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How do you calculate your worth? Success relies on creating – and communicating – a strategy to make sure your price is right.
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Why it’s time for accountants to raise their prices
02 January 2024
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11 minute read
At its heart, accounting is a numbers profession. However, accountants all too often seem to get the numbers wrong when it comes to calculating their worth and charging their clients according to the value they provide.
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Against a more challenging economic outlook, with inflation rebounding, higher interest rates and labour costs, many accounting firms could find their margins being increasingly squeezed. Creating the right pricing strategy and pricing their services accurately will be critical to setting themselves up for success in 2024.
For many accountants, this will mean increasing their prices. For accountants considering how to raise their prices without alienating their customers, here are three things that you should consider.
Out with the hourly
Many accounting firms today still use an hourly pricing model, which involves charging an hourly rate and multiplying that by the total number of hours worked to determine the final price. While this model is simple and easy to enforce, clients typically do not know what the price is until after the fact which can lead to “bill shock”. Increasingly, clients want to know what the cost of their service is upfront from their accountants.
Hourly billing is also a quantitative way of billing, incentivising the amount of time you put into your clients’ work, as opposed to the quality and value of the work that you provide. This model is not ideal for accountants looking to grow their advisory and compliance services, which typically come at a higher cost.
Accountants looking to raise their prices should explore new pricing strategies, such as a fixed-fee pricing model, which sets a fixed price for each service based on a narrowly defined scope.
Another approach is standardising services, to ensure prices are consistent and have clear guidelines in place on how to deliver services, while allowing flexibility to adjust to specific needs of customers and value-added services.
One cardinal mistake that many accounting firms make is not starting out with an engagement letter. Beyond being an extremely important reference point for a clearly defined scope of work, an engagement letter can also allow you to add a clause to adjust the fees if you ever find that you have underquoted.
The price is right?
For accounting firms moving away from hourly prices, they will need to work out how much to charge. In addition to understanding the market rate and factoring in inflation and any other increase to their operational costs over the next 12 months, accountants should take four simple steps to set their price.
- List your services: This task can be as simple as exporting a list from your firm’s accounting or billing system. However, if you don’t already have such a system in place, put pen to paper to create a robust list of all the services your firm offers.
- Calculate your average fees per service: If you can export details from your accounting software then you can complete this step pretty quickly as well. If possible, export a detailed list of transactions from your income accounts within your ledger. Sort these by description or service, and you should then be able to total everything up before calculating the average price that you currently charge for each of your individual services.
- Set your minimum fees as a baseline per service: Now you know your average fee per service type, and you can also filter the data to see your current minimum and maximum fees. This information will enable you to set your minimum fees for your services going forward, which can have a transformative effect on your revenue.
- Determine your tiered pricing: Last but not least, have a think about your tiered pricing structure and create a detailed pricing matrix. To do this, consider each step that is involved in providing your services - think about any factors that might delay or complicate your ability to complete the jobs in question. Use this information to devise a way to categorise your clients.
Automate price increases and late payments
Changing your fee structure and determining the right price will get you to a good place to ensure you’re being paid fairly and accurately for the work and value that you provide to new clients. But what happens when it's time to renew a contract with existing clients? Many accounting firms are hesitant to broach the awkward conversation about annual price increases for fear that it will turn the client away.
This is where automation can work in your favour. Suitable technology can automatically apply a percentage price increase when renewing annual client engagements and automate invoicing and payment collection. For accountants, this enables them to grow revenue, improve profitability and prevent them from underselling your services.
At the end of the day, no matter what approach you take, these changes need to be communicated to clients consistently and effectively to avoid confusion. No one likes surprises when it comes to paying their bills.
By exploring new pricing models and assessing the right price against market rates and automating billing and invoicing processes in the back end, accounting firms can stay competitive and grow customer value in 2024.
David New is Asia-Pacific managing director of Ignition.
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