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Pricing accounting services: Pros and cons of 3 popular strategies
Pricing accounting services can feel like a minefield at times. Learn the pros and cons of these 3 main strategies and decide on the best pricing strategy for your firm.
Pricing accounting services is a popular topic (or debate) in the accounting & bookkeeping profession.
So in this article, we've pulled together the 3 most common pricing strategies and broken them down into:
- What they are
- How they work
- The fundamental problems/issues with them
Our goal isn't to tell you which one is best or which one you should use in your firm.
The reality is that it's entirely up to you which approach you take to pricing accounting services. Hopefully, this article will help you make a more informed decision about the available options.
Here's everything that we'll cover:
- Three common accounting pricing strategies
- 1. Hourly billing
- 1.1 What is hourly billing for accounting firms?
- 1.2 How does hourly billing work?
- 1.3 The problems with hourly billing
- 2. Fixed fee billing
- 2.1 What is fixed fee billing for accounting firms?
- 2.2 How does fixed fee billing work?
- 2.3 The challenges with fixed fee billing
- 3. Value pricing
- 3.1 What is value pricing for accounting firms?
- 3.2 How does value pricing work?
- 3.3 The issues with value pricing
- Pricing accounting services - the key takeaways
3 common accounting pricing strategies
So, you're wondering what pricing strategies are available for you to use?
We've provided three of the most common accounting pricing strategies for you below.
1. Hourly billing
What is hourly billing for accounting firms?
As the name suggests, hourly billing involves billing your clients by the hour. Who'd have guessed it?
With hourly billing, you typically charge a standard hourly rate multiplied by the number of hours the project takes to complete.
Although some may say hourly billing is an antiquated billing strategy, many accounting and bookkeeping firms prefer to use this approach.
So why is hourly billing considered antiquated? It has a few disadvantages (we cover those in detail a little later on). There are also many alternatives to hourly billing, which we'll get into below.
How does hourly billing work?
So, yes, hourly billing is slightly old-fashioned. If it's not for you, we won't take too much offense if you decide to skip ahead to our two other pricing models just below.
Hourly billing is the easiest to implement and to calculate:
Hours worked x Hourly rate = $ Fee
In terms of the overall quotation, billing, and invoice process, it generally looks like this:
- The agreed-upon hourly rate (you might also give a rough estimate of hours)
- Completed work and recorded time
- Total time x hourly rate = fee
- You choose whether to invoice the total fee or write some off based on pre-agreed hours.
- Invoice client
- Client pays
This process has some challenges and disadvantages, which we'll run through next.
One thing's for sure: you'll need to track the number of hours spent on each project, which you can quickly achieve by using time and billing software for accountants. Once you've monitored the hours spent on each project, you then charge your clients at the end of a particular cycle, which might be weekly or monthly.
The problem with hourly billing
Does your accounting firm bill by the hour? You're not the only one. As we've mentioned, there are still many accounting & bookkeeping firms that use this pricing model. However, many others have made the informed decision to transition to a fixed fee or value pricing billing approach.
We say 'informed decision' because there are a few problems with an hourly billing approach.
One of the problems with hourly rates is that it takes up valuable time and can limit productivity. You might not have this problem if you use good time and billing software, but up-keeping time and billing can consume 7% to 10% of a firm's gross revenue. That's a lot of time spent tracking time.
Another big issue with hourly billing is that clients may not perceive it as fair. In their mind, when you choose to bill by the hour, they feel they may be rewarding inefficiency. The longer it takes, the more you can charge. They don't know how much it will cost them until afterward, making it harder to plan and budget. Sure, you could give them an estimate, but then you risk having to charge more or write time off.
The final issue with hourly billing is that it has low perceived value, making it hard for your clients to look at it any other way than as an expense.
2. Fixed fee billing
What is fixed fee billing for accounting firms?
Fixed fee billing is a pricing model used by many accounting & bookkeeping firms with which they charge their clients a fixed rate – no matter how much time has been spent on the project.
This pricing model typically involves offering fixed fees and implementing them for services in packages, allowing prospective clients to select the option suitable for them. If you're charging for recurring services, this pricing method for accounting services can be ideal.
With fixed-fee billing, you'll have the option to bill your clients either before or afterward. You'll also be able to set the bill as a one-time fee or one that recurs regularly.
How does fixed fee billing work?
