How some accountants charge 100% more than others

In the first article we looked at the IRIS sponsored benchmarking finding that half of all practising accountants earn notional profits of £78,000 or less a year (in fact, the same study showed that 25% of partners earn less than £52,000).

We also saw that, if we use the definition of profits preferred by economists, venture capitalist and Dragons, and deduct a full open market salary charge for a partner grade employee, then well over half of all practices are making “true” losses.

Most partners do not earn enough

But, even if we don’t go as far as that economist’s distinction between “notional” and “true” profits, there is widespread agreement that a great many partners, probably even the majority, are not earning enough.

Not earning enough to properly recompense them for the hours and effort they put in or the risks they take. Not earning enough to properly reflect their seniority, professional qualifications, skills and knowledge. And, most importantly of all, not earning enough compared to their aspirations.

If you are already 100% happy with what you earn, then you probably don’t need to read on, since this article wasn’t written for you. But if you don’t feel that way, I would like to explain what the evidence suggests is usually the biggest cause of not earning enough, and what you can do about it.

The biggest cause of not earning enough is...

... not charging enough.

It really is that simple. After all, on a job by job and client by client basis, profit is the difference between what you charge and what it costs.

Generally most accountants have got a pretty good handle on their costs, but it’s the pricing side of things that really messes things up for them.

And when they charge higher prices, things get better.

“But surely”, I can hear you thinking, “we can’t charge more than the market price, can we?” The answer to which is a resounding “yes you can”, because of the following incredibly liberating fact...

There is no such thing as “the market price” for accountancy services

There is no such thing as the market price in theory. And the evidence shows that there is also no such thing in reality either. Let me explain.

No such thing in theory

Economists tell us that in a perfect market (ie where there a large number of suppliers selling identical products, with no switching costs, to consumers who have perfect information and make perfectly rational choices) there will be a single market price. But it is crystal clear that accountancy is nothing like that type of textbook perfect market.

In the market for accountancy services: most firms have their own ways of doing things; service is all about people, and clients can only get your people from your firm; clients rarely have the skills or information to properly compare and contrast different firms; and there is little transparency over pricing. Consequently decisions to appoint and sack accountants are often inevitably made on emotional rather than perfectly rational grounds.

And in that type of market, according to economists, there will be no such thing as the market price. Instead what we should see is that prices are set by accountants not by the market, and that as a result there will be very big differences between what different firms charge.

And no such thing in reality either

And that is exactly what an October 2010 study of the prices actually charged by 180 UK small independent accounting practices found: very big differences between what different firms charge.

For example, when looking at the price charged for two common services offered by almost every accountant, the study found that the top half of firms successfully charge around twice as much as the bottom half, as the following table shows:

Continued...

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Comments

Great article Steve ...

Adrian Pearson | | Permalink

 .. but you better put your tin hat on now :-)

Adrian @topaccountants

cymraeg_draig's picture

Way off topic - but some comments simply cant go unchallenged.

cymraeg_draig | | Permalink

BMW aren’t ripping your client off when they choose to buy one of their cars for two times the price of a broadly similar Ford.

 

Yes they are.

BMW's are based on old fashioned engineering, the fit and finish is poor, and their supposedly superior handling is a myth, there are numerous cars more stable and quicker round corners than BMW's.

As a confirmed petrol head with 40 years racing experience I wouldnt touch a BMW with the proverbial barge pole.

 

On charging more

Paul Dunn | | Permalink

Right on Steve but I feel you're going to need the tin hat!

But had you started with a point that you make in the latter part of the article, you may have needed less tin.

Here's the crucial point you make:

"The point is this: your clients are always choosing to pay more than the bare minimum for things – provided that they believe they are worth paying more for."

I would put that this way: 

Your clients are always choosing to pay more than the bare minimum for things – provided that they AND YOU believe they are worth paying more for.

Here's a great example ....

