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HOW CPA FIRMS CAN
DRAMATICALLY IMPROVE
PROFITABILITY THROUGH PRICING
R O B N I XO N, C E O O F PA N A L I T I X
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INTRODUCTION
Pricing is a critically important
issue when it comes to improving
your CPA firm. If you get your
pricing right, you will eliminate
write-downs, you will significantly
increase your average hourly rate
realized and you will improve
profit margins. And you’ll
improve client service. Given
that all of these objectives are
on the priority list of most CPAs,
we hope you’ll take time to read
this whitepaper and discover how
leading firms around the world
use pricing techniques to make a
real difference.
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THE PHILOSOPHY OF PRICING
There are five methods typically used by CPA
firms to price engagements. They are:
1. Hourly rate – this is a methodology that is
common in many professional service firms
and is used in the vast majority of CPA firms.
An arbitrary billing rate is assigned to each
professional, usually calculated as a multiple
of salary. Professionals then track their time
on the job, apply their billing rates and the
result determines the fee. This is then billed
to the client when the work is completed.
2. Value pricing – in a true value pricing
environment, the professional and the
client together assess the value that will
result from achieving the objectives of the
job or project. An appropriate price is then
proposed and agreed, commensurate with
the professionals’ contribution. The price is
agreed upfront.
The job or project needs clear objectives and
ways to measure progress towards those
objectives.
3. Success fee – occasionally an opportunity
will present itself where the professional
decides to take a fee risk by agreeing to a
no-win, no-fee arrangement. An example
may be winning a difficult case with the IRS or
obtaining a favorable settlement. A CPA might
agree to take on the engagement and be paid
based on a percentage of savings.
4. Contingency – an example of this type
of pricing could be where a CPA assists a
client to sell their business. The CPA might
negotiate a fee of, say, 10% of the sale
proceeds upon completion of the sale. (Note:
check with your State Board of Accountancy
regarding any restriction on contingent fees).
5. Cost Plus –this is often used in
management accounting. Cost Plus is a
variant of the hourly billing rate methodology.
Cost Plus pricing determines the cost of
production (in the case of a CPA firm, this
would be personnel costs plus an allocation
of overhead); a mark-up is then applied to
determine the price and the profit.
We do NOT consider taking a write-up
after the fact, using an hourly billing rate
methodology, to be value pricing. In fact, if
you are using hourly billing rates, to bill more
than what is on the clock could be considered
unethical.
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Of all of the above pricing methodologies,
the most common is the hourly billing rate. It
is the primary reason why the net profits of
accounting firms around the world tend to
remain steady at the 30-40% mark. The old
1/3-1/3-1/3 rule of thumb (one third for labor,
one third for overhead, one third for profits)
means that CPAs get what they deserve,
despite having invested collectively billions
of dollars in technology to streamline their
processes. Jobs are getting done faster, but
the benefit accrues to the client, not the CPA.
There are some other major flaws with the
hourly billing rate methodology. They include:
• For the hourly billing rate method to be
accurate, both the billing rate and the
time taken need to be correct. In our
experience, this doesn’t happen.
• If your pricing policy is based on time
taken to do the job, you are incentivized
to go SLOWER while the client wants
you to go quicker. This presents an
ethical conflict.
• If accountants are measured on
productivity, they will ‘dump’ time on
jobs where they believe there will is an
available budget.
• The client has great uncertainty, not
knowing the price until after the job is
completed.
• A combination of all of these factors
results in write-downs being the norm
in the accounting profession. This has a
range of negative consequences.
• It is our view that pricing in arrears is
plain wrong and that pricing upfront is
the only way to go.
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WHY PRICING UPFRONT IS THE
ONLY WAY TO GO
Let’s start with a definition of pricing upfront.
This is where you provide the client with a
price for each job before you start the work.
Note, this is NOT a price for the whole year
(who knows what projects might come up?).
You are pricing on a job-by-job basis and
letting the client know the price before you
start.
NOTE – pricing upfront is a mechanical
change and is not necessarily value pricing.
There are four important reasons why we
believe you should price every job upfront.
They are:
1. Your firm will quickly become much
more efficient. Your team members will be
incentivized to find ways to do each job more
efficiently as they are given a budget for each
job.
2. Your write-downs will disappear (and
become write-ups, which you can now
ethically take, since you have agreed each fee
with the client upfront.) Your average billing
rate will increase, driving up profitability.
3. Your clients will appreciate that you have
removed the uncertainty around fees. Now,
if they don’t like the price, they can tell you
before you start and you can either refuse
the work or remove some value and settle on
a lower price. This is, quite simply, the right
way to do business.
4. By properly analyzing jobs so that you can
price them upfront, the boundaries around
each piece of work become much clearer.
As a result, scope creep is less likely to occur
and, with proper training and scripting, your
professionals will stop giving away valuable
intellectual property for free.
