Why firms should review their pricing

There is a direct correlation between an accounting firm’s capacity and its pricing methods. If a firm is underpricing, it will not be able to hire the staff it needs to keep up with the work it has, let alone take on additional clients or services. Its revenue is capped, and the firm’s value is stagnant at best.

The problem is particularly acute for small firms that don’t raise fees high enough to pay for the staff or technology needed to handle the workload. In those cases, partners must bear the burden of the extra work, adding to their stress and taking away from their time to work on the business.

Proper pricing leaves firms either with the same revenue and fewer clients or with the same number of clients and higher revenue. Either way, the firm — and its people — come out ahead.

MAXIMIZE THE IMPACT OF FEE INCREASES

Every dollar the fee is increased for a current client is an extra dollar of profit, as author and GoProposal founder James Ashford has noted.

With a new client, only part of any price increase goes to the bottom line because the firm is taking on additional work that will require added resources. So, even tiny changes in pricing for current clients have a bigger impact on profitability than taking on new clients.

When the firm has the right pricing, its people are less stressed and better able to potentially provide a wider range of services or advice to clients, and firm leaders can focus more on higher-level work. Clients will no doubt recognize the difference in the firm’s people and their capabilities. With higher profits, the firm can invest in more robust software, including automation and other emerging technologies that can further enhance productivity and expand capacity.

Firm leaders may avoid raising fees for a number of reasons:

• Fear of losing clients: It is true that some may not want to pay the new prices, but much or all of those losses will be offset by the higher amounts being collected from the remaining clients.
• Underpricing as a strategy: Being the low-price provider may seem like a good way to bring in more clients, but lowering prices to increase volume is not a healthy approach for the firm or its people. Clients that consider price alone will not appreciate the overall value that the firm offers and will not stick with the practice if they can find a cheaper alternative.
• Obligations to long-standing or other special clients: Practitioners can certainly choose to give a break to certain clients for sentimental or financial reasons, but they should be careful to define and limit the number of clients this will apply to. Overall, it is not good stewardship to give concessions that could threaten the going concern of the firm and jeopardize the firm’s health and firm leaders’ succession plans.

Firms will miss out if their pricing is not right, and firm leaders should consider what their reluctance to adjust pricing costs the firm and its people.

HOW IT SHOULD WORK

Decisions to change pricing become straightforward when practitioners fully commit to pricing their services at the proper level.

Fundamentally, pricing decisions should be objective and based on the value the firm provides. That value depends on what makes one client a heavier lift than another or on what insights or information the firm provides a client.

Firms can do that by multiplying complexity by frequency — for example, setting a base fee for a service and multiplying it by established multiples based on frequency of transactions, reconciliations, bank and credit card accounts, and whether bank feeds are available.

Firms can also charge set fees based on:

• Invoices and bills to reconcile (modified accrual basis).
• Accruals to books (full accrual basis).
• The need for a cash flow statement or filtered financials for classes or projects.
• Whether the client will be filing sales tax returns or 1099s.
• If inventory needs to be adjusted each month.
• There is sales data to import.

STEPS TO TAKE WHEN ADJUSTING PRICING

As you work to set the proper pricing for your services, list each client and their annual fees and services and rank them based on the level of satisfaction with the working relationship, client responsiveness, profitability, whether they are good referral sources, or whatever issues are important to them. Firm leaders are encouraged to then review and adjust pricing for one segment of clients at a time. Begin by repricing the clients who fall below the mean profitability or satisfaction marks.

This exercise forces a focus on data and facts rather than guesswork and emotions. It’s then possible to give each client a capacity or load score based on the difficulty of the engagement versus what the client is paying.