You'll recall that lovely (and probably mythical) story about Picasso being approached by a woman in a cafe. She recognises him and asks Picasso if he'd mind sketching her. "Of course," says Picasso, "I love nothing better than sketching."

So in less than 2 minutes Picasso does the sketch and hands it, signed, to the happy woman. "I must pay you," she says. 

"Indeed you must," says the Master. "That will be 400,000 francs."

"WHAT!!!" she explodes. "I saw you doing that and it only took you 2 minutes — that's ridiculous."

Picasso's response is beautiful and I think almost poignant. "Madam, that did not take me 2 minutes; it took me my entire life to know how to do that like that."

Picasso never had any issue with HIS value. It's strangely sad that so many Accountants do.

-- Paul Dunn Chairman, B1G1 Come join me at www.b1g1.com Giving your business the power to change our lives Follow me on Twitter at http://twitter.com/pauldunn Email me at: paul@b1g1.com

kirstymcgregor's picture

I can better that!

kirstymcgregor | | Permalink

Excellent post Steve.  Another point - compliance fees are much harder to increase as they are products that can be compared more easily to other firms.  But 'special/value-added/expert work' for areas such as fundraising, corporate finance, exit planning & transactions are much harder & rely on the client's belief that you are capable and trust you. 

But the real nugget, that my member firms achieve, is this - by marketing your expertise in corporate finance as commercial business advisers, your clients will respect you enough so you can increase their compliance fees too!

Kirsty McGregor, Chairman The Corporate Finance Network

www.corporatefinance.org.uk

Bob Harper's picture

What are you selling?

Bob Harper | | Permalink

@Kirsty - anything can be differentiated, you just need creativity.

Perhaps the perfect market is the stock market, if you were selling shares could you charge more for a share than another stockbroker? Oneshare.com has done it. Would someone pay £5,000 for a carwash? Yes, and you can check out this video.

Pricing is the most powerful marketing strategy there is. It is an art, links to strategy and requires firms to think about positioning and what they really sell. BMW get it; have a look at their advert. They are not selling cars but joy from the experience of driving the ultimate driving machine. As soon as they think they are a commodity and just selling cars they are dead.

Anyway, this sounds like most clients - you need to watch to the end click here.

Bob Harper

Portfolio Marketing

 

Most partners do not earn enough - aka Greed within the professi

StaceyGeorge | | Permalink

Reading this article fills me with disgust.  It is the repulsive, greedy attitude pervading it that is making this country an increasingly unpleasant place to live with an ever growing gap between rich an poor.

Accountants are not 'worth it', they simply take advantage, like all the other professions, of their stonghold within the powers that be, generating increasingly complex and extensive rules and regulations that the little man is powerless to resist and obliged to conform to at great personal cost.

Can I ask Steve what a nurse should do when she finds her patients are delighted with the service that she offers at the same time as realising that she is working long hours at great personal risk - to her health?  Presumably she should just be grateful for the odd box of chocolates that comes her way.  Meanwhile, the highly profitable accountant will be doing all he can to avoid paying any tax to contribute to the possibility of her having a salary commensurate with her contribution. But then, it is of no real concern to him and his like anyway, as they will be free to spend their inflated profits on private healthcare, offering the level of service which only a rich man deserves.

Steve Pipe should be utterly ashamed of himself, but I suspect he does not have the conscience to be.

 

 

Most partners do not earn enough - aka Greed within the professi

StaceyGeorge | | Permalink

Reading this article fills me with disgust.  It is the repulsive, greedy attitude pervading it that is making this country an increasingly unpleasant place to live with an ever growing gap between rich an poor.

Accountants are not 'worth it', they simply take advantage, like all the other professions, of their stonghold within the powers that be, generating increasingly complex and extensive rules and regulations that the little man is powerless to resist and obliged to conform to at great personal cost.

