Accountants and bookkeepers often struggle with the question of the proper pricing for their services. Pricing methodology is one of the toughest nuts to crack, and it impacts much more than just profitability.
Improper pricing might affect client recruitment and firm growth. It can make you work longer hours and feel underappreciated, and generate frustration for you and your clients.
So there's no doubt that pricing strategy has to be done right, and we're here to help you with the task.
There are three main pricing methods currently used in the accounting industry: Hourly, value and fixed pricing, with a constant trend to move away from hourly pricing to the other two methods.
Let's review the alternatives.
For many years the standard pricing model for the accounting industry has been billable hours. It was simple and straightforward: Accountants would bill their clients for the number of hours they worked for an agreed-upon hourly rate.
Back when it was the industry norm, it worked well enough. But then clients started realizing that they want to be paying for the service they're getting and not for the time it takes to provide that service.
The "billable hours" method also failed to incentivize accountants and bookkeepers to become more efficient in their work, adopt new technologies, and evolve in their practice.
On the other hand, it created an unhealthy connection between financial growth and worktime. The equation was brutally simple: If you wanted to make more money, you (and your team) had to spend more time at the office.
Business clients also needed to know their expenses in advance. The hourly pricing model makes it hard for clients to know how much money they will spend for their accounting services.
Employees are also not crazy about the 'billable hours' model, as it becomes a performance measurement tool. They don't want to spend late evenings and nights at work. They want to be appreciated for the quality of their work, their dedication, and their knowledge, and then they want to go home at a reasonable hour so they can spend time with their families and friends.
That is why the industry is moving steadily towards fixed and value pricing. A 2018 survey held by the AICPA among accounting professionals reveals that the future does not look promising for the 'billable hours' model. The survey shows consistent declining use of hourly pricing and preference to other pricing methods: Firms of all sizes showed a decline in revenues from hourly-based billing from the previous survey year (2016) of up to 11%-21%.
Let's have a look at the two most common alternatives.
When it comes down to brass tacks, fixed and value-based pricing share the same principle: both are based on the value of the services provided rather than on the time it takes to provide them. In both methods, the pricing is determined upfront before the service is provided.
In other words, both methods are, in essence, a form of value pricing: The difference between the two approaches is similar to that between "off-the-rack" suits and tailor-made ones.
With an "off-the-rack" suit, there's a limited selection of predetermined sizes, fabric, and detailing, with the same price for all clients, with little to no customization.
Contrary to that, a bespoke suit is designed and sewn for a single client after the tailor and the client have an in-depth conversation about the client's preference (fabric, buttons, style, etc.) and taking the client's measurements. It's made on-demand for a specific client's preferences, and the price varies accordingly.
How does fixed pricing work?
Fixed pricing, like the "off-the-rack" suit, offers a limited number (usually 3-4) of predetermined service packages, from the most basic to the most inclusive, for clients to choose from, for (usually) a monthly rate. There's little to no flexibility in changing the service package for each client.
There should be significant thought and planning when building the different packages and pricing them appropriately. But once it's done, there's no need to reinvent the wheel with each client, and since all clients are getting the same service packages, it promotes work efficiency.
It does not mean, however, that the pricing should not be periodically reviewed and updated.
How do I build the 'fixed' service packages?
Before you even start thinking about building and pricing your service packages, the first thing you have to do, is to have in-depth conversations with clients, understand their needs, the volumes of work they require, and what types of added services they will be interested in, what do they consider as essential (usually what is needed for compliance), and what is a luxury for them.
Only after getting a detailed picture of your clients' needs, you can start with the pricing decisions.
It's best to have at least three packages offering different service levels, from the most basic to the most inclusive and name them accordingly - for example: Basic, Extended and VIP, or Silver, Gold, Platinum).
Why three and not two? First, it's essential to offer a variety that will help the client get the service package closest to their needs. Second, because of the (somewhat ill-named) "Decoy Effect," whereby adding a third pricing option will alter the client's preference to move away from the most basic and inexpensive one.
Before you decide on the packages, make a full list of all the services you can offer and organize them from the most basic (such as data entry, bank record reconciliation) to the more advanced (such as cash-flow forecasting).
It's important to delineate the borders of the services you provide when you move away from an hourly rate. Otherwise, it's a slippery slope into scope creep, where you will find yourself providing more services (and working much harder) than you agreed on and without getting paid for it.
Make sure you put number caps on the services provided, wherever you can: for example - the maximum number of bank accounts and monthly transactions that you will be handling, number, and duration of consultations. Also, make sure to clarify who does what is in the relationship between you and your client in terms of document delivery and sorting and use it to differentiate between service levels.
How does value pricing work?
In value pricing, the accountant or bookkeeper tailor a service package for each client, specifically for that client's needs.
