Many CPAs in public tax practice view pricing and billing activities as a necessary evil (and we won’t even discuss collections). This article does not try to counter that presumption. However, CPAs can minimize some of their burdens and maximize their rewards by adopting the right approach.
Methods for setting prices for CPA tax services span the same spectrum but overwhelmingly favor billing based on time spent at hourly rates. According to the 2016 PCPS/TSCPA National Management of an Accounting Practice Survey, 90% of firms surveyed bill approximately 80% of their services using standard hourly rates.
Where does this leave fixed-fee or value-based pricing arrangements?
- Many hourly tax engagements are often disguised fixed-price (or fixed-price-range) engagements with a “value” adjustment upward (usually for added work due to an unusual circumstance) or downward (most often for uncommunicated added work due to an unusual circumstance).
- Clients like fixed-fee arrangements. How often does the answer to a client’s question start with “it’s complicated?” A fixed-fee arrangement allows a simple answer.
- Value pricing is most commonly employed in tax practice when subjectively setting a price for a tax engagement, rather than upon a time budget. Expected billable time can be the basis for pricing, but the perceived value to the client is also part of the equation.
Pricing based on billable time has limitations. Among them is that the practice can be untimely (is all time captured?), unpredictable (what took eight hours last year may take six or 12 this year) and possibly irrelevant (at least to the client).
How, then, are tax services to be priced? Many discussions on this topic lead to a lengthy mathematical exercise involving a desirable profit margin on salaries driving targeted realization and billing rates based on expected staff use and firm structure. This equation can be a compelling analysis of factors influencing profitability. Pricing, however, is not so much about how the firm operates, or its profitably, but more about marketing its services and positioning the firm to customers. This is where value pricing principles prove most useful.
Suggestions for setting a value-based price for tax services
- Segment the tax practice by clients and service. The value of an annual tax return preparation engagement for an individual should be differentiated from that of a tax planning engagement for a business acquisition or disposition.
- Identify the client’s next best alternative. Individual clients may have many options, but which is the next best choice? Is it a retail tax preparation service or is it more likely another CPA? For some business clients, the next best alternative may be a larger or specialty firm, or a law firm, depending on the nature of the engagement.
- Differentiate the service to be provided. How does the firm’s service differ from the competitor’s work? Perception can be as important as reality in this area, but tangible evidence trumps image. This is a market segment-by-market segment analysis. Expertise in a specialty area that a competitor lacks may be a key differentiator for a client with a complex tax problem, but responsiveness and availability of firm owners may be the deciding factors for individual and small business clients.
- Estimate the value of differentiating features. In other words, how much would a prospective client pay to one firm for the difference in service it will receive from the firm’s competitor? This determination is likely the most uncomfortable step in the process for a CPA as it is hard to quantify.
Implementation of a pricing strategy is far simpler than determining fees in the first place. This consists of three key elements:
- Planning: The pricing analysis discussed above is part of the planning. Once that is determined, the next step is to communicate the fee to the client including estimated time requirements, the timing of billing, collections and completion. This discussion is the single most important step in improving client satisfaction and is often neglected. It’s also a golden opportunity to identify and value the differentiating features of the firm’s services for a client.
- Progress reports (and billing): For longer engagements, bill early, bill often and collect. Couple this with engagement status reports, and client satisfaction will soar.
- Completion: The client will never be happier with a firm’s service than upon completion. Deliver the final invoice upon completion of the engagement and ask for payment then. If the firm has delivered on its promises, this should be a satisfactory moment for the client. If the client isn’t happy, now is the time to find out.
Adopting the right approach to pricing and billing activities can set you and your clients up for a satisfactory interaction each time. Be sure to review your current pricing structure to get the most out of the services you offer.