Pricing Models for Accountants: Hourly vs Fixed Price vs Value Pricing Options
Accountants trying to determining the optimal pricing model for their clients have a difficult time transitioning from one pricing model to a new model. One of the hot topics among accountants and many firms deals primarily with price sensitivity. What is the best option for a particular client?
Price Sensitivity and Value Pricing
Every client has a particular price sensitivity. As an accountant, it is your responsibility to the client to provide the value sought for the service offered. Upfront pricing eliminates confusion among clients and ensures clients understand exactly what they will be provided in return for compensation.
This is the ideal situation for both the accountant and the client.
Pricing sensitivity is a major factor in all pricing because it determines the risk factor for the client. You wouldn’t charge the same rate for a tax return as you would a complicated tax matter that saved a business millions of dollars.
The business would always be charged a higher rate in this case.
Pricing sensitivity is based on the following factors:
- What is the cost of not solving the problem from the customer’s perspective?
- What does solving the problem allow the customer to achieve?
- What benefit does solving the problem offer the customer?
- What risk, if any, exists by not solving the customer’s problem?
Major accounting errors in business call for precise expertise to correct. When the risk of not correcting a problem is great, as an accountant, pricing sensitivity will not be as high, especially when consulting with the owner of a business. Your work is essential to correcting the business’s immediate problems.
Price sensitivity must be measured internally by all accounting firms.
When pricing is based on the value of the work provided, it is considered value pricing.
Pricing Options for Clients
Pricing options provide a fair trade for all parties involved. As a client, money can be spent on just the services needed, while the work of the accountant is decreased or increased accordingly.
Allowing clients to have further pricing options reduces the amount of lost profit due to adequate compensation in return. However, there will always be unforeseen variables that can cause the initial pricing to be more or less profitable.
Specifically in the value pricing model, clients that are given pricing options may have different pricing for:
- The time to complete the project.
- Adding or removing specific services.
- Meetings and communication extras.
The amount of value provided will be the tradeoff between pricing options for clients. A business that demands your time immediately to complete a time-sensitive task within 48 hours will be charged an upfront premium as a result.
It’s these options that provide value pricing with a major benefit over fixed pricing and hourly pricing.
This isn’t to say that, as an accountant, you can’t offer varying fixed pricing options that follow these same principles. You can – and many firms do have varying fixed pricing options.
Hourly Pricing Option
The billable hour was not implemented into the industry until the ‘50s or ‘60s. Before this time, accountants would charge on a daily rate. The truth is that the billable hour was a smart idea that allowed for profitability and a fair profit margin.
But, it allows for a suboptimal profit to be made.
Billing clients hourly is based on an internal metric. Choosing this model requires you to:
- Determine internal costs.
- Determine internal inputs.
From a client perspective, there is nothing in the billable hour model that considers price sensitivity and the value of the work provided.
Automation has also eroded the profitability of the billable hour. If an accountant works 40 hours per week at $50 an hour, the most the accountant can earn in a week is $2,000. These figures are completely arbitrary.
There is a cap on the amount of profit able to be achieved with an hourly model.
Automation has caused many accountants that effectively sell their time to reevaluate their pricing models. Tasks that once demanded several billable hours may be done in a fraction of the time. Productivity is rising while hourly rates are lagging behind, causing lower or the same profit margins.
Fixed Pricing Option
Fixed pricing is a model often used with smaller accounting agencies. Many agencies have been transitioning from hourly to fixed pricing. There are a lot of benefits to the fixed pricing model, but there are also a few drawbacks to consider.
A general tax return is a good example of a task that often comes with fixed pricing.
In this example, all tax returns are treated the same despite the amount of work necessary to complete the return. Someone that works a regular 9 – 5 job may have a simple return with little to no deductions, and little paperwork to sift through to be completed.
Another return may include capital gains, massive deductions and hours of work to complete.
Ultimately, the fixed pricing model evaluates the preset amount of time it may take to complete a project with a little pricing increase to offset miscalculations or overlooked time investments.
Fixed pricing requires more diligent work to get the task completed within a profitable duration.
This pricing model can further lead to quantity over quality wherein a firm must produce a certain quantity to remain profitable while sacrificing quality. It is a pricing model that can be very profitable if the right pricing is placed on a project.
The issue is the unknown.
What happens if it takes 3 more hours to complete the project? Money is lost.
Many firms choose a mix of pricing models to offer the best value to their clients. This can be billable hours, value pricing based on the risks associated with a project as well as fixed pricing models for routine projects.
Transitioning to the best pricing model must be done internally over time.
In the ideal world, all accountants would base their work on a value pricing model where the value provided would dictate the cost of the work provided. Fear of losing the revenue source (clients) for a firm due to switching pricing models is the biggest obstacle accountants face. It’s not an easy transition, but it is one that offers profitability based on the value of the service provided.