This should be done across the firm, since more cohesive packaging means that many clients are receiving a range of services, and their prices should be considered in the aggregate:

• Avoid pricing well below the competition. Firms can gather pricing details through surveys and other data for the markets they serve.
• Consider increasing fees until more than one-third of clients are rejecting the new pricing.
• Consider what price point would ensure that the engagement is the best use of firm resources. If capacity is ultimately limited, is it worthwhile to take on this engagement instead of another one based on price? Practitioners should set prices they can stand by whether the client accepts them or not, since anything lower would not be worth taking on.
• Acknowledge that a bad fit is a bad fit at any price. Not surprisingly in a strong market, 62% of accounting firms are culling clients, the 2023 AICPA National Management of an Accounting Practice (MAP) survey found. Even after firms raise their prices, they may find that some clients that stay on simply don’t fit the practice.

Tax services should be priced by complexity plus value, not by time. Firms can set established prices for each level of complexity beyond the fee for a basic return — including each additional necessary form and schedule and whether out-of-state income taxes will be an issue.

BEST BILLING PRACTICES

Once pricing decisions have been made, firms should also consider best billing practices. That includes:

• Firms should consider listing all services (accounting, tax, payroll, and advisory) on one bill as is done when a firm uses a valuepricing model. There are efficiencies of scale when the firm provides all financial services, and clients will appreciate this method because:
  • Many will prefer a holistic approach to services and billing.
  • There are no billing surprises, and cash flow planning is simpler.
• If you’re able to bill the same amount each month, regardless of the service mix, the firm can set the process on automatic draft, which is more efficient.
• Before you send a bill that reflects pricing changes, firms should write to clients to emphasize the importance of your relationship and detail how fees will be adjusted. Let the client know that you will respect whatever decision they make about staying with the firm and that you will help ensure a smooth transition if they decide to leave.
• Here are some other ways to improve firm collections:
• Firms should aim for zero accounts receivable. They should set their own payment schedules rather than letting the client decide when to pay.
• All recurring work should be set for automatic draft.
• If tax services are not bundled, 50% of the estimated fee should be collected upfront. No tax returns should be e-filed until the fee is collected in full.
• Accounting and payroll services should be billed monthly, regardless of period. Quarterly accounting work, for example, should be billed monthly. This simplifies billing, keeps cash inflow constant, and makes it easier for clients to budget.
• Helpful collection tools include:
  • Ignition, a platform for engagement letters with automated billing.
  • Xero with payment services (Stripe and GoCardless).
  • GoProposal, which helps firms engage with clients.
  • Anchor, to automate and manage billing.
  • Other billing and collection options of note include BILL (a commercial partner of AICPA subsidiary CPA.com), CPACharge (an AICPA affinity partner that offers member discounts), Laurel (a participant in the 2024 AICPA/CPA.com Startup Accelerator), and QuickFee.

WHAT’S NOT TO LIKE?

The prospect of billing practice changes and hiking fees is a challenging one. After years building a firm, practitioners may be reluctant to endanger a client relationship and the income it provides. But being a low-cost provider limits the firm’s opportunities to take on more attractive clients and engagements, and staff and owners are overburdened as the firm tries to maintain profitability by working longer hours.

When firms change their pricing, they have more resources to boost capacity through new hires or offshoring. Many who made the decision to raise fees ask themselves why they didn’t do it sooner.

About the authors 

Amanda Aguillard, CPA, is COO for the accounting firm franchiser Padgett. Anita Dennis is a freelance writer based in New Jersey. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.

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AICPA & CIMA MEMBER RESOURCES

Articles

“Bad Billing Practices Can Affect Malpractice Risk,” JofA, May 1, 2023 

“When and How to Raise Fees at Your Firm,” JofA, Jan. 1, 2022 

“10 Billing Myths That Can Undercut Your Value,” JofA, Sept. 1, 2021

Podcast episodes

“Getting Started With Value Pricing,” part 1, AICPA & CIMA, July 10, 2019 

“Getting Started With Value Pricing,” part 2, AICPA & CIMA, Aug. 23, 2019

Tools

Pricing tool

Overcoming pricing objections

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