The second in a series of articles in which practice strategist Steve Pipe reviews the evidence on how UK accountants price.
As with the others in this series, this article is only for practitioners who want to improve some aspect of their pricing, profitability, client base or service. If that is not you, please stop reading now.
In the first article, we saw that:
- Not charging enough causes accountants to compromise one or more of their personal income, work life balance, or the service they give to clients
- Many accountants charge too little because they mistakenly believe that there is a market price above which they can’t go
- But the evidence shows that the market doesn’t set an immutable price – instead, prices are a key strategic choice that accountants must make, with the average accountant successfully choosing to charge 56% more than the bottom quartile, and the upper quartile successfully choosing to charge 151% more
How you choose to set your prices is, of course, entirely up to you. But if you would like to be able to do what many other accountants are already doing, and choose to charge higher prices, the question is simply… what is stopping you?
What seems to be stopping many of the accountants I talk to are the five limiting beliefs that:
- Our services aren’t worth more than we currently charge
- We don’t know how to charge higher prices
- Charging higher prices is ripping clients off
- Charging higher prices is unfair
- If we increase our prices we will lose all our clients
So let’s look at each of those in turn.
Our services aren’t worth more
This statement is either true or merely your perception.
If it is true that you are currently not worth a single penny more than you currently charge, even though other accountants charge more, then the solution is straightforward: Improve what you do, so that you are more valuable to clients.
If it is merely your perception, the solution is equally straightforward. Start believing in the value of what you do. Think about all the times you have already made a real difference to your clients’ profits, income, wealth, business value, cashflow, work-life balance, stress levels and tax bills. Think about the problems you’ve solved for them, and the opportunities you have created. Think about how much it adds up to across your entire client base in monetary terms. And think about the positive impact all of that has had on your clients businesses and families, how many jobs it has helped create or save, and how that has also made life better for the families of those employees. Now think about all the ways you will be able to replicate that kind of impact in the future across your entire client base.
By the time you’ve done all of that thinking your perception will have changed. You will understand your value. You will be able to explain it. And you will never again undersell yourself.
We don’t know how to charge higher prices
Once accountants accept that they are worth more than they currently charge, the next obstacle often put up is to say “but we don’t know how to charge more”.
To which, once again, the solution is very straightforward: Learn how.
After all, if one of your clients (or even one of your children) said to you “if only I knew how to do X like other people do, it would really make my life so much better”, your advice to them would simply be “learn how to do X, then” wouldn’t it?
And the good news is that we will be focusing on what the evidence suggests are the keys to charging better prices in a subsequent article.
Charging higher prices is ripping clients off
This reality is this: Your clients are always choosing to pay more for things… provided that they believe they are worth paying more for.
So if they accept your higher prices, they will do so because they feel your services are worth paying more for (just as the clients of the upper quartile firms feel that their accountant’s services are worth paying 156% more than they could have paid to a bottom quartile firm).
That isn’t ripping clients off. Just as the local private school isn’t ripping your clients off when they choose to send their children there rather than to the local comprehensive. Or Starbucks aren’t ripping your clients off when they choose to buy a cup of coffee at twice what they could pay elsewhere, and 10 times the cost of making it at home. In all these cases the transaction is an open and honest exchange of value between intelligent consenting parties.
Charging higher prices is unfair
The next thing that stops accountants charging more is the belief that “OK, even if it isn’t ripping clients off, surely charging more is unfair?”
However, the evidence seems to suggest the exact opposite: Charging too little is unfair to both accountants and their clients.
Charging too little is unfair to accountants, because, as we saw earlier, it forces us to compromise our work life balance and/or our income. And the evidence for that is all around us, since most accountants feel that they work too hard and earn too little.
And charging too little is also unfair to our clients, because it often means there isn’t enough time in the budget to do an outstanding job for them.
Ours is a great profession, filled with honourable people who work hard and want to do the very best for their clients. But when fees are too low, corners sometimes need to be cut in order to stay within budget.
Generally the corners are not cut on the things we actually do for clients. Instead, research suggests that corners tend to be cut on the things that we should be doing for customers, but don’t get round to doing because we don’t have the time.
For example, until recently I used to show accountants a list of high-impact standard advice that they should be giving to their clients. They always agreed with the list. But staggeringly less than 10% of them claimed to have actually given that standard advice to all of their clients for whom it was relevant. And when I asked them why, they always said “because there isn’t enough time in the budget”. Consequently, despite their best intentions, most accountants admitted to falling short of delivering service excellence because they charge too little.
The bottom line seems to be simple business mathematics: You can’t deliver first-class service for a third class fee.
If we increase our prices we will lose all our clients
Having spoken to hundreds of accountants, and reviewed the research literature, there doesn’t appear to be a single case of an accountant losing all of their clients. But there are of course many cases where accountants have lost some of their clients.
You can do the breakeven maths as well I can. If you lose more than the breakeven number of clients when you increase your prices, your profits will fall.
But if you lose less than the breakeven number of clients, not only will your profits increase, but with fewer clients you will have more time (a) to serve clients better, and (b) to improve your work life balance.
So the crucial question is how many clients are you likely to lose when you increase your prices? In other words, as economists would put it, what is your “elasticity of demand”?
In the next article in this series we will look at the best practice steps you can take to ensure that you lose very few clients when you increase your prices.
But even without factoring that kind of best practice into the analysis, the evidence suggests that the elasticity of demand is low - ie you won’t lose enough clients to be worse off - so charging higher prices will earn you bigger profits and free up more of your time. For example:
The evidence that charging higher prices works
In a controlled test by 12 UK practices a few years ago, clients were offered a fixed price IHT review: Half the clients being offered it at £250 and the other half at £750.
This was not a theoretical exercise – real clients actually handed over £61,722 of real money for the service, making it what is believed to be the largest ever study of the elasticity of demand for accountancy services in the UK.
And what those practices found was that:
- When they charged £250 for the IHT review, 7.2% of their clients bought it
- But when they tripled the price to £750, they still had 3.9% of their clients buying the service
Quite clearly, therefore, the higher price generated higher total fees, and much higher profits, for almost half the work. It also meant that here was more time in the budget to do a first class job.
So charging higher prices led to better outcomes for the accountants and for their clients.
In the final article in this series I propose to look at what the research tells us about:
- What the most successful firms do to make their two-to-three times higher prices stick
- The other best practice steps you can take to ensure that you lose very few clients when you increase your prices
Would that be useful?
Steve Pipe is a leading researcher into the commercial issues and opportunities facing accountancy practices.
About Steve Pipe
Steve is an FCA who is passionate about the profession. Often described as one of the world's leading strategists for the accounting profession, he has had helped hundreds of UK practices.