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INTRODUCING PRICING UPFRONT
TO YOUR CLIENTS
A common question we receive from CPAs
is, “How do I tell my client that I am changing
my fee arrangement to pricing upfront?” This
is simple! – do not over-think it. Here’s what
you need to do:
1. Pick a date. This is the date from which
every single job will be priced upfront for
every client. Do not procrastinate and wait
for the first day of the next calendar or fiscal
year. Pick a date in the near future. Making
a firm decision on the date is the most
important thing you can do to successfully
implement a new pricing regime.
2. Clean out work in progress accumulated
under the old system. We provide our
members with a template letter that informs
the client that you are changing to pricing
upfront. The letter explains why you are
making that change and outlines that there
is a certain amount of WIP that has built up
under the previous hourly rate methodology.
You are enclosing an invoice in respect of that
WIP and henceforth, every job you do for the
client will have an agreed, upfront fee.
You may be thinking that sounds too easy
and you may have lots of ‘what ifs’. But this
process has been followed and successfully
implemented by hundreds of your peers. And
your clients will love it.
Over the past 20 years, we have conducted
hundreds of client focus group meetings with
HOW TO PRICE UPFRONT
The best way to ensure that your firm’s new pricing methodology happens every time is to
wrap a process around it. For our subscribing members, we provide a best practice 18-step
workflow process for accounting firms. Early in the process is a meeting with each client to
determine the scope of the work, determine the value and price the job. Please note that
‘meet’ in this context varies depending on the size of the client and the complexity of the work.
It can range from a series of face-to-face meetings to a quick email exchange.
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Here are some examples of situations you will face, with suggestions on how to price each
scenario:
SCENARIO
GUIDANCE
Simple compliance or compilation job, same work
involved as in prior year.
Review the client’s records. Unless you do
something different in your delivery to add
value, apply a modest increase in price and
communicate it to the client. Once the client
agrees, schedule the work. You need to
document the agreement, which can be as simple
as an email.
Simple compliance or compilation job, same work
involved as in prior year but you want to provide
more value and charge a higher fee.
To justify a higher price, add some value. As an
example, consider:
• 3 year business performance review
presented graphically
•
Where did the cash go (difference between
profit and cash flow) graph
•
Financial targets for new fiscal year
•
Present the information to the client in person
and explain the trends.
In this case, follow the same process as above
but your price increase will be higher as the
client appreciates the additional value you are
proposing.
Raising a fee which has been below where it
should have been for many years (possibly
because you have elected to take repeated writedowns).
Use the following script:
‘John and Mary, we’ve been doing some in-depth
analysis on our clients and our fees and we’ve
discovered that we have been undercharging you
for the past five years. Now that’s our fault and
we’re not about to rectify the issue retroactively.
But, going forward, our fee needs to be at $x,xxx
otherwise, I’m sorry, but we can’t do your work
anymore.’ You’ll be surprised how few clients
actually leave when you use this approach.
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CREATING CAPACITY WITH PRICING
When you price in arrears, your team is not
incentivized to be faster or more efficient.
When you price upfront, the dynamic
changes. Once you have agreed the fee with
your client, you provide each professional
working on the job with an hours budget
(not a dollar budget.) You then institute daily
accountability. You take the focus away from
chargeability and onto more relevant key
performance indicators, such as:
• The number of jobs completed within the
hours budget
• Number of jobs completed within the firm’s
turnaround time target
• Revenue generated.
When you do this, you will find that you
quickly create capacity in your firm because
the hours taken on jobs will be driven down
(whilst maintaining quality, of course.) If you
need proof that people can do jobs more
quickly than they think, consider when you
are at your most effective – just before you
are about to go on vacation! Suddenly you
are much more productive and do things in
half the time. What if you rewarded behavior
that created that sort of hustle every day?
In fact, when you price every job upfront and
focus on an hours budget for each job, if
you’re like most CPA firms we have worked
with, you WILL run out of work. You will find
that you end up completing 12 months work
in nine or ten months. There are, of course,
some issues here. There is no point going
faster just for the sake of it. You need to refill
your new-found capacity, preferably at higher
recovery rates, to grow the firm’s revenue
and profit and ensure that your clients are
fully serviced. Now that you have the capacity,
it is time to enter into new discussions
with clients to uncover their as yet unmet
needs. And this is where you will identify
opportunities for value-based fees.
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VALUE PRICING – WHAT IT IS AND
WHY IT IS IMPORTANT
Value pricing is the ultimate approach to
breaking the nexus between hours and price.
Consider how many times in your career you
provided a client with advice that created
significant value but because it only took you
30 minutes, your fee was very low (or even
non-existent.). We heard recently from a CPA
who had a client tell him that one piece of
advice provided in a two-minute discussion
had saved the client $100,000. The client
was extremely grateful but the CPA felt taken
advantage of – and rightly so. It may have
been a two-minute discussion but it was the
product of 30 years experience during which
time the CPA learned HOW to provide such
advice. And it’s that value gap that you need
to fill by becoming expert at value-based
pricing.
