Accountants have long relied on the crutch of the hourly chargeable rate to decide how much to invoice clients. It’s a process so firmly entrenched that it’s rarely questioned. But now the combination of the commoditisation of compliance services and a crisis of confidence means that there are growing calls for a more sophisticated value-based approach.
“Pricing is the most important issue facing accountancy firms and the root of most problems affecting the profession,” says Steve Pipe, a founder of AVN.
“They have a belief that there’s a market rate above which they’ll lose all their clients but the reality is there is no such thing.” AVN’s analysis shows some practices are successfully charging three times more than others for the same compliance services.
Online accounting services are putting downward pressure on accountancy grunt work and it’s a trend set to continue. A “stack high, sell cheap” approach can work as a niche for smaller clients, says Pipe, but you have to be very efficient, it’s incredibly price-sensitive and very competitive. “If we want to carve out a profitable role, we must harness that technology, master it and help clients to make the most of it,” he says, “and then wrap around services offering proactive and valuable advice. It’s not just about keeping the score but helping clients score goals.”
Ron Baker is one of the founding fathers of value-based pricing, having started the move away from timesheet billing in the 1990s and as co-founder of the VeraSage think-tank. “The idea that there’s any relationship between value to the customer and labour input by accountants is absurd. This is a business model change, not just a pricing change. It’s about how you create value and price it.”
Ori Wiener is a partner at Cambridge-based Møller PSF Group, a specialist consultancy to the professional services sector. “The profession needs to recognise that success isn’t measured by technical brilliance alone – it needs to be a mix of technical brilliance and business acumen,” he says.
The thing that unites many successful and profitable practices, Wiener continues, is that they get the importance of pricing and assignment profitability and they know how to negotiate with clients. In contrast many less profitable firms remain almost apologetic about the fees they charge.
Given that value-based pricing hinges on linking the value of what you do to the price you charge, you can see why accountants might be reluctant to give up the relative simplicity of the hourly rate.
It helps to put yourself in your clients’ shoes; the majority are driven by the desire to improve profit, cash flow and personal wealth and not the need to hit the tax deadline or file end of year returns. “We have to be better at communicating the value of what we do,” Wiener says. And much of that hinges on the intangible feelings that you want clients to experience – a good relationship, trust and peace of mind.
Detailed discussions about the scope of the work must be the starting point for pricing negotiation. “People get caught up in hourly rates or a fixed price without discussing what will be delivered.
One of the biggest stumbling blocks is that the accountancy profession has a very low tolerance for ambiguity, but value is a feeling, not a number (Ron Baker)
If you want to improve pricing you need to improve scoping – not just documentation such as engagement letters but also how you respond to changes in that scope,” Wiener says.
Rather than take any extra workload on the chin, firms should use project changes to broach the subject of pricing. “The start and end of projects are the worst times to be talking about money,” he says. “If clients are asking you to do more work, they will pay. Riding the scope creep wave is an opportunity but only if you have a well-defined scope. Tell them what you’re going to do, what you’re not going to do and what additional services will cost. If you’re transparent they don’t feel taken advantage of.”
Offering three levels of service and pricing options – so-called Goldilocks pricing – puts clients in control of the service level they desire and the price they are willing to pay, and is a powerful and effective strategy. Most clients will pick the second option, but be prepared that they may choose your “platinum” level service.
One of the simplest and most powerful ways to add value to clients stuck in a rut is benchmarking; showing them how their figures – for example margins, debtor days and other financial metrics – compare with others in their industry. There are various commercial solutions on the market to arm your practice with that information.
Meanwhile, being selective about which clients to take on – or retain – may seem counterintuitive to growth-hungry firms, but will pay dividends, says Pipe. “Identify the 20% of clients that give you 80% of your grief – the ones who if they left you’d celebrate.” His advice is to only take on clients willing to meet quarterly to look at management accounts and KPIs to develop an action plan for the next quarter. “Those meetings get you deeper into the business and the whole relationship moves from accountants being the people who keep the score to being the ones with our finger on the pulse,” says Pipe.
“People often take on work for the wrong reasons,” Wiener adds. “If it’s simply to be busy it could mean you do unprofitable work. If it’s paid training for juniors that’s fine as long as the juniors are doing the work. Chances are if you’re doing the work for ‘strategic’ reasons, it probably means you have yet to come up with a reason why it makes commercial sense. The opportunity cost of doing bad work is really high,” he warns.
Paul Kennedy, partner at Hertfordshire-based firm O’Byrne & Kennedy, says the firm’s annual fixed price agreements for a concierge-style approach to accountancy services are reviewed every year. “Value is subjective. You price the customer and not the work. And this way it gives the client control. We would hate them to use us because they couldn’t be bothered to find someone else. We will proactively not renew contracts if we’re not creating enough value.”
The worse thing accountants can do is nothing, warns Pipe. He believes that current pricing models force all too many accountants to compromise, either on the level of income they receive, their work/life balance in compensation for insufficient earnings, or the level of service they offer to clients. Even if value-based pricing is a step too far now, consider putting your prices up by 25%. “A small proportion of clients may leave but that spare capacity frees up time for the clients that remain.”
“Remember too that clients use price as a means to complain but they will only moan if you’re not adding enough value for the fee you charge,” says Graham Lamont, ICAEW Practice Committee member and chief executive of accountants Lamont Pridmore. Since taking over the practice in 1979 it has grown from a single-office, sole practitioner with one-and-a-half staff to a top-100 practice with eight offices across Cumbria and Lancashire.
“A lot of SMEs want a one-stop-shop for business advice. We explain to our clients what kind of services we can provide and present the benefits,” Lamont explains. “If we don’t make a difference we won’t charge the client.” As a rule of thumb, the fee charged equates to around 10-20% of the savings made, “so if you save your client £30,000, you can charge £3,000-4,000 and give a real guarantee. Our experience has shown that clients are happy to pay that,” says Lamont.
Pricing your services properly is hard and takes energy and effort, but a 2-3% uplift in margin is the most effective thing you can do to increase profit. The biggest challenge for accountants isn’t increasing their fees, it’s having the confidence to do so, and step away from the PAYE mindset, Wiener says.
Despite being an early adopter of the value-based pricing approach, Kennedy admits the art of pricing continues to be a challenge. “It’s something I’ve had to work at and you never really know if you’ve got it right, but you just have to keep trying. The secret is to get clients to tell you what they value.”
Ultimately, if you believe you sell time, you will never get away from time-based billing, Baker warns. “One of the biggest stumbling blocks is that the accountancy profession has a very low tolerance for ambiguity, but value is a feeling, not a number.”