Implementing Value-Based Pricing in Accounting: A Comprehensive Guide
Most accountants are all-too-familiar with the hourly billing model. You log your time by the client or project, then you invoice your client on a regular basis for the time you’ve spent. Put a different way: in this model you’re wasting a lot of precious time tracking your (precious) time.
However, technology has made alternatives like value-based pricing much more feasible for CPA firms. When done right, value-based pricing strategies can show your firm’s unique strengths and help clients understand what they’ve bought.
Of course, it’s a big adjustment to switch to a new pricing model. So it’s important to understand how to set your strategy up for success.
Benefits of Value-Based Pricing Strategies
In an episode of On the Air with Accounting Today, professional services consultant Loren Fogelman shared why the billable hour creates so much conflict with your clients:
“The billable hour creates a tug of war between you and your clients, where your clients want you to do the work as fast as possible to pay as little as possible.”Loren Fogelman
But with value-based pricing, you charge based on how the target market perceives the value of your services (compared to competitors.) So whether you bill at the beginning of the work or after completion, the effect is the same: You’re charging what the client is actually willing to pay.
This is how value-based pricing eliminates the constant “tug of war” and allows you to focus on getting things done. You and your team are compensated for any hidden value-adds, like saving hours of manual work or providing deeper insight into client financials.
Here are a few other benefits to value-based pricing:
- It makes your cash flow more predictable. With a value-based pricing model, your paycheck doesn’t depend on your hours. That means fewer surprises on the final invoice. (Also: no more frustrating arguments with your clients about how many hours a project actually took.)
- It rewards staff for efficiency. Since staff members are not paid by the hour, there’s also no temptation to drag out the project. Any additional efficiency gains from new technology and processes can be reflected in your prices, too.
- It puts an end to unnecessary time tracking. Value-based pricing also eliminates the extra hassle of tracking time per client and makes invoicing easier at the end of the month. (You may still want to track some time metrics to monitor profitability, but it’s optional.)
- It makes every client profitable. Your prices will likely rise when you evaluate them based on value. While that may sound scary, it means the quality of your client list will also increase over time. Ideally, you can do more for fewer clients.
How to Set Your Firm’s Prices Based on Value
Pricing based on value has many potential benefits for a CPA firm. But to set accurate prices, you’ll have to take into account the overhead costs, time, expertise, and effort required to make each project a success.
For example, when you’re working on a tax return for an enterprise-level business, the scope of work would be much larger than one for a small business owner. So you would probably want to take the complexity and size of the business (as well as the costs and effort from your team) into account when setting up prices.
Contrary to popular belief, however, you don’t have to assign a dollar value to every possible aspect of every service. In fact, it’s better to start by setting up general “packages” for core services where there is already a steady demand. From there, you can get more specific about prices for the key deliverables, add-ons, and upsells that could be included in those packages.
What to Evaluate in Value-Based Pricing
To start with the most obvious: It’s important to have a clear understanding of your costs. This includes both your true overhead costs and the cost of the projects themselves.
Be sure to include the following when calculating any service cost:
- Administrative staff time
- Any specialty resources/time required
- Office supplies
- Computer software
- Communication tools
You also need to gather a lot of information about the going market value of your services. This could either mean conducting new competitive research or surveying your existing client base. And if any services have been lagging behind in client adoption? You may need to re-evaluate the core strategy for these before setting a value-based price.
Without accurate information on your costs and the market value of services, you will have a much harder time setting a price your clients will pay.
Communication is Key in Value-Based Pricing Models
One of the other biggest challenges with value-based pricing is communication. Firms have to be prepared to communicate more clearly with clients about their prices and project needs in order to make this model work.
Here are three steps for better communication when you switch to value-based pricing.
Step #1: Set up e-invoicing and online payment options.
Before you change anything with your prices, be sure that you have the right payment systems in place to support your new strategy and make it simple for clients to pay you.
If you do not already offer an e-invoicing solution, now may be the time to consider one. Value-based pricing can speed up the work-to-cash cycle, but without convenient email invoices and online payment options, you may still struggle with late payers.
Additionally, if you are putting any clients on retainer, you’ll want to set up automatic recurring bills to save you from the hassle of manually billing clients each month.
Step #2: Get your firm aligned on the new processes.
After you make the announcement to your team, you will need to get everyone aligned on the new pricing model and any process changes. That could include training sessions on how to counter objections and explain the pricing change to existing clients. This will also mean creating new templates for proposals, invoices, and contracts that reflect the new pricing.
Step #3: Clearly explain the pricing change (and the benefits to your clients.)
When you do change the pricing on your services, be sure to tell clients exactly what they can expect, and when. Consider sending an email blast with content that summarizes how this pricing change will benefit them and make their accounting costs more predictable.
You should also bear in mind that not all clients will be ready to change the status quo and may balk at the higher prices. This is why many firms choose to “phase in” their value-based pricing strategies over time, rather than all at once.
How to Handle Scope Concerns & Objections
Accountants discuss money with their clients all day long. Yet a surprising majority of accountants are very reluctant to discuss their own pricing or to chase down past-due accounts.
In fact, Ignition’s 2022 State of Client Engagement’s survey found that:
- 78% of accountants were reluctant to chase late payments
- 76% would not advise clients if work fell outside of the scope of the engagement, and
- 53% of accountants say they don’t even bill for work that falls out of scope.
It appears that while talking about other people’s money is second nature to accountants, speaking about their own money is so uncomfortable that most accountants avoid it. Even if it costs them up to $100k a year on average.
Value-based pricing can actually help you with many of these awkward conversations and ensure that your clients never get hit with a surprise bill again. But in order to make it work, you have to overcome the discomfort of talking about prices and the scope of your projects upfront.
The Dangers of Scope Creep
Scope creep is also a common issue with value-based pricing. This is when the scope of the project changes after the price has already been agreed upon, which can lead to additional costs (and frustration from clients.)
Here’s how you can reduce the risk of scope creep:
- Create strong engagement letters. It’s important to have a direct and concise agreement with clients from the start. This should always include a detailed description of the work to be done, as well as the price(s) you’ve agreed upon.
- Commit to regular client check-ins. It’s also a good idea to have regular check-ins with your clients throughout the project. This will ensure that everyone is on the same page.
- Set up an escalation plan. Scope creep in one project can affect many other projects, too. When that happens, staff need the ability to escalate through the right channels and keep all clients happy. This could mean pulling in other team resources or setting up a client meeting to re-evaluate the project. No matter what options are available, a smart escalation plan will help to prevent your team’s projects from spiraling out of control.
Optimizing the Client Experience
You’ve probably gathered that value-based pricing is about much more than just setting prices. It represents a foundational shift in how accountants approach the client relationship.
In September 2022, we sent a survey to over 1,400 professional services clients and found that 77% are taking steps to reduce spending due to concerns about the US economy. 53% expect that it will impact use of their service provider.
With growing economic concern – and an ever-more-competitive market – CPA firms are being forced to innovate and create a truly outstanding client experience.
Here are a few ideas to optimize your client experience beyond value pricing:
- Deepen your focus on niche services that make you different from other firms (and create meaningful thought leadership around these services.)
- Invest in referral-based marketing strategies that will help you expand your base.
- Use a company-wide Customer Relationship Management (CRM) system so that team members can keep detailed, shared records on client needs.
- Be proactive about diversifying your services as new trends arise.
- Don’t let technology obscure the “human element” or depersonalize your communications.
Learn more about how QuickFee can further optimize your client experience with an e-invoicing solution here.