Whenever I speak to accountants about creating a cloud practice, the most common question is, “How do I charge my clients?” Ten years ago, maybe even five years ago, if I would’ve posed this question to a new accountant, I would have received a resounding response of: "Hourly billing."
Hourly billing has been the traditional way that accounting professionals charge their clients, but much like accounting operations as a whole, this model is changing (and in my opinion, for the better). In this blog, I am illustrating a model that may work for you, value based pricing, and how it can benefit your business moving forward.
Hourly billing has settled into the standard billing model because accountants are typically hired as contract employees and most contractors are paid hourly. However, accounting partners offer a unique service -- managing the financial heath of the company. Therefore, clocking hours doesn’t account for the expertise you are providing. You provide value not only because you handle the books, but also because you have the knowledge and expertise to provide financial counsel and help small business manage their cash flow that they would not be able to do on their own.
A more accurate model is value pricing, which means you charge your client a fee based on the Scope of Work (SOW). The SOW is determined by the client’s need, which is settled upon by their size, complexity, tax structure, revenue generation, type of advisory services they need, etc. A value-pricing model provides significant benefits and improved efficiencies for an accounting practice, such as:
a) You have the cloud tools to automate a majority of the data entry and number crunching, enabling you to better collaborate and show your value as a financial advisor.
b) The more experience you have, the more efficient you will become at day-to-day operations. That shouldn’t mean that your fee diminishes with the client engagement. Instead, over time you will be able to take on more clients and spread out your services without reducing your fees, ultimately allowing you to grow your business.
So, how do you set up your business with a value pricing-based model? First you need to select the platform you are going to use for your practice, discussed in my previous article “Working the Cloud." Once you have selected the right platform, choosing the right staffing model and experience level is key to deliver these services.
Here’s a quick snapshot of how to create a menu of services rather than using an hourly rate. This model will allow you to offer your clients, or potential clients, a breakdown of value service offerings to let them pick and choose within their budget, rather than offering one price. Here's an example:
$XX for Accounts Payable
$XX for Accounts Receivable
$XX for Bank Reconciliation
$XX for Payroll
$XX for End-of-Month Entry
$XX for Analysis/Advisory
$ XX Total
With this model, the client has the option to pick and choose which service will benefit them most or fit into their budget. It benefits everyone because there is a clear understanding before the engagement begins which services your practice will provide. Also, I always recommend documenting the scope of each menu item and having a quarterly check-in on the pricing with the client to make sure the arrangement is still working for both sides. This check-in is not only to provide advisory services, but also to see how satisfied the client is and see if they want to engage any additional services you offer.
There are many ways to go about creating this model for your business; this is just one idea. Once you create your own value pricing model, you will definitely tweak it over time as you find what works and what doesn’t. When you are starting out, I’d recommend offering a discount or trying it out with friends and family clientele before pitching it to brand new clients to make sure you have the formula right.
In my next post I’ll take this one step further by teaching how to sell this model to the client and the questions you need to ask in order to offer them the best solution. Until then I encourage you to check out The Small Business Association to learn more about the available pricing models and how to select the right one.
About the author:
Amy Vetter, CPA, CITP, CGMA, is the Global Vice President of Education and Enablement for Xero. In this role, she is responsible for developing and executing Xero's worldwide education strategy with a focus on Xero University (XeroU) and Xero TV. You can find other blog posts by Amy on business topics and yoga at: http://thedrishtiqcpa.blogspot.com/.