Price It Right
How to Value Accounting ServicesBy August J. Aquila Value-billing made simple – for firms of every size By the best-selling author of How to Engage Partners in the Firm's Future and Leadership at its Strongest Upgrade your order with the PDF instant download eBook edition and start benefitting immediately
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Step-by-Step Procedures in Six Compact, Powerful Sections
Comprehensive, authoritative, and practice-proven methodology
I. Traditional Pricing Methods and Marketplace
- The Two Traditional Methods
- The Rule of Three Method
- The Cost-Plus Method
- Marketplace Orientation
- Selling Orientation
- Product Orientation
- Production Orientation
- Marketing Orientation
- How a Production Orientation Can Be Harmful to a Firm
- Changing from a Production Orientation to a Marketing Orientation
II. Marketing and Pricing
- The Marketing Mix
- Various Pricing Strategies
- Pricing on Cost
- Price Leaders
- Prestige Pricing
- Bait and Switch
- Market Penetration
- Market Skimming
- What the Market Will Bear
- The Product Life Cycle
- Introduction Phase
- Growth Phase
- Mature Phase
- Decline Phase
- Perfect Competition
- Monopolistic Competition
III. Utility and Value: How They Affect Pricing
- How Clients Perceive Utility
- How Clients Perceive Value
- Value and the Services Provide
- The Value Curve
- Categories of Services on the Value Curve
- Other Considerations When Using the Value Curve
- Using the Value Curve to Define Market Position
IV: Alternative Pricing Methods
- Ethical Pricing Issues for CPAs
- Discussion of Rule 302, “Contingency Fees”
- Discussion of Rule 503, “Commissions and Referral Fees”
- Subjective Pricing Issues
- Alternative Pricing Methods
- Fixed or Flat Fee
- Unit Fee
- Contingent Fee
- Hourly Rate
- Blended Hourly Rate
- Fixed or Flat Fee Plus an Hourly Rate
- Hourly Rate Plus a Contingency
- Retrospective Fee Based on Value
- Availability-Only Retainer
- Retainer as a Deposit Against Future Services
- Statutory or Other Scheduled Fee System
V. How to Implement a Change in Your Firm’s Pricing Philosophy
- Preparation for Making a Change in Pricing Philosophy
- Getting Partners to Accept a New Pricing Philosophy
- Getting Clients to Accept a New Pricing Philosophy
- Making It Happen
VI. How to Bill and Collect Effectively
- Developing an Effective Billing Philosophy
From the Introduction
The primary purpose of this book is to bring the reader ideas, concepts, and tools on how to price the various services that accountants now provide to their clients. You won’t find anything in the following pages about getting rid of the time sheet. Ron Baker has already written and said quite a bit about that. What you will find are practical ideas to help you price your services accordingly.
Twenty-two years ago, there weren’t many articles or books written about pricing methods. Most of the literature at that time dealt with billing and collection. If you search the topic today, you will find hundreds of articles, videos, and books to read or watch.
Even if your billing methods and philosophy are diligently followed, and your collections are under control, if you are not pricing your services properly, you are still leaving significant dollars on the table. This book will show you how you can price your services to receive the maximum fees possible.
Most other professionals today price their services based on what the market will bear. Just think for a minute about the following professionals. What do they all have in common? A physician, real estate broker, insurance broker, stock broker, business broker. Their fees are not based on hourly rates; rather they are based on the relative value of the procedure, the size of the real estate transaction, the premium of the life insurance policy, the number, and value of the stocks bought or sold and the value of the business sold.
This book is as much about the term value as it is about pricing. The underlying concept of this book is that pricing is a marketing activity. Think of designer clothes. They cost a lot more than clothes you can buy off the rack at any store. It’s not that the clothes themselves are that much different.
What’s different is the market. The buyers of designer clothes are willing to pay a much higher price than the buyers in a department store. Ultimately the market (i.e. your clients) will determine the value of your services. For most customers, price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire offering and do not simply make their purchase decision based solely on a service’s or product’s price. In essence, when a purchase situation arises, the price is only one of several variables customers evaluate when they mentally assess a service’s or product’s overall value.
Value thus refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a service or product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation:
Value = Perceived Benefits Received / Perceived Price Paid
For the buyer, the value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial; it can also involve other things that a buyer may be giving up. For example, in addition to paying money, a customer may have to spend time learning to use a new software product, pay to have an old product removed or close down current operations while a product is installed or incur other expenses.
The current hourly billing method, unfortunately, is based on cost estimates and not on value. Think for a moment; what does this imply? When you determine your fees based on cost you are looking inward. It is as if you are working in a vacuum. Unfortunately, too many accountants function this way. If, on the other hand, you are truly client-centered, you realize that it is the client who is at the center of your thought process and that everything you do, whether it is developing an internal process to turn tax returns around quicker or to start a new service, is done to better service the client. Client-centered firms never forget that it is the client who ultimately determines the value of their service.
If you do things right from the start of getting a new client, you won’t have problems billing or collecting. If you are not pricing your services properly, you are leaving significant dollars on the table. This book will show you how you can price your services to maximize your fees and profitability.
Let’s look at the following example. As a partner in a three-partner firm, you have always achieved 100 percent realization. And you are very proud of this. Your billing rate is $190 per hour. You provide a variety of services to your clients. The services range from monthly write-up to more complex tax consulting and business consultation.
Is this practitioner maximizing his revenue and profitability?
Is he doing justice to himself? Is he doing justice to his clients by charging the same hourly rate to review a simple 1040 with a Schedule C as to assist the clients in a more complex merger and acquisition tax issue?
What would you do in this scenario?
Our partner in the above example is probably pricing some of his services too low. Since his experience has been to achieve 100 percent of his $190 billing rate for basic work, why couldn’t he charge more for more complex, valuable services? Wouldn’t a client see more value in the merger and acquisition services than in the tax compliance? And wouldn’t it be more profitable to get 90 percent of $230 for the basic work?
Perhaps you are beginning to see the importance of determining the true value of your services. Making more money in the profession today does not require that you work more hours or work harder. It does require that you work smarter and learn how to price your services accordingly.
We have lost the art of pricing our services based on value. Instead, the profession has created an hourly billing method that is based on cost. The computed hourly rate often bears little relationship to the client’s perception of the value of the services rendered.
This is nothing new. The AICPA’s Management of an Accounting Practice (MAP) Handbook from 1993 states:
“Time charges at standard rates should only be the starting point for determining the amount to be billed. The real criterion is the value of the service to the clients.
Too often, this is recognized only negatively by billing at less than standard rates. Standard rates should not represent a maximum that can be billed for services; rather they should represent a minimum.”
We need to focus on value and leave pricing alone for a while. For the most part, we are not providing a product, but a service, and it is a service that can have a great degree of value. The value is ultimately determined by the client and not by the service provider. We need to become better at understanding and determining what the value is to the client. When we learn how to do that, we will be able to use the tools presented in this book. Pricing is a representation of the value the client receives, and pricing has to be a win-win situation, or there can be no long-term relationship with the client.
I have tried to look at value and the ways that you can become more profitable by using the ideas and tools presented here in your day-to-day operations. A number of the examples presented in this book come from practitioners throughout the U.S., Canada, and England. Many are ideas that I have suggested to firms during my years of consulting. It is important to remember that the ideas presented here are meant for use by all accountants, from the sole practitioner to the Top 100 Accounting Firms.
That’s it, so let’s start.
– August J. Aquila
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