Can I ask Steve what a nurse should do when she finds her patients are delighted with the service that she offers at the same time as realising that she is working long hours at great personal risk - to her health?  Presumably she should just be grateful for the odd box of chocolates that comes her way.  Meanwhile, the highly profitable accountant will be doing all he can to avoid paying any tax to contribute to the possibility of her having a salary commensurate with her contribution. But then, it is of no real concern to him and his like anyway, as they will be free to spend their inflated profits on private healthcare, offering the level of service which only a rich man deserves.

Steve Pipe should be utterly ashamed of himself, but I suspect he does not have the conscience to be.

 

 

stevepipehome's picture

To StaceyGeorge

stevepipehome | | Permalink

Given the tone of your post and the fact that it is your first on this site, am I right to presume you are not an accountant?

Either way, please let me put the record straight… this series of articles is NOT about being greedy. It is about doing a professional work and getting professional rewards.

At the moment the facts show that well over half of all accountants make a loss (my first article http://www.accountingweb.co.uk/topic/practice/why-over-50-practicing-accountants-are-making-losses/478533 ), and that the main cause of this is the way they price (my second article, above). So my advice has essentially been “if you don’t feel that what you are currently earning is fair to you and your family, charge more”.

And there is nothing greedy or unfair about that – since if clients don’t also think those higher prices are fair, they simply won’t pay.

So my conscience is clear, since all I have advocated is an outcome that both accountants and their clients regard as fair.

In the next article in the series I will show how not charging enough leads to one of two types of harmful compromises. Either a compromise that harms their family and health as they either have to work too many hours or not bring home as much money as the family needs. Or a compromise that harms clients by cutting corners on service in order to keep things “within budget”

Either way, my conscience will still be clear since I shall be giving accountants the insights they need to avoid harming them and their clients in these ways.

What would you rather I suggest that accountants do… carry on being forced to make compromises that harm their health, families and clients?

 

 

Who said anything about losses?

StaceyGeorge | | Permalink

Steve

Thank you for responding to my post, and in such an even tone, as I appreciate it was a rant.  However, it is rather high handed of you to assume that I am not an accountant.  Why, because I don't see the world as you do?

I am a chartered accountant, which is why I am aware of the profession's obsession with creating ever more complex rules that, in turn, require more and more professional advice for their interpretation.  A bit of self interest there, perhaps?

When I qualified in 1994, good sense and judgement were still key qualities to being an effective accountant.  Now, the whole thing is just rules driven and, in the endless quest to eliminate inconsistency between accounts, they have become far too cumbersome, with their endless disclosures, and virtually incomprehesible to all but the 'qualified'.

However, I digress, my problem with your article is that its starting point was not that many accountants are operating at a loss but rather that the 'average' accountancy partner's profit of £78,000 is too low and accountants 'deserve' more.  On what grounds?  You seem not to have responded to that point.

As I suspect you do, I move in circles where I and all my friends are free of financial worry.  By that, I do not mean that there is no risk that we might lose our livlihood unexpectedly, because that is universal.  What I mean is that, as long as we are able to maintain our current employment, we can sustain a lifestyle where we can afford every basic need and much more besides.  Improving partnership profits is not about ensuring there is food on the table, clothes on one's children's backs or even putting a bit aside for a rainy day, it is about better holidays, better schools, more beautiful homes etc.  And meanwhile, the vast majority of people work just as hard, if not much harder than we do and are constantly struggling to make ends meet.  On that basis, I maintain my position, that your article is distasteful.

But good luck to you in your noble crusade of pushing under remunerated accountants even higher up the social scale.  Perhaps once they are earning 'enough' they can take a bit of time off and make a contribution to our 'Big Society'!

stevepipehome's picture

To StaceyGeorge again

stevepipehome | | Permalink

Please accept my apology for the presumption.