Remember, value is subjective. It is essentially what a specific client is willing to pay for a service, and this changes dramatically from one client to another. Think of two business clients - one is tech-savvy and a control-freak. The other is technophobic and hates the hassle of handling the small details. Their price tag for you handling Accounts Payable for them is dramatically different. So why charge them both the same? Furthermore, your "fixed" service bundles may deter one or both of them.
Essentially, both fixed and value pricing are trying to achieve the same goal: get as close as possible to what your clients are willing to pay for your services. But while fixed pricing is a "close enough" approach, based on a generalized perception of prospective clients in general (though based on research), value pricing is the "real deal" - if done right, the price will be as close as possible to the highest price-point your client will agree to pay for the value you provide them.
Value pricing mandates a separate process for each client, but it offers another advantage over fixed pricing in that no matter how much you try to standardize pricing, not all clients are the same, and their dissimilarities often lead to different work volumes on what appears to be the same tasks.
How do I price my services in "value pricing"?
Value pricing always starts with an in-depth conversation with your client, where you must actively inquire about their needs and expectations so that you can assess the scope of work and the pricing for it. You have to be active in your questions and get down to the smallest details, to have a clear picture of the service you need to provide them with.
The goal is to not only assess the amount of work needed to provide your client with the best service but, more importantly - evaluate what they consider most important and valuable for them in their relationship with their accountant.
Here are some suggested questions you can ask your prospective client as a starting point for the conversation:
- What service do you consider basic and necessary?
- Are you in need of specific services or a more comprehensive and flexible work scale?
- How do you prefer to communicate (scheduled meetings, email, text)?
- What is the level of availability you need from us?
- How proactive would you like me to be in our relationship? Do you expect me to initiate conversations? Keep you updated on tax issues, remind you of important deadlines? Inform you of potential risks? Provide you with guidance?
- What accounting, payroll, and bill pay software are you using? How important is it for you to stay with your current tech solutions?
- Is your bookkeeping up to date?
- How are you managing your documents? How do you prefer to handle the sorting and delivery of documents?
- How are you paying your vendors? How are you getting paid by clients? How important is it for you that it stays the same? Do you send out checks? Whom do you want to handle the AP/AR process? How much involvement do you want in the payment process?
- Do you need help with cash-flow management?
- What are the most important things for you in terms of service?
- What time frames and deadlines do you expect from us?
- How many transactions do you have per month?
- How many bank accounts do you operate?
Now that you have a complete picture of the client's needs and expectations, you can assess the scope of work, design a tailored service package, and have a tentative price for the service. As in with fixed pricing, it all starts with a comprehensive list of all the services you offer and the basic pricing you assign them, to be used as a reference point to build your package.
Here's a table comparing the three methods of pricing:
Additional tips on the pricing process
Calculating the price. Here are some of the factors to keep in mind when deciding on the pricing:
- Cost is never the way to determine value pricing, but you need to calculate it to have a low-end benchmark.
- Before determining a price, identify and research your competitors. Some firms advertise their prices on their website. Try to find firms most similar to yours in profile.
- Take into account geography, firm size, client-type, and service-type.
- Look up online sources and surveys. Intuit’s 2019 rate survey provides comprehensive information on rates by state, region, certification level, and more.
- You need to hit the balance for the most your clients are willing to pay for your services, based on value and not on your time, costs, or anything else. The best way to hit that balance is through trial and error, maintaining a learning curve and understanding that part of the process is some clients saying no.
- If all your clients immediately agree to your pricing, it means you're underpricing your services. If, on the other hand, too many clients are declining, it doesn't necessarily mean you're overpricing, but something in your process needs revision. Maybe you're not getting their needs and priorities correctly, or you're not presenting your skills and abilities in the best way possible.
Building your service package: Fixed and value pricing are theoretically two different methods, but often reality dictates a blurring of the line between the two, and hybrid pricing methods.
Some accountants use the fixed packages as a starting point and tailor the packages to their clients' needs with add-on services. You can use this pricing template created by Hector Garcia, CPA, as a reference for customizing a service package.
Have an engagement letter in place: value-based pricing is fertile ground to misunderstandings and frictions over scope and responsibilities issues and scope-creep. You should prepare a comprehensive engagement letter to save yourself a lot of headache.
Optimize your tech stack: the array of technologies and software you're using is an integral part of the service you provide and directly impacts the quality of your service. You're asking them to choose you and pay you more based on your efficiency, responsiveness, and accuracy.
Furthermore, you are no longer paid for your time, so every minute you spend on handling work manually or wrestling with overcomplicated, clunky apps is on your dime and cuts into your profitability. That is why you need to have the best tech-stack available.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.