Pricing your services: Are you leaving money on the table?

Pricing is a critical component of any tax and accounting firm’s success. Traditional hourly billing, while familiar, may be leaving money on the table and limiting a firm’s growth. To thrive in today’s market, tax pros must shift their focus from pricing “tasks” to pricing the value and expertise they provide. By embracing modern pricing models, including value- and subscription-based pricing, firms can increase profitability, build client trust, and differentiate themselves from the competition.

What’s going on in firms?

1. Clients are seeking more complex services, have higher expectations, and are willing to pay for this increased level of service. Remember the Paycheck Protection Program and Economic Injury Disaster Loans? During the pandemic, we were asked to provide guidance on these government loan applications, a service that went beyond traditional compliance work.
2. There is growing competition, and when compliance-based work is increasingly seen as a commodity, clients may shop for the lowest price. Firms that can differentiate themselves by offering a “basket” of services instead of just a “bag of apples” can attract clients who prioritize value over cost.

The perils of hourly billing

Bean counters. Green eyeshades. Dark rooms without any windows. Whatever the scenario looks like, tax accountants of yesteryear billed hourly, but there were significant drawbacks to that strategy that can damage a firm’s potential.

Hourly billing penalizes efficiency because the more quickly a task is completed due to expertise, the less a firm can bill. This model also undervalues the professional’s knowledge and experience by focusing on the time spent rather than the outcome achieved. Hourly billing also creates price uncertainty for clients, which can be unsettling and erode trust. Clients are left in limbo, unsure of the final cost until the work is complete.

Hourly billing shifts the focus from results to inputs. Clients are not interested in the number of hours spent on a project; in my experience, they care about the final outcome. A client needing help with an IRS audit wants to know if you can resolve their issue instead of knowing how many publications you’ll read or phone calls it will take to get it done.

The goal is to focus on the desired results and bill accordingly. A firm can bill significantly more for a valuable outcome than they can for the time it took to achieve it.

The power of value-based pricing

Value-based pricing centers on the results and the worth of the service to the client, not the time spent. It’s a model where the firm gets paid what it’s worth, while the client feels they received more value than they paid for. This approach reflects the client’s perspective and their willingness to pay for a beneficial outcome.

For example, a firm that develops a tax strategy saving a business $50,000 should not price the service based on the one or two hours it took to create the plan. A value-based price would be a fraction of the savings, such as $4,000, which is still a significant win for you and your clients.

A value-based pricing model moves beyond the traditional mindset of “cost-plus” pricing and focuses on the true impact of the service. A firm that can get a $4,500 penalty waived for a client in just 15 minutes can justify a $1,500 fee because the client is happy to pay for the expertise and the relief of not dealing with the IRS! This approach highlights the professional’s expertise and aligns pricing with the tangible benefits delivered to the client.

Advantages of subscription-based pricing

Subscription-based pricing is a model of recurring fees, which is common for monthly accounting and bookkeeping engagements. However, this approach can also be applied to tax services by bundling compliance and advisory work into a single, ongoing fee. The main benefit is that it provides predictable revenue for the firm and predictable costs for the client. It also builds a foundation of trust.

Subscription-based pricing enables a firm to manage its client relationships more proactively and consistently, rather than on a transactional, per-project basis. Clients receive ongoing support and advice, which helps the firm deliver continuous value beyond the traditional tax season. This stability allows firms to plan for growth, and invest in technology and services that further enhance their offerings, creating a win-win situation for both the firm and the client.

Implementing your pricing strategy

Changing a firm’s pricing strategy requires a thoughtful approach, especially with existing clients. These clients are price-anchored to the current model, so a sudden switch to a new pricing structure may cause them to leave.

Instead, firms should introduce changes with a more strategic or planned approach. For example, a firm can create service bundles that combine traditional compliance work with value-added services such as tax planning or resolution. This basket of services, which includes more than what the client is used to, justifies a new, higher price point that is not directly comparable to the old hourly rate.

For new clients, a firm can set the tone from the very beginning. They can present a tiered pricing structure, such as “good,” “better,” and “best” packages that allow the client to choose the level of service that best fits their needs. This approach not only provides the client with options; it also prevents the firm from over-delivering on a lower-priced package.

Technology, including Intuit® ProConnect™ Tax, can significantly aid in this transition by streamlining processes and enabling firms to offer a broader range of services more efficiently, making it easier to implement value-based and subscription models.