The accounting profession is slow to change. We like our routines. If something isn’t broken, we don’t feel a need to fix it. While this attitude often prevents us from getting swept up in the latest fad, it can also make it so we allow the problems we face to fester. In more recent times, the failure to address climbing employee costs, perceived commoditization of services and negative perceptions of busy season have caused CPAs in both public and private firms to feel the effects of lower profit margins. Many firms are now left wondering how to make significant changes to their business model to keep up with these undeniable trends in our profession.
One commonly proposed solution to these issues is changing to a value-based pricing model for services. However, is this truly the universal answer to declining profit margins for CPA firms? When is a value-based pricing model appropriate? Finally, if it is the right move for your firm, how do you implement it? These questions are at the forefront for many CPA firm owners as we move into a new year.
What Is Value-Based Pricing?
Value-based pricing is a simple concept: You charge the client based on the value of the services you perform. Instead of charging a client based on the time you put in on a tax return or punching the time clock for agreed-upon procedures, you charge based on what those services are worth to the client. There is no longer a risk to the firm for miscalculating the time involved in an engagement or a tendency for CPAs to lower their hourly rates in order to remain in-line with competing firms. In this way, the firm should be more profitable because the client will always pay the market rate for the work.
In concept, many CPAs love this model because they often feel their skills are undervalued. Do-it-yourself tax and accounting software packages advertise that they emulate a CPA’s work at a much lower rate. This common client misperception forces us into a bidding war to win business, so we often agree to the engagement for a lower price. This leads to resentment and a feeling like we’re not getting paid what we’re worth. In this all too common scenario, it’s no wonder we are enticed by the thought of getting paid our actual value.
What holds us back from implementing value-based pricing?
Our experience with and worries over client perceptions most commonly restrain us from the euphoria of a value-based pricing model. we don’t really know how to value services outside of time. any of us were taught very early in our careers to keep track of client time for billing purposes. We were rewarded for the amount of billable hours we worked during busy season. Is it any wonder that when we’re asked to price a job now, we esimtate the time it will take as our first impulse? The profession is seemingly preoccupied with time. Therefore, when we try to place a value on services, we naturally focus on the time they will take. For many of us, it’s all we’ve ever known and a hard habit to break.
Perhaps an even bigger issue than this, we are worried about how clients will perceive this change. Value-based pricing only works if clients are willing to accept the market rate that we charge. It assumes that they can differentiate between the expertise involved for certain services over others. If they can’t see these things, then they won’t be willing to pay the market rate – and we will simply lose business.
How do we get around these hurdles?
While both of these issues are significant, we can overcome them if we think differently about the problem. First, we must start thinking about accounting services in terms of scarcity and uniqueness as opposed to simply how much time they take. This requires being honest with ourselves about which services client truly could get anywhere versus something they need us specifically for. For example, many CPA firms can competently prepare a tax return. However, most CPAs I know don’t just prepare tax returns: They give their clients advice or offer expertise in particular industries. They help clients plan ahead for next year and add essential perspective on tax problems. Small business owners may not perceive bookkeeping services as unique; however, the analyses and interpretations we provide are invaluable. By thinking about the unique attributes we bring to the engagement, we can begin thinking about how hard it will be for the client to find these services elsewhere.
Second, we must clearly articulate our singular skills to the clientt. When we have certain professional expertise, we must communicate this through our websites, email communications and branding. We must demonstrate how our services are different – that ot every CPA or CPA firm is the same.
Third, we must be willing to relinquish the business of clients who really don’t understand our value. Practitioners always find this to be the toughest part because it seems counterintuitive. However, if a client only seems to find value in the deliverable and not the unique service you provide, the only thing left is price. The client will only look to get the deliverable at the cheapest rate possible – which will often be something less than the market rate. The practitioner will be left with a choice – either accept the lower rate or give up the business. By giving up the business, the practitioner will have the capacity to take on other clients that can more easily see the value proposition.
Is Value-Based Pricing Always the Way to Go?
Not every firm needs to change their revenue model. For firms that have a loyal client base that understand and appreciate the current business model, there may be little reason to move to something different (see my “if it isn’t broken, don’t fix it” comment above). However, value-based pricing can help the right firm get paid more for the true value they bring. Clients can better appreciate the unique skills that their CPA has and this can create even more client loyalty. It can lead to healthier profit margins, more appreciative clients and a sustainable future for firms.