Set Prices That Mirror Your Worth


CHECKLIST
Are you charging clients amounts that recover the time and effort you put into working for them? Do you also factor into your prices things such as the value you create for your client, your abilities, your specialized skills and the demand for your services? If you answered “no” to either question, you may want to rethink your billing rationale and follow the tips below to learn how to set prices that are fair to both you and your clients.
Record all chargeable time to ensure pricing accuracy. Chargeable time measures the cost of serving clients. It’s how long you spend working for them, regardless of whether you plan to send a bill.

To determine whether time is chargeable, ask yourself, “If I did not have this client, would I have spent this time doing something else?” If you answer “yes,” the time is chargeable. Nonchargeable time is time worked but not chargeable to a client. Examples of nonchargeable tasks include practice development, recruiting, training and attending meetings and conferences. Authorized leaves of absence during business hours, civic activities, holidays and vacations also count as nonchargeable time.

Some CPAs think that if they don’t plan to send an invoice for a certain service, they need not record the time. This can cause a loss of profitability in firms because failing to record all chargeable time distorts the cost records for particular clients. If you don’t know how much a job cost last year in materials and time spent, your decisions are not going to be accurate the next time you need to set a price for a service or create a budget. The chargeable time you spend on a client (whether or not you write it off) still is a cost to serve that person and should be recorded in your time-keeping system in order to better manage your business.

Learn how to use value pricing. With value pricing you charge for services based on their value to the client rather than on how much it costs you to provide them. You can—and should—price many engagements based on what the client thinks they’re worth instead of the actual time you spend doing the work. For example, when you show a client a return on investment substantially greater than the amount he or she invested or get someone a bigger tax refund than he or she expected, that is a good time to consider value pricing. Keep in mind a simple truth: Most clients value your services higher than you do.

Value pricing is particularly appropriate for value-added services or when monetary savings or the extra revenues you produce for clients are visible to them and measurable. If the value of your services is above standard, you should charge above-standard rates. Remember, clients will accept value pricing if you discuss it with them before performing services: If you have a long history of charging clients based on chargeable hours, you don’t want to surprise them.

Also become familiar with the value gap —the amount clients are willing to pay in excess of the amount the practitioner feels comfortable charging. Aside from objective elements, such as time at standard rates and other direct chargeable expenses, you should consider subjective factors that merit a price either higher or lower than the standard. Some such factors include the acceptability of the price to both you and your client, the amounts involved, the degree of risk and responsibility you assume, the priority and importance of the work to the client, the results you obtain, seasonal factors and your special capabilities. The primary criterion, however, is the value of the services to your clients.

Know what results pricing is and isn’t. Results pricing is the practice of agreeing with the client in advance to charge based on the results you obtain, regardless of the amount of time involved. It is not a gratuity you add on for extra special service after an engagement has been completed.

Consider the use of fixed-price agreements. These pacts transfer the risk of cost overruns from the client to the CPA. In return for assuming such risk, you can charge a premium to the client. Given a choice, many clients prefer to pay more in return for having a ceiling on their price. Fixed-price agreements communicate competence, confidence and experience on your part. However, when using them, be careful of scope creep, a phenomenon in which a project expands beyond its original conception because the client keeps asking for additional services and the accountant provides them because he or she hasn’t set clear boundaries on the engagement.

Know the right way to raise prices. Most clients have no problem with increases of less than 25 to 30 percent; therefore there’s no need to announce such routine hikes. If you decide to raise prices more than 25 to 30 percent, make sure you discuss this with clients—using the word adjust instead of raise —before you do any client’s work. If someone has a problem with your new prices, it is better for you to find out beforehand. This gives him or her the opportunity to go elsewhere for services and you the opportunity to stop working for less than you are worth.

Source: Adapted from Bill What You’re Worth by David W. Cottle, CPA, AICPA, 2003.

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