The case for transitioning your firm to value-based pricing

Value-based pricing versus billing

When it comes to shifting your approach to value-based pricing, it’s important to remember that billing and pricing are not interchangeable terms.

Pricing is defined before any work begins and involves identifying your firm’s costs, analyzing market value, and setting a price for each type of service. Often, accountants base pricing on time spent. Accurate and consistent pricing is pivotal in establishing value-based fees, fixed-fee rates, and CPA hourly rates.

Billing occurs after work has been completed and is usually based on an hourly rate by service or role. Billing invoices show the fees and rates charged for all services performed during a specific time or for a contracted project.

In short, pricing is strategic and proactive, while billing is reactive.

Forward-thinking firms that infuse AI into their processes to offer data-driven insights are proactively anticipating their clients’ needs — and that’s an extremely valuable service they should price appropriately.

A deeper look at value-based pricing

In the past, accounting firms followed a transactional model, providing annual services primarily focused on meeting compliance and reporting obligations. However, with the advent of AI-powered tax technology and growing client expectations, accountants are evolving beyond just tax compliance to offer year-round, value-added services that address clients’ comprehensive financial well-being.

With the value-based approach, you assign a price based on the value your services bring the client. The cost varies from client to client because you base it on what the client values most — and what they are willing to pay for that value. For example, some clients may value a consultative brainstorming session every month more than bookkeeping services and would be willing to pay more for accounting advisory consulting on a recurring, monthly, or quarterly basis.

To start, define the scope of work at the beginning of the project and ensure the client knows what is included and what will cost extra. This method might require educating them upfront on what’s included and not included in their engagement. To maximize this pricing model, you need to scope the project accurately and clearly, but value pricing can result in higher margins and happier clients.

“Value pricing allows you to use your own body of work and experience to predict the future for your clients,” said Paul Miller, president of Business by Design in Edina, Minnesota. “You come to me with a problem, and I can predict the path you’re currently on, and I can also predict a different path, a different outcome.”

Explore value-based pricing

Why are a growing number of firms choosing value-based pricing?

This shift towards an advisory approach stems from the aim to fortify client relationships and compensate accountants for their knowledge and expertise. Rather than solely completing tax filings or financial reports, forward-looking firms are actively engaging with clients throughout the year, offering guidance on topics like tax planning, financial management, and business expansion.

A value-based pricing model allows firms to drive profitability because you can demand a higher price for your expertise. With value pricing, you are compensated for your knowledge and use of modern technology rather than giving away advice for free.

The advantages of value-based pricing include:

• Clarity and certainty. Value-pricing arrangements allow you and the client to define the full, detailed scope of the engagement and the price and value your firm provides before work begins.
• A defined scope of work. You and the client know which services you will provide in what time frame. This scope will ensure your firm doesn’t perform work beyond what the client is willing to pay for.
• A consistent cash flow. Value pricing often means shifting to a monthly billing structure, which can help you better manage cash flow while enjoying a consistent revenue stream and reinforced client interaction. Meanwhile, clients appreciate knowing exactly how much you will be billing them each month so they can budget accordingly.
• Staff happiness. Research shows that young professionals entering the accounting field are less likely to tolerate dull and monotonous accounting tasks than previous generations. In a tight market for top talent, you need every advantage to attract and retain staff. Employing technology and transitioning to a practice that revolves around relationships and using knowledge and expertise to bring value to clients can help with this retention.
• Gaining a competitive edge. Clients are savvier than ever; they realize AI-powered technology makes the job easier for accountants, so they’re interested in getting their value in other ways. By transitioning to a value-based pricing model, you free employees to become collaborative advisors and partners who build long-lasting relationships between clients and your firm.

Which types of services are value-based pricing best used for?

Value-based pricing is ideal for firms providing value-added advisory and consulting services or specializing in a specific vertical or niche.

From financial accounting to consulting, there are many types of advisory services that accountants can provide, including:

• Financial accounting advisory services. Involves providing guidance on financial reporting, compliance with accounting standards such as GAAP or IFRS, and addressing complex accounting issues.
• Tax advisory services. Includes tax planning, compliance, and consulting services to minimize tax liabilities, navigate tax regulations, and optimize tax strategies for both individuals and businesses.
• Business advisory services. Comprises various services to improve business performance, such as strategic planning, financial analysis, budgeting, cash flow management, and risk assessment.
• Management consulting. Covers helping clients improve operational efficiency, optimize business processes, implement technology solutions, and address organizational challenges.
• Audit and assurance services. Includes conducting audits, reviews, and other assurance engagements to provide independent assessments of financial statements, internal controls, and compliance with regulations.
• Risk management and internal controls. Involves helping clients identify, assess, and mitigate business risks, as well as design and evaluate internal control systems to safeguard assets and ensure compliance.