As for the question "what makes me think that accountant are 'worth' more than £78k", let me start with my general thoughts:

  • In capitalism, what you are “worth” is not a moral judgement (since if it were front line medical staff like my daughter would be paid more). Instead it is driven by market forces
  • In turn, the main driver is how much value we create for our clients – the more value, the more we are worth to them, the more they will pay us and the more we earn
  • To me, by far the most important way we create value for clients is to help them build more valuable businesses – since that creates more jobs, wealth and tax revenues for the good of all. And I am on a mission to help accountants do much more of this
  • As an aside, whatever their political persuasion, every accountant knew when they entered the profession that tax planning was a key thing the market wants from the profession. So tax planning pretty much “goes with the territory”.

Going back to £78k specifically:

  • Sadly the market makes it clear that some accountants are NOT worth more than £78k, because they aren’t serving their clients well enough
  • Some accountants earn more than £78k because (a) they are worth more because they meet market needs better, and (b) they have found the way to turn that higher worth into higher earnings - and to me these are the role models
  • While some accountants have not yet worked out how to turn their higher worth into higher earnings – and it is to this audience that my articles have mostly been aimed so far

That’s how I see it. But ultimately, however, I think we will probably need to agree to disagree.

Bob Harper's picture

Different perspective

Bob Harper | | Permalink

@Stacey - I can totally understand your comments; on the surface it does look like this is about accountants being greedy but the reality is very different; there is much more depth to this.

The good old days of charging what you want are disappearing fast. Fundamentally, the only way accountants can charge more is by delivering more value. There are different ways to do this; one way is to help business owners create more profit. These businesses will then pay more tax and ultimately we have a better society, including higher pay for nurses. So, for me more profit is good for everyone.

The other point is that many accountants give advice away for free and very often it is ignored. This advice can help people avoid making losses and make more profit so there is a good argument for accountants to raise their game and their prices. 

Bob Harper

Portfolio Marketing 

cfield's picture

Why shouldn't accountants earn more?

cfield | | Permalink

Stacey, you seem to have a problem with accountants (and presumably other professionals) earning more than the vast majority of people. Steve has already explained that morals don't come into it in a market economy, but there are in any case some moral arguments in favour of higher earnings for accountants.

As a chartered accountant yourself, you know that it requires years of study and hard work to qualify. I know that nurses and other key workers also work hard to qualify, but usually that is whilst they are doing their jobs. The vast majority of people can't be bothered to study once they leave school. Some don't have the ability anyway but in most cases it is simply down to lack of ambition and willpower. Those that do have the inclination and the wherewithal to better themselves deserve to earn more and live better than the vast majority of people.

Those accountants who took the plunge and set up their own practice deserve to earn even more (in common with anyone else who is self-employed) as they are giving up the cosy world of guaranteed pay, employment rights, pension rights, redundancy pay, mininum wage, maximum hours, etc for something a lot more uncertain. Starting up on your own takes a lot of courage and effort, and success is by no means guaranteed. Good luck to those willing to try - they deserve to earn more than the vast majority of people.

Lastly, you only earn high fees as an accountant if clients are willing to pay you those fees. There are plenty of other accountants they can go to if they think your fees are too high. It's not like bankers paying themselves huge bonuses against the wishes of the public who actually own the banks (either through the state if it is a bailed out bank or via their pension funds). It's not like fat cat civil servants lording it over us and paying themselves what they want out of the public purse. It's not like tube drivers earning huge wages after years of holding the public to ransom with constant strikes. I just hope they suffer the same fate as the old print unions one day.

Those are the people who are ripping off the public, not hard working self employed people. Clients don't have to pay high fees - they can always walk away. So anyone who does manage to earn high fees can be sure they deserve it.

One last point. You should always have some sort of a gap between rich and poor, otherwise there would be no incentive to work hard, study hard, start businesses, invent things.... Any society where there is virtually no gap in earnings between those who aspire to a better life and those happy to plod along will soon go downhill, because it will become lazy and complacent and other countries will soon overtake it. The person who gets up early to go to work on a wet morning should always earn more than someone still in bed who lives on benefits, for whatever reason. And the person who works hard to better themselves should always end up earning more than someone who just plods along.

