deliver more value to clients while freeing your team from timesheets.
by jody padar
the radical cpa
consider the $25k rule.
because this method requires heavy lifting on the front end, a good rule of thumb is to only value-price engagements of $25,000 or more. if the client falls below $25,000, they are eligible for a fixed price or fixed price plus a value add. this rule is important because if your client is a small business, it doesn’t matter how much value they perceive in your services; they will not be able to afford value pricing above a certain level.
more: three critical factors drive the value pricing trend | accounting disruptors are heading your way … with deep pockets | the convergence of trends makes pricing changes imperative | stop looking for talent that does not exist | advisory work must be priced by value, not hours
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most services are fixed-priced, but based on conversations with the client, those prices may drop or be raised accordingly. some of the data points used to set pricing are the pita factor (pain in the a#%) and the client’s gross revenue.
the pita factor is important because if a client is difficult, you want to make sure your staff is compensated for the extra work they’ll have to put in, even if it is just emotional energy.
gross revenue is important because it’s a risk indicator. if you have a client with high gross revenue and if you make a mistake, your liability for malpractice is much higher. it’s smart to adjust your pricing to cover that risk. additionally, if your client perceives a particular service as having higher value to them, you can increase the price to reflect their perception.
why is pricing so difficult at traditional firms?
anyone who has tried eradicating weeds in a garden bed knows how frustrating it can be. you can spray them, cut them or yank them, and they still come back in numbers bigger than before. the only way to get rid of the pesky little devils is to get the entire root out, and that is hard work.
changing your pricing structure presents similar frustrations. the rewards can be great, but you must get to the root for positive change. in this case, the root happens to be hourly billing.
think about how hourly billing impedes change. first, it hides what’s really involved in providing a service because the scope of a service isn’t really defined up front, and no planning is required. why establish scope when an hour is an hour? a firm accepts work however it comes in the door and executes with little oversight management. in the end, an invoice is sent, multiplying the number of hours it took to do the job by the appropriate billing rates.
billing rates themselves may be problematic. somehow, someone came up with a number as a billing rate. perhaps a staff accountant bills out at $100 an hour, a senior at $150, and a partner at $250. geographic location plays a significant role in setting billing rates, as a partner could bill out at $75 or $1,000 depending on where they live.
when pricing is based on hourly charges, there’s no standardized process or mold that clients need to fit into, so it’s hard to even know how much work each project will require. maybe a client comes in with hard-copy bank statements, excel files or qb desktop. each requires a different amount of work.
i remember one client i handled early in my career. the owner’s wife handled all the accounting on quickbooks (sounds familiar, right?) and brought the files to me during tax season. it took me hours every year to untangle the mess. when there’s no standardization, it’s hard to know what the work will take. when you don’t understand the scope of the job, up-front pricing is impossible.
scoping becomes an issue when you accept every type of client and file and document. with zero client and file standards, chaos ensues, and your team doesn’t know where the work begins and where it ends. they also don’t know what services they deliver and how long they should work a file.
you end up with a situation where an accountant will reconcile and spend two hours looking for a penny. when you go to bill the client for those two hours – and please don’t put in the line item “looked for penny” – the client is going to be upset. the client does not understand why they are paying for those hours. you end up in a scenario where time is spent, measured and billed on activities with questionable value. this scenario results in one of the following:
- the client will pay the bill but won’t understand it or see the value in the paid time.
- the client pays but is annoyed because the time wasn’t discussed up front.
- the client is mad at you and does not want to pay for the two hours spent looking for a penny.
up-front and value pricing rely on your team knowing the scope of an engagement, and understanding what they sell, how they service the engagement and what the deliverable is. you’ll soon find that standardized pricing is possible with some time spent talking to clients to determine what they want.
in new firms that utilize technology and standardization, these things come together, and order is applied to the chaos. clients are served more quickly because a set process powered by technology creates efficiencies.
once you understand the work involved and the pricing possibilities, your firm may decide to stop taking on clients who can’t link bank feeds. suddenly, time is no longer wasted on reconciliations.
when your firm embraces accounting technology, automation suddenly takes care of compliance work. with each step forward, up-front pricing and scoping become easier to implement.
it all starts with finding the root of the problem. hourly billing creates chaos and prevents the implementation of a proper business model.
pricing affects every area of your firm. once you commit to an up-front pricing model, it’s time to figure out what you’re going to sell, how you’ll standardize your offerings and how to understand the scope of every engagement up front so you can figure out successful pricing. obviously, this pricing model requires a certain technology level and willingness to free yourself from the slavery of timesheets, so traditionally run firms that are light on technology and reliant on timesheets probably aren’t going to see the desired results.