A value-based price reflects the value
you provide to the client by applying your
intellectual capital. The client receives great
value and you are properly rewarded.
To price based on value, you need to
understand your client’s objectives and
the perceived value, if you achieve those
objectives. This means you need to become
very good at:
• Finding opportunities to have discussions
with clients
• Asking great questions
• Listening more than talking
• Articulating value.
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SETTING THE PRICE – HOW TO
KNOW IF THE PRICE IS RIGHT
A common question we get is, “How will I
know if the price is right?” Let’s address that
question directly: the price is NEVER right.
You have no way of knowing whether the
price is right or not. All you can aim for is that
you are happy with the price and the client is
happy with the price.
As a general rule, if your clients say yes too
quickly, then your prices are too low. When
we work with CPA firms, we find that a 1020% price rise generally goes completely
unnoticed, providing empirical evidence that
their prices were too low. As the price-setter,
you have far more of an issue with prices
than your clients ever do.
The key to value-based pricing is, perhaps not
surprisingly, an ability to be able to quantify
the value that you provide. Sometimes the
value will be in $ terms, other times it will be
qualitative (e.g. less stress, keep me out of
jail, IRS off my back.) Whatever it is, you need
to be adept at engaging the client in a quality
discussion that results in the CLIENT (not you)
articulating the value they believe they will
receive. We will give you a process to help
you do that in the upcoming sections of this
paper.
There is no magic formula for setting the
price. It is a combination of art and science.
Test your prices constantly. Look out for
indicators such as clients saying yes too
quickly. Change your focus from what you can
get out of it to how you can create so much
value that price is not an issue.
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VALUE ARTICULATION
There is value in everything you do for your
clients. Even on jobs where the value is not
obvious (such as compliance or compilation
work), there is value.
When we coach firms, we play a game to
help team members understand the value
they create and how to articulate that value.
The game, named simply Where’s the Value,
starts with someone in the group naming
a service. Let’s say the service is a basic
compliance service. The rest of the group
then brainstorms the value that the client
might receive. It is important to take the focus
OFF the activity or input and ONTO the value.
Some examples in the case of compliance
work:
•
•
•
•
•
•
•
•
It satisfies the IRS
It keeps cash coming in
It helps me plan
It helps me benchmark my performance
against other firms in my industry
It helps me satisfy my bank
It lets me know how I’m doing
It avoids surprises
It gives me my key performance metrics
IDENTIFYING VALUE-BASED
PROJECTS
CPAs are at their best with numbers. That’s
why we believe that year-end or compliance
services should form a springboard into more
value-based projects. Imagine if you held a
quality, face-to-face meeting with each of your
business clients after completing their yearend work. At the meeting, imagine that you
presented a couple of potentially valuable
opportunities. And imagine that you had a
proven sales process that you used every
single time. It’s our contention that most firms
could double their revenue just
by doing that, given what we know about how
underserviced most businesses are by their
CPA firms.
We have created a process called Finding
Opportunities. Every time we run this with
a group of accountants, new, previously
unnoticed opportunities become apparent.
We know there are hundreds of opportunities
out there – you just need a process to identify
them, the courage to present them and the
capacity to deliver.
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SELLING VALUE-BASED PROJECTS
In conjunction with the hundreds of CPA
firms we have worked with, we have created
a unique sales process. The process is based
on asking your clients the following types of
questions in the order specified:
Problem questions: what is stopping the
client from achieving their goals right now?
Measurement questions: what would show
the client that we are on track towards
achieving their objectives?
Decision-makers: ensure all decision makers
are present. Don’t hold a meeting with
the husband when the wife is actually the
emotional buyer (or vice versa).
Value questions: what would the client get
out of achieving the specified goals? It can be
monetary, emotional or any other point of
value articulated by the client.
Background questions: before you launch
into determining client objectives, ensure you
have some solid understanding of the client’s
situation.
Consequence questions: what would happen
if the client did not do something different?
Timing questions: is this a later or a sooner
project?
Motivation questions: what pleasure does
the client wish to move towards, or what pain
would the client like to move away from?
What are the client’s objectives?
One of the resources we provide to our
members is a Client Interview Worksheet.
Many CPAs have created notepads based on
this worksheet and find that it keeps them on
track and improves outcomes.
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CONCLUSION
We have provided a number of ideas in
this paper on how to implement changes
to your pricing process. Formulating a
change in approach is the easy part. It’s the
implementation of that change where many
firms fall down. That’s why we’ve created a
special e-learning program that you can run to
engage your partners and team members in
these ideas. The program, called Pricing Power,
has been used by over 1,000 CPA firms during
the past eight years. Put simply, it works.
As part of the program, you will receive
the templates and tools referred to in this
whitepaper, and more. To get started, please
go to www.panalitix.com/pricingpower. We
look forward to hearing about your pricing
successes.
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