of them have like a preconceived amount that they want to spend.

jamie lopiccolo  05:40
right. right, or they have a preconceived set of services. you know, a lot of people don’t think that they need the tax planning, or they don’t need that second advisory meeting, or something along those lines. and i tell them that i’m not a tax preparer. i’m an advisor, a tax advisor. and in order for me to properly advise you, i need to be meeting with you. and so really kind of level setting those expectations of what my services and what the minimum, i’m going to be required for you to work with me. it’s important to set that in that first meeting.

steven sacks  06:12
so, do you have, in terms of the range for the services, if you have, let’s say, two similar types of clients, would they both be getting, let’s say, the same 10 or so items, or might there be — be an additional item or two that is sure particular to that industry?

jamie lopiccolo  06:39
so, we do have a standard level of services. we have a standard level, minimum level of services. and then we have a whole menu of other service options that we can add on. so, we may have a client that requires some sort of a different level of accounting, or bookkeeping services that is part of this. and some may just want, for example, we have what we call a quickbooks online. we have a reconciliation and review. and that is something where we maybe we look at the client’s books on a quarterly or monthly basis, maybe do their bank recs, and maybe look at the trial balance for any– any adjustments that need to be made. other clients may want us to do more in depth bookkeeping, of recording the transactions for them, in bringing in the bank feed and doing some other things. so, yeah, no two clients for us are the same. and there’s certainly not a — we don’t kind of just say, this is what you’re going to be at. we, we customize every one of our clients’ packages. so, you know, we end up in our processes, we have two meetings with them. we have what i call a discovery meeting or initial meeting where we talk about what our needs are, how we can help them and so forth. and then we go back and build up proposal, build a plan for them and present that to them for their consideration. and then we — if they agree to it, then we move forward.

steven sacks  07:53
you know, i could imagine beyond managing the cash flow within your firm and managing expectations, you could probably use this whole approach as an analytical tool to help you determine, you know, which clients may or may not be as profitable in your engagements — because,  i guess there’ll be some months where you have to eat some time with a client. and there’ll be other months in which you’re sort of ahead. you get my point.

jamie lopiccolo  08:25
yeah, yeah. so when we look at this as is that we’re not going to — not every client we’re going to be, you know, what we call making money. and we can have a discussion on what is making money, because at the end of the day, our fees are still higher than what our costs are going to be, it’s just maybe we’re not making the ideal amount of profit, or, you know, dipping in a little bit closer to true cost of operating that particular client. but, i look at it from a from a totality point of view. and i look at it, you know, i look at my clients as my portfolio. and we all have investment portfolios, and yes, we’d all want them to be, you know, the microsofts or the googles of the world, where they’re just constantly going up, and we’re making money every month on them. but the reality is, is we have some dogs in all of those. and at the end of the day, i just hope the overall portfolio is going to be on the positive side versus on the negative side. and, and historically, it has been.

steven sacks  09:18
but i guess it’s also a way to cull the a, b, c, d clients. and yeah, i guess you want to get rid of the d and try to move up the other two groups.

jamie lopiccolo  09:31
yeah. and then it also gives you  — you know, the nice thing with doing this is it allows us and it’ll as a firm, to really concentrate at the beginning of a client engagement of what are their true services that they need. so that allows us to anticipate and really sit down and say, well, they’re going to need this, instead of just kind of doing it. on the hourly basis, you’re just doing whatever, as it comes up, and you’re not really doing any planning in my mind because you’re you’re just saying: okay, this is this and we’re going to do this. we’re gonna do that. they call they needed this or, or whatever. whereas in our process and other firms are doing this as well. but in our process, we’re trying to anticipate all of their services and getting those lined up. so that way, we know exactly before the start of a, you know, right now we’re in first of january. so we’re in the start of what i call 1099 and year-end payroll season. so this is where we’re preparing all these. we already know the number of clients. and we’ve already done a lot of prep work ahead of time, because they’re already on that subscription model. and they’re already paying for that level of service. and so we’ve anticipated that ahead of time that they’re going to need 1099s. and so we’ve just already started. we started the process right after october 15, to start getting the firm ready for this. so hopefully, that it’s not a crazy time for us. and, you know, as we  — the goal for the 1040s, which is the last element for us to bring on to this subscription model is for us to know what 1040s we’re going to be doing before tax season starts. because they’re all going to be starting that monthly agreement before we start tax season.

