The third in a series of articles in which practice strategist Steve Pipe reviews the evidence on how 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.
- 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 fall into one or more of five mindset traps – none of which are actually supported by the evidence
- Instead the evidence shows that prices are a key strategic choice - and that by making better pricing decisions, the average UK accountant successfully charges 56% more than the bottom quartile, and the upper quartile successfully charges 151% more
In this article we will look at what the research tells us about:
- What the most successful firms do to make their two-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
A word of warning
Let me make this point, immediately… this is not yet another article beating the drum for value pricing. While there are clearly firms getting great results by using value pricing, the research certainly doesn’t suggest it is the only way to price successfully.
Equally importantly, no matter how you arrive at your prices, Mark Lloydbottom is absolutely right when he says that, in the eyes of clients, every bill is a value bill. And if they don’t see our prices as representing value to them, they won’t be happy. So in that sense, clients will be judging us as if we use value pricing, whether we like it or not.
Even so, what we are looking at here is what the research tells us about BETTER PRICING, not value pricing per se. Pricing that delivers better results to accountants.
Two common approaches that don’t work well
Sadly the two most common approaches to pricing don’t deliver optimal results:
A few years ago a major study by Sage found that the number one thing clients hate most about the way accountants operate are “surprise bills” – i.e. bills where either their existence or magnitude is not known to the client until after the event. And, of course, time-based billing inevitably leads to surprise bills, because their magnitude can only be calculated after the event once the number of hours is known. In addition, many clients also object on the basis that “it doesn’t seem right that the longer you take and the slower you go to help me, the more I have to pay”. So time-based billing doesn’t normally work well for clients, and for many of them it is the diametric opposite of what they want.
And if that weren’t enough, it doesn’t work well for accountants either. Firstly, most accountants are already unhappy with the profits it generates for them. And secondly, time-based bills will inevitably get smaller and smaller as technology reduces the time it takes to do things. This decline in fees threatens capital value (which has historically been based on a multiple of recurring fees), and the profitability of firms that are not able to reduce costs at a faster rate than their falling fees.
No doubt these factors help explain the recent decline in time-based billing as the dominant approach
Single fixed pricing
Given the problems with time-based billing, many accountants have moved to a form of fixed pricing that is equally flawed. And it generally works like this: “I look them in the eye/look at what the previous accountant charged/use my judgement to quote them a fixed price”. The problem with it is that the single fixed price quoted is unlikely to be optimal: Since it is rarely exactly the right price to maximise profits, and instead it is generally either too high or too low.
- If the fixed price is too high, of course, the accountant loses out because the client walks away - or at very least they force the accountant into a humiliating climb down, resulting in a unilaterally reduced fee and providing a precedent that makes it much harder to charge profitable prices in the future
- And if the fixed price is too low, the accountant loses out by leaving money on the table
Despite these being to the most common approaches to pricing, they clearly don’t work very well for accountants. So what does?
The pricing approaches that do work well for accountants appear to be based on a number of guiding principles, including:
- Simplicity and transparency - prices must be easy for both the accountant and client to understand and explain
- Fairness - they must be perceived to be fair by both parties. And a key part of this is…
- Value for money - as Mark Lloydbottom rightly points out, to clients every bill is a value bill, so clients must perceive that they are getting value for money. And they judge value for money as the difference between the benefits they receive and the price they pay to get them. In other words, “their profit on the deal”. Of course, being value for money does not necessarily mean being cheap, because a high-priced service that delivers great benefits can still be seen as better value for money than a low price service that delivers limited benefits
- Choice - generally there is no one-size-fits-all solution. So the key is to give clients a choice between suitable alternatives: some at higher prices (with higher benefits) and some at lower prices (with lower benefits)
- Leverage - giving prices should not be something that can only be done well by the people at the very top of a firm. Partners, managers and all other senior client facing team members should all be equally capable of pricing to the same high standard
- Depersonalised - the prices quoted should not be affected by the mood, confidence or frame of mind of the person giving them
The last point is particularly important, since sadly what often happens at less successful firms is that on days when partners are feeling “negative” they quote lower prices than on days when they are feeling more positive. These feelings of negativity can be caused by anything from anything, from headaches, bad traffic and computer problems, to client complaints, bad debts or missed deadlines.
But probably the most important factor that creates negativity – and thereby drives down prices – is low self-esteem. In order to successfully charge better prices, it is essential that accountants have high levels of self esteem. And that means really understanding and believing in the value of what we do, the impact it has, and the difference it makes.
Ours is a noble profession. And by helping clients to get better results by making better decisions based on better data, we help make the world a better place. One decision at a time, one £ at a time, and one client at a time we help to create jobs, prosperity, wealth and economic progress.
And the sooner we start understanding and believing that, the sooner we will start to earn (in every sense of that word) better prices.
Specific approaches that work well
Three of the pricing approaches that are currently working best in the UK based on these guiding principles are:
- Iterative digital pricing - this is where firms use software to show clients the price of the various options, iteratively tailoring the service to the client’ precise needs, instantly recalculating the price at every turn, and automatically creating a ‘fixed price agreement’ confirming the agreed scope and price of the engagement in writing
- Extra work orders – before starting a task they systematically check to see whether it is included within the scope of the existing fixed-price agreement. If it is not, then they only start the task once the client has signed an “extra work order” confirming the scope and price of the extra work. Typically, these extra work orders arise when clients (A) ask for a completely new type of help, or (B) move the goalposts on an existing piece of work (for example, not completing the promised bank reconciliation before passing their books to you. In which case, instead of simply doing the bank reconciliation and hoping the client will pay for it, switched on accountants tell their clients upfront “you can either take the records back and do the bank reconciliation yourself, or we can do it for you on the terms set out in this extra work order” - both of which are great outcomes for the accountant.)
- Automated payment - to avoid overtrading and other cash flow problems, many practices now use direct debits to greatly simplify the process of getting paid. Indeed, many successful practices go even further and use cloud technology to fully automate the process of identifying invoices due for payment, collecting the cash and updating the accounting records… all without any human intervention
In fact, many of the UK’s most successful and fastest growing firms have built their entire pricing strategy on these three approaches.
The bottom line
I don’t really care how you do it. I just want you to earn the prices you deserve. The prices you need to deliver outstanding service. And the prices you need to make life better for you, your business, your team and your family.
If you do that by copying what is already working really well from the firms, that’s great. But if you find your own way it works brilliantly for you, that is even better still.
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.