Subscription Billing for CPAs: How and When to Use It
Want to know a simple way to improve your payment collection rates and keep revenue steady? Try setting up some of your CPA firm’s services like an “accounting subscription.”
CPA firms typically bill on an hourly basis or per project, but that may not always be the most effective method. Depending on the services offered, you can consider offering fixed fees, also sometimes called “value-based pricing.”
When you combine fixed fee pricing structures with scheduled payments, you can create a subscription billing experience, which brings many benefits for both you and your clients. Setting up your regular clients on a subscription minimizes the time spent on billing activity and can help improve your client engagements over time.
What Are the Drawbacks of Hourly Billing?
The traditional billable hour comes with drawbacks that can make it hard for firms to manage their practice and serve their clients effectively.
Hourly billing often leads to staff inefficiencies and higher costs. For one thing, employees may be incentivized to work slower and boost their hours with less-valuable “filler” tasks.
Hourly billing can also create cash flow problems, as businesses may not be able to predict how much they will need to pay their CPA each month. When it’s hard for clients to plan their service costs, it will be even harder to predict revenue for your firm.
Finally, hourly billing can damage relationships with clients in the long term, as they may occasionally feel that they are overcharged for services they do not understand. If your clients constantly question invoices (and leave them unpaid for months), it can create serious collections problems. Even more so when clients pay via paper check every time.
The Benefits of a Subscription Billing Model for CPA Firms
When used strategically, the subscription-based billing model can help your firm address some of the classic challenges with hourly billing.
Where hourly billing makes it hard to track revenue, a subscription business model can help you better predict and manage cash flow, as well as provide a steady revenue stream. It’s not just for e-commerce any more, either: Between 2011 and 2016, the market for subscription services in SaaS and B2B grew from $57 million to $2.6 billion.
Subscription models also allow you to automatically bill your clients each month without wasting precious hours chasing down payments, calculating each bill, or printing and mailing invoices.
Of course, this model may not work for certain advisory or consulting services. If you’re considering a subscription model, be sure to seek out feedback from clients and take a careful look at your current offerings.
It’s also a good idea to get familiar with the metrics for recurring revenue. Check out this post from Karbon for more information.
Setting Up Scheduled Payments for Your Clients
The ticket to a smooth transition is to implement a recurring or scheduled payment option, typically using ACH to securely transfer funds from the client’s account at set intervals. This allows clients to stay current on invoices without thinking about it.
If your clients prefer not to set up recurring ACH payments, there are plenty of other options for integrated online payments and e-invoicing that can make things easier too. Some platforms will even allow you to set automatic payment reminders when an invoice is due.
You can also consider recurring payments via credit card, although you should then take into account the merchant credit card fees when setting your pricing. Remember that having a recurring bill is convenient for your clients – but only if it’s coupled with a convenient way to submit the payments online.
What Changes Does a Firm Need to Transition?
Ready to transition to a subscription-based billing model? There are a few changes you will need to make first.
Step One: Set your service tiers.
Ever wondered why SaaS companies usually offer 3 service tiers? Behavioral research shows that this is the easiest structure for people to understand – and that most people tend to go for the middle option. It serves as a balancing point between cost concerns and VIP-level service.
When setting your levels, think about how you can bundle your regular services together. For example, you could start with a basic financial planning option and add bookkeeping services in the next tier. The key is to make sure every new tier provides more value to the customer.
Step Two: Develop a fixed pricing structure for these new services.
Once you have decided which services to offer on a subscription basis, you will need to develop a fixed pricing structure. That means being transparent about your value: For example, if you are offering a monthly bookkeeping service, you will need to charge enough to cover the cost of your team’s time, expertise, software, and so forth.
One common challenge with fixed fee pricing is that projects can quickly go beyond the scope of work. To avoid this scenario, you’ll want to account for “scope creep” in your fixed fees. This could land around 2-5% depending on the nature of the work.
As an expert on transitioning to value pricing, Ron Baker shared the following advice with Thomson Reuters:
“The first thing I recommend firms do is take a look at their highest revenue client and their lowest. Usually, in smaller or midsize firms, you’ll see a pretty wide band. It always amazes me that some firms have $100,000 clients and yet they have a bunch of $500 clients — that’s insane. You can’t do that in this model. You have to pick one of the ends, or maybe gravitate a little bit toward the middle.”Ron Baker, Founder of the VeraSage Institute
Step Three: Implement a recurring ACH payment or credit card option.
To deliver a true subscription experience, you need an automatic payment method you can trust. QuickFee recently introduced a recurring ACH payment option that allows your firm to set the exact terms and parameters of each plan.
Remember: It’s okay to start small with a test group and see how it works. As your recurring revenue grows, you can always scale the new subscription model to other service areas and client groups.
Which Accounting Services Work Best on a Subscription Basis?
Many accounting services can be offered on a subscription basis, including:
- Financial planning
- Financial statement preparation
- Tax services
When deciding which services to offer on a subscription basis, it’s important to keep client patterns in mind. For example, if your clients tend to fall behind on basic bookkeeping, offering them a new monthly bookkeeping service could create immediate results for them.
Value needs to be top of mind in these equations, too. Consider a sole proprietor who is a lawyer and spends three hours a week just maintaining her books and billing clients. If you can take that process off her hands, you will allow her to bill an additional three hours weekly. If she bills $450/hour, you allow her to bill an additional $1,350/week. That doesn’t mean you have to bill $1,350/week, but you should consider this when calculating value.
However, you also don’t want to price yourself out of the market. Be sure to do some research on other firms offering similar services to get an idea of what is a fair price. You should also look at the services and billing rates of national firms since more accounting work is being handled virtually.
Making the transition to a subscription-based billing model can certainly be a change for your firm. But it may also be a necessary one as clients expect more convenience from their providers.