When and how to raise fees at your firm

Several factors come into play when adjusting rates in order to run a profitable and healthy business.
By Anita Dennis

 IMAGES BY ALEXEYVS/ISTOCK
IMAGES BY ALEXEYVS/ISTOCK

Raising fees can be a challenging consideration for firms. Practitioners want their fees to reflect the value they offer and to provide sufficient revenue to run a profitable and healthy firm. On the other hand, they worry about losing clients by charging too much, particularly in light of economic uncertainties of the COVID-19 pandemic.

But rest assured that a well-thought-out analysis and plan to raise fees is a good idea, and following these tips from experts can take the worry out of it.

ACKNOWLEDGE THE IMPACT OF COVID-19

Despite the many recent economic uncertainties, don't let the pandemic deter you from raising rates.

"If you do not raise fees now, when will you?" asked Todd Koch, CPA, partner at 40-person John A. Knutson & Co. PLLP in Falcon Heights, Minn. With complexity at an all-time high after a year of shifting tax deadlines, COVID-19 relief programs, and a shortage of professionals, firms need to hire and hold on to the best people, he said. That could require pay increases or added benefits for talented staff. In addition, he noted that the clients who have been hardest-hit by the economic uncertainty of the pandemic are also the ones who have relied most heavily on CPAs to develop new business models and other solutions and to navigate relief programs. Since firms have clearly demonstrated their worth to these clients, it should be easy to justify a fee increase.

While there may be difficult conversations with clients who have struggled, "it's important to acknowledge the client's challenges while showing your firm's value in coming alongside to help them weather the storm," advised Jon Lokhorst, CPA, a coach and consultant at Lokhorst Consulting LLC in Andover, Minn.

CONSIDER EXCEPTIONS AS NEEDED

Raising fees does not mean that firms can't provide a discount to certain clients if circumstances require it, said Carl Peterson, CPA, CGMA, AICPA vice president—Small Firm Interests. That way the firm can keep fees at market level while making an exception for some as appropriate.

Another option for valued clients experiencing cash flow issues is to offer them deferrals or payment plans, Lokhorst said. "In those cases, be clear about the exception you're making and your plan to get back to your normal financial terms down the road," he said.

Remember that discounts or deferrals should be the exception and not the rule, said Peterson, who previously owned a six-person firm. In addition, "it is not good practice to have different rates for new clients versus old, since you will run into problems keeping track of who is charged which rate."

RECOMMENDED STEPS FOR RAISING FEES

Economic disruptions or not, there are some steps practitioners can follow when approaching fee increases.

Set policies and aim high

When he ran his firm, Peterson set and stuck to certain fee principles. For example, he advised raising fees every year, even if only by $5 per hour, to prevent stagnating or backsliding. Failing to do so could mean that fees for current clients fall below market fees or don't keep up with the rate of inflation, he said. "Clients are smart and expect to have annual increases as inflation impacts every other part of their life," he said. "CPA services are no different."

Peterson also recommended billing as much as firms two to three times larger than yours do. "There's no value in being the lowest in town," he said.

That's especially true if you plan to be involved in merger or acquisition negotiations down the road, since many potential M&A partners won't be interested in a firm with below-market fees. Low fees can also make it harder to offer compensation that will attract and keep quality staff, he said.

To learn more about average fees in your region, the benchmarking information in the AICPA PCPS/CPA.com 2021 National Management of an Accounting Practice (MAP) Survey (available at www.aicpa.org) "is the premier place to find out what others are charging," Peterson said. In addition, most metro areas have formal and informal networking groups of firms run by state societies or local chapters that share best practices, he said. Once prices are set, firms can use the PCPS Pricing Tool (available at us.aicpa.org).

Koch has found that competitive bidding situations can also offer great insights. When his firm bids on an engagement and finds that other firms are offering similar bids, "that is the best indication that our rates are market rates," he said.

Review relationships regularly

Lokhorst recommended that firms consider fee increases during annual assessments of client relationships to determine whether the client still fits the firm's service model, capacity, processes, and other factors. That effort can help firms decide if the client relationship is worth keeping and also serve as a review of the value the firm offers the client. Turn to the PCPS Client Evaluation Tool (available at www.aicpa.org), the Good Fit Client Tool (available at www.aicpa.org), and the Proposal Meeting Prep List (available at us.aicpa.org) for help.

After assessing their client relationships, firms will be better prepared to justify a fee increase, Lokhorst said. "You can highlight the ways you've delivered value in the past and discuss future opportunities to do the same," he said. "Emphasize the client's pain points and the significant problems you help them solve," including financial and nonfinancial benefits that clients gain from their relationship with you.

No matter what services you offer, point out the added advice and information you offer. "Recognize that you do much more than compliance," Koch advised.

Be confident in your decision

During the actual conversation with a client, stop talking after you've explained the increase, Lokhorst recommended. Don't undermine your case by offering to lower your fee before giving the client a chance to respond, he said. The PCPS Overcoming Pricing Objections Tool (available at us.aicpa.org) can help.

To maintain confidence in their fees, CPAs should identify reservations they have and consider whether they're valid. For example, in some cases, practitioners are uncertain about fee increases because they have spent fewer hours performing the same services due to new technology or other efficiencies. In that case, Koch said, remember that you are efficient because of the investment the firm and its professionals have put into education, expertise, and technology, which justifies the increase.

Raising fees is simply a matter of recognizing the value of your work. "As a profession, we tend to undervalue our services," Peterson said.


About the author

Anita Dennis is a New Jersey-based freelance writer. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at Chris.Baysden@aicpa-cima.com.


AICPA RESOURCES

Survey

AICPA PCPS/CPA.com 2021 National Management of an Accounting Practice (MAP) Survey

Tools

Client Evaluation Tool (AICPA member login required)

Good Fit Client Tool (Private Companies Practice Section (PCPS) member login required)

Overcoming Pricing Objections Tool (PCPS member login required)

Pricing Tool (PCPS member login required)

Proposal Meeting Prep List (PCPS member login required)

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