Typically, to put in place a fixed fee billing process, you have a 'menu' of prices for different services or fixed fee packages containing multiple services.
It might also be the case that some of your fixed-fee services are variable, i.e. the amount can change based on volume. For example, you might have a fixed fee for payroll, which scales up based on the number of team members you're running payroll for.
Agreeing to a fixed fee with your clients upfront has a couple of advantages, including:
- You know precisely what the 'budget' is for each job, and it's in your best interests to work as efficiently as possible to make the fixed fee as profitable as possible
- Your clients have the peace of mind that they won't receive any surprise bills
In terms of the overall process, it generally looks like this:
- Services & fixed fees agreed on upfront with the client
- If services are recurring monthly, these are invoiced upfront at the beginning of each month
- Payment is then collected each month for that invoice (this entire process can be automated using apps like GoProposal and Practice Ignition to save time)
- If services are one-off, these can be invoiced upfront or afterward
The challenges with fixed fee billing
There are a few challenges with fixed fee billing regarding pricing accounting services.
The first of these is that fixed fee billing can at first seem difficult to implement if you're just moving across from hourly billing.
How do you choose your prices? How do you price fixed fee services so that they're profitable? How do you bundle these services together into fixed-fee packages?
Finding answers to these questions can be difficult if you're doing it for the first time. For more information on calculating fixed fee prices, check out this article about setting fixed fee prices.
The second challenge with fixed-fee pricing is that regardless of the...
- expenses you incur for the resources you've used
- or the amount of time taken to complete the project
...you're always going to earn the same fee at the end of the cycle.
To put it another way, if you use fixed-fee billing, you have to work hard to improve operational efficiency to make the fees as profitable as possible.
Will this be the case for all of your clients? Possibly not. It's worth remembering that some will be over and some will be under, although they might average out over time. The only way to truly get this "right" is with experience and tracking.
The final challenge here is that you're potentially leaving money on the table with fixed-fee pricing. Would specific clients pay more than others for the same service? Probably. This is where value pricing comes in...
3. Value pricing
What is value pricing for accounting firms?
Value pricing means charging your clients depending on the value your clients see in a service. This differs from fixed billing as your clients might be willing to pay more for a particular service than other clients based on their perceived value.
Choosing to go for a value pricing option typically means that the amount you charge each client is likely to vary.
For example, let's use monthly bookkeeping as an example. The amount you charge one client for monthly bookkeeping will be different for another client (even if the scope is the same). This can make some jobs extremely profitable compared to the hourly billing and fixed-fee pricing approaches.
How does value pricing work?
Value pricing works like this. You'll need to get to the bottom of how your clients value your services to get an insight into what your prospective clients are willing to pay.
To do it, you will need to ask questions — a lot of them.
You can dig deeper into your client's requirements by setting up a meeting and begin to assess their accounting needs.
For a complete overview of the value pricing process, including meeting agendas and email templates, download this free guide + workflow template we created with value pricing expert Mark Wickersham.
The issues with value pricing
While value pricing can seem like the most attractive of the 3 pricing models with substantial potential profits, it's also the most difficult to implement.
The value of...value is entirely in your prospective client's perception. So you have to be very good at asking the right questions and then translating this into an amount in pounds or dollars.
One way to do this is to quantify the service's value in terms of things like time saved or a percentage of tax saved. You can read an example of how a bookkeeper secured a bookkeeping contract worth $44,000 here.
Another issue with value pricing is that it's challenging to systemize it and make it consistent across your firm. As your firm grows, you might want some of your team members to start getting involved with prospect & pricing meetings. With hourly billing and fixed-fee pricing, it's pretty easy for them to get up to speed with this. Whereas value pricing will be much harder for them to learn and implement.
Pricing accounting services: the key takeaways
Pricing accounting services can feel like a subject-matter minefield at times. Here are some key things to consider when implementing a new pricing strategy or updating your existing approach:
- There is no right or wrong way to do it - only what works for your firm
- Brush up on some of the key pricing models above to make an informed decision
- If you're going with fixed or value pricing, look to standardize your services and create packages
- Have conversations with your staff and some prospective clients before rolling out your new prices, and
- Consistently deliver exceptional services to justify the fees you have set
With the right pricing strategy, you'll soon feel more confident when pricing your services (and hopefully notice an increase in profitability as well!).
The second you start attracting more prospective clients, explore our accounting practice management software to increase productivity, efficiency, and keep your new clients happy.