How to develop a value pricing strategy

To set your fees, value your knowledge at different price depths or tiers. Consider:

• What type of advisory services are you delivering?
• What kind of value does it bring to the client?

Here’s how these tiers and your value pricing strategy might look:

• Tier 1. If the service you’re delivering brings a direct bottom-line benefit, you can charge the greatest percentage of value for your fee. For example, if it takes you 15 minutes to identify $200,000 in tax savings for a client, are you going to charge the client for those 15 minutes? No, you will price based on the value you delivered. That’s a valuable direct benefit for the client.
• Tier 2. Services with an indirect movement to the bottom line will have a lesser percentage of price to value. For example, your firm helps a client gain business efficiencies, which means it has time to generate sales. However, if that client doesn’t do their part and dedicate extra time to making more sales, your service has had less impact.
• Tier 3. Services that deliver a protective benefit of sorts may have the smallest percentage of value to price. For example, your firm provides a service to a client that makes them less susceptible to fraud or negative audit findings.

How to show clients the value you bring to their business

Today, many companies understand the value of knowledge and getting business done faster and are willing to pay for that.

Spending habits have shown that today’s accounting clients will pay for knowledge compared to their counterparts from prior generations. Earlier generations were willing to pay for skill but didn’t want to pay for knowledge.

Your task is to show clients that value. You can do this by connecting services with outcomes to demonstrate how your services align with their goals.

This approach starts with investing the time to listen and understand the client’s goals, needs, capacity, and strategies and then helping them determine the path to achieving those goals. Once you lay out that path, show them how your services will help them accomplish their goals. Most clients will agree to pay a premium when they fully understand the value of your knowledge and business offerings; they see the greater value they’re getting from spending their fees on services that add value rather than pure processing.

A deeper look at fixed-fee pricing

Fixed-fee pricing is a set price that applies to all clients for the same service. Like value-based pricing, you establish this price before work begins.

The fixed fees can serve as a menu of sorts — clients review your offerings and their prices and choose which services they want. Fixed-fee structures simplify pricing and billing but don’t offer the same margins as value-based pricing.

Which types of services are fixed-fee pricing best used for?

Fixed-fee pricing is often associated with compliance-based services.

How can you determine your fixed fee for each service?

The baseline for developing the fixed-fee pricing menu is to consider the costs — in labor, software, overhead, and more — required to complete each service, then add your firm’s markup. While this may seem like a simple math equation, you must carefully consider all costs or risk fully underpricing a service. As with value pricing, these prices will likely evolve as you better grasp what it costs your firm to complete each task.

The advantages of fixed-fee pricing

• Pricing is simple. Fixed-fee pricing based on a cost basis isn’t subjective.
• It’s easy to justify to clients. If your firm needs to increase pricing due to rising costs, fixed-fee pricing can be easier to explain and justify to clients.

The disadvantage of fixed-fee pricing

• It doesn’t account for value. When adopting a fixed-fee pricing model, you are not factoring in the value you’re providing your clients. That’s what matters most to the client — they aren’t interested in your costs.

The advantages and disadvantages of hourly billing

Advantages:

• Familiarity. Change isn’t easy. Hourly-based billing is deeply engrained within the accounting profession, and shifting to a new way of pricing can seem daunting.
• Easy to justify. Billing by the hour is not subjective or ambiguous like value-priced pricing, making it easier to explain to clients.

Disadvantages:

• Increases fee pressure. When firms operate in a transactional business model, it’s easy for clients to comparison shop, making it difficult to develop a sufficient profit margin, especially as costs rise.
• Ignores value. Hourly-based pricing does not factor in what matters most to the client — the value you provide them.
• Lacks certainty. Clients value transparency and certainty. Under this pricing model, clients don’t know how much they will be paying for your services until the work is complete and the hours are calculated.
• Discourages collaboration. If a client has a question or runs into an issue, they could be hesitant to reach out to you for guidance, knowing that as soon as you pick up the phone, the clock starts running. This hesitancy could lead to a weakened client relationship.
• Punishes efficiency. Today’s firms are looking to drive greater efficiencies and automate workflows to service clients better and ease the strain on staff. However, under an hourly billing model, this also means fewer billable hours and, ultimately, less profitability for the firm.