steven sacks  11:03
you know, one of the things that you and i have discussed, also in the past, was this concept of value pricing or value billing. and now there’s this…

jamie lopiccolo  11:13
i heard about the value billing. in ours, we’ve developed a different model to determine our pricing based upon the size and what’s involved with the complexity of the client. you know, again, from our perspective, the values in — in the services that we provide, and what we’re doing and the client size, complexity, there’s a lot of different factors that come into value billing versus i saved you x number dollar taxes, because the value billing — to some extent —  model is requires you to have an outcome first, and then come up with the bill, right? so, we’re coming up with — in even in our advisory level services, we’re coming up with the outcome at the beginning of the engagement to present to the client to show that where our value is on this particular engagement. so based upon complexity and results, and so forth, versus, you know, hey, i just saved you $20,000 in taxes. so, i’m going to bill you x number of dollars, because i did that. where we’re going to anticipate what we think the savings are going to be at in various things. you know, one of the one of the big things that we look at is in any new clients. we look at their entity structure. and we go through an analysis to determine is there some possibility to save them if they’re not an s corporation? or should they be an s corporation? so, one of our first advisory services that we require our clients to go through is this evaluation of their entity to make sure that they’re in the proper, proper entity. and we’ll do a real rough calculation of where they’re at and make a determination that, hey, if we make these changes, we think we can save you x number of dollars of taxes. and if you don’t do anything, this is the price of you’re not doing anything. and this is the price of you doing something and that’s our fee. and usually, our fee is is going to be much more beneficial than them doing nothing over a five-year period. yeah. and the tax laws changed a bit and has been more complex. you know, before in our industry, it was, you know, you’re an llc, let’s make an s corporation. that was the natural transition. nowadays, there’s too many other factors that come into play to just to say, you’re an s corp. and i’ve seen clients where other practitioners have done that. they’ve just said: well, you’re making too much money, you’re paying too much in self-employment tax. so we’re going to make you an s corporation, ignoring some of the other impacts that go into the income tax that the client pays, because it’s income stuff — it’s all taxes. so, we take a holistic approach of looking at what is your total tax liability from a to z? and are they the best entity? you know, that’s just a preview of what we do. and then we look at other things. you know, what would it be to to put in a 401k or so. we’re building the plan before we before we meet with that client.

steven sacks  13:58
that makes a lot of sense, because now they’re coming into the meeting and understanding really what a strategic approach you’re taking, rather than looking at it ground level. and it’s kind of hard for a typical client to understand especially if they were never getting those types of services to begin with, you know, from a predecessor cpa.

jamie lopiccolo  14:23
this is kind of propelling the cpa profession into a different model than they’re ever used to. they’ve always looked at them as service providers and never product. and then i’m making the saying that our services are our product. and as if you were to buy a high level, like for us, if we were to buy a high-level tax program, we wouldn’t just go out and just tell them they want to buy it. we’d meet with the sales rep. we talk about it. we identify the services that we need. and then they’d come back with a proposal letting us know what our fees are going to be in how we’re going to pay for and so forth. this is no different with us doing the analysis of what we think our clients need.

steven sacks  15:01
well, the bottom line is, however you want to slice and dice it, you are providing value, and therefore, your services you bill are going to — you’re not paying for the actual thing. they’re paying for your knowledge.  look, that’s, that’s terrific. any final thoughts as we close today’s session with respect to where do you think subscription pricing will go? and will it be, let’s say, limited to certain size firms? or will regional firms? what do you think the whole landscape where this is concerned?

jamie lopiccolo  15:40
so, if you take the traditional accounting services, which is our tax and accounting, that most cpas do, i don’t envision the bigger firms, and even the regional firms, moving to this model. and i think we talked about this in november. it’s too hard to turn that ship around. and to change the direction midstream, or, however. i see the smaller firms being able to adapt to this more. for one, they don’t necessarily always have… think — of think of this way, and i’m going to tell this to all the small firms that are listening to this: is think of the time that you spend billing. and the first of the month, and you’re going through and doing billing and looking at hours, and so forth. if you could replace that with just one client — working on one client, you’ve already paid for paid for whatever systems, you’re going to put a place to do the value billing. and so i don’t — i see smaller firms being taking advantage of this first. maybe some regional firms, but i really don’t see because they’re still tied up into the billable hour and making sure they’re making money and, and it really is going to require who’s going to do the proposals, who’s going to do the calculations, and all of this to get ready to be delivered to the client. so, i just find it hard that they’re going to do that you may see it in the audit realm.

steven sacks  16:57
gotcha. gotcha. well, i want to thank you very much, jamie, for your insight on this subscription model, where you see the profession is and where you believe it’s — it’s going in the future. and, in the fact that you’ve been doing this for the past four years, and now it’s starting to come into vogue, if you will, says a lot about your innovative approach and your strategic thinking in the way that you run your firm and manage your client relationships.

jamie lopiccolo  17:29
it’s not easy, but we’re trying steve.

steven sacks  17:32
well, you seem to have gotten the hang of it. so, i thank you very much for — for sharing that with us.

jamie lopiccolo  17:39
thanks. thanks for the time, steve. i appreciate it. you have a great day.

steven sacks  17:42
thank you. you, too.

 

posted on july 25, 2022