The Power of Pricing

Pricing services by the hour may be simple, but it is not always the best way forward. On the other hand, how do you confidently calculate fixed price servicing in a simple way without selling yourself short? Tate Henshaw from Xero introduces a couple of methods. ~WizeOwl

Nothing sparks more debate among accountants than the topic of pricing. Everyone seems to have their own method and yet no one feels as if they’ve got it all figured out. The cloud has driven a big shift in the industry from hourly pricing to the fixed or value pricing model.

While the hourly pricing model is far from ideal for a modern firm, no one can ignore it’s simplicity. Each staff member has an hourly rate, they track their time, multiply the two together, and send a bill. While undoubtedly more reflective of the service provided, how do you calculate fixed or value pricing? Here are a few possibilities.

Benefit to cost ratio

This can work well for tax planning. If you know you can save someone $3,000, charge $1,000. This could also work if you can quantify the time you’re going to save a client. Multiply that by their implied hourly rate and, voila! This can also work for the tried-and-true in-house bookkeeper replacement model. If a company is paying an in house bookkeeper $30,000 and you can do it for $20,000 – that’s an easy sell. The point of this model isn’t the specific benefit you use (time, costs, staff) it’s the fact that you’re tying your value to their direct benefit.

$500 per month for every $500,000 in annual revenue

For continuing accounting services. This may need to be tweaked for different industries but it’s a good starting point. For low margin industries you may have to flip this around, although for an inventory heavy business you may need to increase it due to complexity. I would recommend, for each industry vertical you’re in, coming up with a base number like this for quick estimations.

Between 1-5% of gross income

The “somewhere” should depend on your level of involvement. Writeup work is worth less and outsourced CFO is worth more. For clients where you’re handling full business management, with some concierge level services included, your rate should be closer to 5%. For tax clients who just need bank accounts reconciled – around 1% should be your sweet spot. I wouldn’t necessarily use this as the primary pricing method, but as more of a “guard rail” situation for making sure the price you end up with is going to make sense.

Free tax returns

This method undoubtedly gets people’s attention. Obviously in reality we’re not going to give away our time. What we can do is put the emphasis on the value-add services (consulting, coaching, forecasting and so on) and get away from the commoditization of compliance services. Now the conversation has changed and the client’s focus has been moved from price to value.

You may not choose just one of these methods. The sweet spot for your firm could be a combination of two or more of these methods. There are other factors you can take into consideration including transactions, expenses and more. The key is to continue refining your process and to realize that you can always renegotiate engagements. And be confident! You’re the expert in your field and you’re worth a premium.

At Xero Hour this month, we’ll be continuing the important conversation about pricing – learning from each other and sharing best practices. Xero Hour has been a valuable platform both for me personally and for Polay+Clark. We’ve seen improvements in workflows, found new apps for our toolbox, and even made connections that have led to new business opportunities. It’s my hope that each attendee realizes that same benefits that I have personally experienced. Come alone and let’s talk about accelerating our firms together!