Moving forward successfully

How value-based pricing can affect client relationships

Value pricing has many benefits, but perhaps the most significant result is how your clients respond to it. They’re no longer worried about the clock each time they talk to you; instead, they can begin collaborating with you. They become part of the process, with a deeper understanding of your partnership and the value they will receive before work even begins.

This pricing model eliminates confusion later and creates a lasting bond, establishing longevity for the professional relationship. This partnership allows you to take more time to challenge them, guide them, and help them grow their businesses.

Establishing enduring and meaningful connections is how you generate more transactions, retain clients, and build a sustainable business.

Do hourly billing and time tracking still have a place in a modern tax and accounting firm?

Hourly billing still has its place in today’s accounting firms when you can’t control how long a project may take — for instance, in litigation support services. Tracking hours is necessary when determining value-based and fixed-fee pricing, but hours spent on a project shouldn’t be the basis for most billing.

Do not take this to mean that tracking hours is not essential. Indeed, the time of your staff is one of the resources you have to allocate across the board, and you need to make sure that the resource compensation is where you need it to be.

Are value-based and fixed-fee pricing mutually exclusive?

Despite the differences in pricing models, there can be many gray areas and hybrid-fee-structure approaches for pricing accounting services.

“What my costs are have to be a factor as I calculate my value-billing model,” Miller said. “When I’m building my value-bill price, it isn’t just about the client; it is also about what the firm needs to be profitable at an acceptable rate for the owner. I need to identify my cost basis regardless of which pricing model I ultimately choose to use. I don’t think they are mutually exclusive.”

Dealing with the “what-ifs” of the value-based pricing model

What if a client changes things in the middle of a project — or doesn’t give you the complete picture when you’re calculating your value-based price? For example, maybe they forgot to mention two other companies they own.

Two best practices are to:

• Set a time frame for your agreement, so you can annually revisit the deal parameters and all that is involved.
• Be willing to speak up when something is out of scope. Tell the client that wasn’t agreed to, and either wait until you can build it into the following agreement cycle or create a change order that encompasses the new service.

Clients will understand that they’re providing you with new information, and most will be okay with the change in order. However, there are some cases where you may have to eat that extra work until the next contract cycle.

In truth, if you ask the right questions and gather the correct information from the client upfront, this is a rare scenario. Because you’re an expert in this area, you’ll know the questions to ask for each project.

While every firm is different, the AICPA suggests that 12 to 24 months is a good guideline for implementing value-based pricing.

How to succeed with value pricing

Making the transition to value-based pricing won’t happen overnight. There is a transition period that is a natural part of the process — and the process is sometimes the greatest source of anxiety for firms considering it. They should expect and embrace the idea that this is something that is going to take some time.

Knowing where and how to start can be daunting. To smooth the transition, here are some recommendations:

1. Implement your new pricing model beginning with your next new client.
2. Identify a group of consistent or stable clients to help set your foundation and practice your message.
3. Communicate the same message to these clients. For example: “We’d like to even out your cash flow. So, we will take what you paid us last year and divide it by 12. That’s your new fee going forward, and here are the services that the new fee encompasses …”
4. Get comfortable delivering that message. Emphasize how this is a positive change for your foundational clients, and make it clear you’re ready to increase scope if necessary, for example, if they sell their business or buy a new one.
5. Start small. Pick 10 clients to transition to the new pricing model and clearly communicate the reason for the change. Then, learn from those 10 clients to further fine-tune and perfect your new way of pricing.
6. Offer tiered pricing with varying degrees of service and assistance in each level, such as gold, silver, and bronze, or tiers one, two, and three.
7. Have confidence. When you’re secure in your pricing and that you’re worth it, clients will recognize your value and be willing to pay for it.
8. Determine your optimal close rate for new projects. This will help you set your prices. If everyone accepts your fees, you’re probably charging too little. If no one is, you’re charging too much. You want to hit the sweet spot with a high close rate and pricing that turns a nice profit for your firm.

Jumpstart your journey to value-based pricing

Need a helping hand as your firm transitions to a value-based pricing model? Thomson Reuters offers various solutions to help ensure your firm has powerful AI tools and best-in-class content for a proven roadmap to success.

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