In this the first in a series of articles for AccountingWEB, practice strategist Steve Pipe reviews the evidence on how UK accountants price
A word of warning
Firstly, let me make one thing crystal clear. This series of articles has categorically NOT been written for any accountant who is 100% happy with:
1 - The prices and profits they are able to earn, and
2 - The number and quality of clients they are able to attract and retain, and
3 - The quality of service they deliver to those clients, and
4 - The work-life balance their practice gives them
If all four of those things apply to you, well done, and please don’t read this series of articles. What you are currently doing is obviously working brilliantly well, and you do not need any further input from any of the research findings.
If, on the other hand, you would like to improve any aspect of your pricing, profitability, client base and service, you might want to read on.
Why not charging enough is a menace
Not charging enough is the cause of almost every major problem many accountants in practice face. That’s because it inevitably leads to one or more of three types of extremely harmful compromises:
1 – Financial compromises – Either the practitioner settles for earning less as a result of not charging enough, which means that they and their family’s financial security and prospects are compromised and harmed. Or
2 – Personal compromises – The practitioner attempts to rectify matters by working longer hours and doing more of the work himself, rather than paying others to do it – which compromises and harms his life-work balance, the time he is able to spend with his family, and perhaps even his health. Or
3 – Service compromises - The practitioner cuts corners on service in order to keep things “within budget” – compromising and harming the interests of his clients.
The myth of the market price
One of the main reasons why accountants end up compromising in one or more of these ways is the belief that the price they charge is the ‘market price’ and that if they charge more than that market price they will lose most of their clients.
But the reality is that there is no such thing as a single market price for accountancy services.
Economics tells us that there will only be a single market price in a perfect market, ie where there a large number of suppliers selling identical services, with no switching costs, to consumers who have perfect information and make perfectly rational choices.
But of course, the market for accountancy is nothing like that: the services firms provide are not identical, because (a) we all have our own ways of doing things, and (b) 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.
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 that is exactly what the evidence shows.
The evidence is startling
Study after study in the UK has proved that there is categorically no single market price for accounting services.
For example, a 2014 study of 725 UK accounting firms (55% of whom had turnover of less than £250k, 26% were in the £250k-£750k band, and none were in the top 50) revealed following widely divergent prices charged for the same core services:
Source: “How Much Do Your Competitors Charge”, Mark Wickersham, 2014
Even ignoring the lowest/highest prices in each case, a simple averaging of the prices charged for services in these graphs reveals that:
The average accountant is able charge at least 56%% more than the bottom quartile of the profession
The upper quartile of the profession is able to charge at least 151% more than the bottom quartile
Importantly, the same sort of pattern was evident in every single service the study looked at: the top quarter of firms successfully charge around two three times twice as much as the bottom quarter.
Prices are a choice
The implications of the research are crystal clear:
1 - There is no single market price for the services provided by accountants
2 - Instead the prices charged are spread evenly over a very wide range
Clearly, that is because the market is not setting those prices. They are being chosen by accountants.
And the bottom line is equally clear: prices are a key decision that every accountant must make.
Interestingly, some accountants appear to be very much better at making pricing decisions than others. And those who do it really well seem to be able to earn two to three times as much as firms who don’t.
This is the first in a series of connected articles looking at how accountants price. Future articles in the series will focus on, amongst other things, the evidence for:
What the most successful firms do to make their 2-3 times higher prices stick
Why charging higher prices isn’t “ripping clients off”
How to make higher prices fair to clients
And why, for most firms, the assertion “If I increase my prices I will lose too many clients” is not supported by the evidence
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.