Value-based Pricing — What Accountants Need To Know

McKinsey & Company states that an effective pricing strategy can result in 2 to 7% increase in the Return on Sales (ROS). A good tax firm always knows the worth of the services they are offering. Therefore, the increase in pricing of their services often does not change their client retention.

A CPA firm might follow hourly billing, cost-plus pricing, fixed pricing, and value pricing for their services. The type of billing your firm chooses will influence its profits, employee morale, and relationship with the clients directly.

In short, your billing strategy will affect your firm’s profitability now and in the long run.

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Do you have a pricing strategy that is beneficial for your firm and your employees?

Most firms are yet to decide which billing strategy will work suitably for them. However, the advent of new tech in the realm of accounting and billing is making traditional billing strategies redundant.

The new ways of billing, including value-based pricing, are becoming more lucrative for CPAs as well as their clients.

Under the value-based pricing strategy, the firm can charge the customer as per his or her perceived value of a particular service. Negotiations and communication between the firm and the customer determine the prices way before the work begins.

What is wrong with hourly billing?

Hourly billing can be demoralizing for the employees of a CPA firm. Although it has been the norm for customer billing for decades, value-based pricing has made the caveats of hourly pricing even more prominent.

i. The faster your accountants work, the lower they earn

ii. The clients always window shop for the lowest rate and expect the shortest deadline on projects

iii. It is incredibly difficult to convince clients to extend deadlines or raise the hourly price

iv. CPAs are unable to realize their value due to limited pricing strategies

v. The revenue per firm is limited by the time they are dedicating per client

Hourly rates are detrimental to employee morale since the firm has to take on more work to fulfill a profit target. This increases the chances of overworked employees and low payment.

How does value pricing help in redeeming the wrongs of hourly pricing?

The answer to all these woes is value pricing. It involves grouping a set of services into distinct bundles which have a fixed charge/cost. The price is pre-determined, and the client is aware of the charges he/she will be paying. There is no scope for negotiation or adding hidden charges during invoicing.

It can be motivating for the entire tax and accounting firm since the employees can know what to expect in return for their toiling from the day they begin working with a new client. You may have already seen value-based pricing on cloud-based software services and cloud hosting services, but it is quite a novel concept for tax and accounting firms.

It has been aiding CPAs to decouple their services from the time it has taken to provide it. It has helped clients view the services of CPAs according to the quality independent of the time frame.

How is value pricing different from value billing?

Value billing is slightly different from value pricing since the former involves charging the customer once the project/work is complete. It typically involves the totaling of the service costs and applying a markup. Unlike value pricing, it does not present the client with a set pricing table.

Why should every CPA firm consider value-based pricing?

Here are the advantages of value pricing:

i. It provides the necessary incentive to accountants by directly putting a value against their services and skills.

ii. Value pricing removes the urgency to fit multiple clients and projects within a limited time frame to maximize profit.

iii. It keeps morale high and works ethics in place. It fosters a healthy workspace environment by segregating time from profit.

iv. Value-based pricing eliminates all possibilities of unpleasant surprises. Your clients will receive a transparent bill complete with a fixed price.

v. It can boost collaboration between the employees and your client since the latter is already aware of the services they are entitled to for the fixed prices. It also ensures easier access to the accounting professional.

vi. It is much easier to raise the prices for the services when your accounting firm is a popular one. You can easily increase the annual service fee by 10% so that the total amount goes from $3000 to $3300 per client. Clients find it much easier to accept a one-time increase in prices than to comply with an increase in hourly rates.

How to adopt value-based pricing for your tax and accounting firm?

Shifting from an hourly model to a value pricing model will take time and effort. Changing the set ways is akin to jolting a client out of their comfort zone. Here’s what you can do to introduce a new pricing strategy –

i. Determine a market segment

Just like any other marketing strategy, this demands the segmentation of clients according to the way they perceive the value of your business. Determine how many customer segments you cater to right now and estimate the perceived value of your business.

It is the first step towards the implementation of value pricing in place of hourly or value billing strategies.

ii. Know the true economic value of your services

Every CPA firm must know the True Economic Value or Perceived Value of their business services. According to the Harvard Business School Marketing Toolkit –

The cost of the best alternative will give you an insight into how much your competition charges for similar services. The value of performance differential will determine the fine difference between your services and those of your competitors.

iii. Be patient and give it time

Take time to educate your clients about the benefits of value pricing. Train your finance and accounting team, keep in constant touch with the clients to answer their questions about your new pricing model.

iv. Use new technology

Switching to a cloud-based accounting software such as hosted QuickBooks where your clients can see what your accountants are doing, can help in convincing them to switch to a value-based pricing strategy. It can also reduce IT costs, overheads, and automate the most repetitive tasks.

Value pricing allows your firm to break free from time-bound pricing. It allows your employees to use their skills and wealth of knowledge to help your clients. Most importantly, they report higher job satisfaction levels since they receive appropriate compensation for their efforts.