Pricing Basics for CPAs
There is a deep disconnect in the accounting profession. On behalf of clients, accounting firms focus on “profit” – Gross Profit, Net Profit, Profit Margins, and so on. But when it comes to improving their own firms, many CPAs overlook the single largest and most readily available source of profit: improved pricing. So, above all, getting the pricing basics for CPAs right is fundamental for success.
Understanding Pricing Tools to Drive Profitability
Though some firms have moved off hourly billing into fixed fees, few firms take full advantage of the pricing tools available to uncover mounds of hidden profit tucked away in their client roster.
Loss aversion prevents the firm from considering pricing options. “If we raise our rates, we will lose clients. If we lower our rates, we will reduce profits,” goes the thinking. Unfortunately, this black-and-white view of pricing locks the accountant’s prices into a lose-lose-lose situation: the accountant loses if they raise prices, they lose if they lower prices, and the client loses out on purchasing products they might value.
More Than Meets the Eye
Improved pricing is not simply a matter of raising prices vs. lowering prices. Instead, improved pricing includes evaluating the client mix, understanding what different clients value, and offering a range of options to capture the value that is otherwise left on the roadside. In other words, it’s about activating dormant clients, adding product variations, and segmenting prices based on client profiles.
As a result, CPAs shortchange themselves by simply billing for services at a single flat rate without a complete pricing strategy and a predetermined array of offerings.
A Field of Study unto Itself
But CPAs do not have time to make themselves into an expert in the nuances of pricing strategy. If you do, you risk ignoring your practice for four months while getting up to speed.
CPAs need a basic understanding of the most commonly used pricing tools to get them started. Subsequently, as you begin to experience the rewards of an improved pricing strategy – in the form of more revenue and more free time – you can reinvest those dividends into deepening pricing knowledge.
Four Pricing Tools
There are four primary pricing tools that CPAs can begin implementing right away.
1. Fixed Fee.
Also known as Flat Rate, fixed fee prices are commonly used for personal and business returns, monthly accounting, and fractional CFO services. Fixed fees are wonderful when the scope of work is reasonably predictable. In addition, fixed fees encourage innovation to improve efficiency. They reduce the risk for the client by providing a clear up-front price. They enhance client relationships and make “realization rates” a thing of the past. Fixed fees are also highly scalable. But fixed fees have their downside: they will always leave profit on the table. The chances that your fixed fee exactly matches what the client would have been willing to pay is precisely zero.
2. Value-based Fee.
Best for one-time projects with a discreet beginning, middle, and end, value-based pricing is a tool that has a steep learning curve, but once mastered, can reap enormous rewards. Value-based pricing can only be done with a one-on-one conversation with the buyer to determine the value to them. And because the value is in the eye of the beholder, each client will value your service differently. Moreover, because each client will value your service differently, each client will be priced differently. The primary advantage of value-based pricing is that it puts the most amount of profit on the table. But because value-based pricing requires a time-intensive, one-on-one conversation with your client, it is difficult to scale.
3. Pricing curves.
Offering options to your clients is the best way to increase conversion rates. Choices help the client compare your prices among your options instead of comparing your prices to your competitors. In effect, it provides a so-called “choice of Yesses” by changing the question in the client’s mind from “Do I want to work with you?” to “How do I want to work with you?”
Depending on your level of interest in the available work, two different pricing curves are available to help you determine the price spread among your offerings. Further, as you create your service offerings, you can design and price your service offerings to drive the client to the “gold” option with a conservative pricing curve or drive the client to the “silver” option with an aggressive pricing curve.
4. Segmented pricing.
Some people recoil at the idea of charging different prices to different customers. Yet, many are comfortable with the concept related to class fares for airline tickets: countless price options for different flyers with the same destination.
A typical client roster has a wide spread between the annual revenue of business-owning clients. There is a wide spread in a typical CPA’s client roster between the business-owning client with the most annual revenue and the business client with the least annual revenue. For example, a client with $5M in annual revenue generates 100 times the client with a $50,000 business. And yet, often, those clients will be priced the same.
By segmenting clients based on annual revenue, service levels, or industry, the CPA can provide prices that better align with the value to each distinct group and generate more profit.
Learn Pricing Basics to Get Started
In an hour, you can learn what you need to know about pricing to get you off hourly billing and set your CPA firm on an entirely different profit trajectory. You can learn the basics and the most common pricing tools CPAs are using to make the transition from a low-margin tax machine to a high-margin provider of Advisory and Planning Services.
You can learn it today with Pricing Basics for CPAs, available for purchase here.
When CPAs shift to flat-rate fees, they can turn their focus to systemization and optimization to get their time back. When CPAs pivot to value-pricing special projects, clients get better outcomes. In addition, the CPA is better compensated. For these reasons, getting the pricing basics for CPAs right is fundamental for success. When CPAs implement menu pricing and understand the spread between prices in menu options, conversion rates increase, as do profit margins.
Learn what you need to put your accounting firm on a faster track to profitability with Pricing Basics for CPAs.
Geraldine Carter is the founder of She Thinks Big Coaching, where she teaches CPAs to build and price Advisory Services. Her clients routinely double their margins in 6 months or less while working fewer hours. In her free time, she can be found mountain biking forested trails or running after her two small children in her hometown of Ketchum, ID.