So long as everyone gets enough to live decently, I don't see that a gap between rich and so-called poor is wrong. And by poor I mean unable to afford the necessities of life, not the definition they use nowadays, 70% of average earnings or whatever. Poverty should be an absolute concept, not a relative one. Otherwise, we'll end up with a situation where someone is living in poverty because he can only afford to go to Spain for his holidays rather than the Seychelles.

Chris

marklloydbttom's picture

How some accountants charge...

marklloydbttom | | Permalink

Steve

Firstly, let me commend you for your dedication to responding to Stacey and her arising perspectives. However, you make the point that we all understand and that is that there is no such thing as a scale charge - yet. Maybe with price comparisons a speciality of the internet that is a situation that will at some point in time be addressed. Someone will work out how to develop a website that will be populated with the ability to propose what is a fairer fee taking into account such things as SIC codes, size of business etc.  There are undoubtedly product clients who require work done at the lowest possible cost. How many? I do not know but I suspect the number increases when there is a tough economic climate.  However, we should not overlook the fact that accounting services are NOT products (each service is always different), they are experiences. As such, any standard pricing endeavour would, in my opinion, be counterproductive and inappropriate The approach used by many accounting firms is to base this year's price on last year's. This approach makes many assumptions but has the advantage that it is easy to understand and [usually] acceptable to the client. I believe it is possible for any firm to increase fees by up to 15 per cent without clients feeling they are being taken advantage of. Certainly that is not an unreasonable action where profits are not being made. That is profit after charging salary, NI etc. The key to being able to charge more is to deliver more - better service, delivered quicker with a high level of attention given to ensuring that the client is 100 per cent assured that they are paying no more tax than is necessary.  The point I would make with regard to your BMW analogy is that what enables them to charge more is the value of their brand. If accountants focus on building the value of their brand increased revenues would ensue from clients who are totally happy to pay for the service. Mark Lloydbottommark@marklloydbottom.comwww.marklloydbottom.com

 

stevepipehome's picture

To Mark Lloydbottom

stevepipehome | | Permalink

There are already some fledgling price comparison websites for accountancy services such as www.accountantsquoteme.co.uk, and eventually they will have some impact. But in my opinion it will only be at the margin (ie on the really price conscious clients).

After all, which will most really good clients choose to look after their personal health: a doctor who’s sales pitch is “I am cheap and do a satisfactory job”, or a doctor who credibly says “I do an excellent job and so am a bit more expensive”

Why should it be any different for most really good clients when they choose an accountant to help look after their financial health.?

Ultimately, as you say, those with the better reputation (ie “brand”) will still be able to charge much more.

And how does a firm build a better reputation? By doing more of the proactive things that clients really want and value.

Charging higher prices than the average accountant

dcottle561 | | Permalink

This article is spot on!! As one of the highest-priced accounting firm profitability consultant, I have never had any trouble getting my price.

stevepipehome's picture

Thanks Dave

stevepipehome | | Permalink

Coming from you I regard that comment as an honour.

EddieRoyce's picture

Its what good clients Value most

EddieRoyce | | Permalink

Great set of articles Steve and can be applied to several professions not just accounting.

If you want to create a strong business, you need to deal with people you like and good clients will actually value the relationship they build with you over the long term, but its then crucial that you deliver what you promise and add value by being different, using plain english, going the extra mile, educating them and also not forgeting to remind them occasionally how hard you work for them.

This in turn will add value to their businesses and create strong long term relationships built on trust.

Whilst I have accounts dept experience in my history, I'm now an IFA and in my current dealings with other professionals, accountants usually have strong trusted relationships with their clients, unlike the legal profession where many practices are transactional and would love to have our relationship based practices.

If we cannot trade profitably then we won't provide the service for very long and you will lose the good clients and end up dealing only with those that you wanted to avoid in the first place.

There are currently some many opportunities for professionals to talk to their clients, we are the experts and they need good quality advice, which they will pay for.