Three Steps to Pricing Your Services, Part 1
By Jennifer Katrulya, CPA, CITP, CGMA
Practitioners dread the process of pricing their accounting services. If given a choice, there's little doubt your clients would prefer to know up front what your services will cost - which allows them to set a budget for those services - versus being billed hourly. It also gives you the opportunity to establish prepaid fee offerings that can be automatically charged to a client's checking account or credit card, dramatically reducing your internal billing and administrative costs.
If you've been feeling "stuck" in an hourly billing model, but know you want to make a change with new clients - and, over time, with your existing ones - how do you get started? Here are three steps you can take as you consider value-priced, fixed-fee billing arrangements.
Step 1: Determine Labor Costs
It's no secret that the bulk of your billings will be based on the services provided by your staff. In order to establish value-priced, fixed-fee billing arrangements with new clients, it's critical that your firm can access time and billing information from similar, prior engagements to use as a guide for estimating fees for new proposals.
Following is some of the information you'll want to analyze:
- Clients from the same industry vertical.
- Job costing and/or expenses that will need to be reimbursed. You'll want to know about expenses that not only need to be coded to jobs, but that also need to be segregated between reimbursable expenses and those that aren't reimbursable.
- Type and complexity of accounts receivable processing.
- Services relating to gathering data from third-party software solutions or other outside resources. For example, think about your clients who are using a point-of-sale system, medical practices that may be using an outside billing resource, or nonprofits that are using a separate donor management solution.
- Weekly, monthly, and other ongoing internal management reporting needs.
- The number of custom dashboards the client will need for assessment and growth.
- Any ongoing third-party reporting requirements.
- Frequency and general duration of client meetings, and whether those meetings will be conducted by telephone/video-conference or on-site.
If you can assess the time your firm incurred at each staff level for existing or prior clients, you'll know how to estimate your fees for any proposal. This isn't an easy task! However, if you take the time to figure it out correctly, you'll be able to apply your findings to every proposal, give or take any unique requirements.
In a perfect world, you'd have automated or paper time sheets to find the information, but what do you do if your firm no longer keeps time sheets for every client? As more firms move to value-priced, fixed-fee billing models, many firms opt to limit or eliminate time sheets within their firms. While the debate is sure to continue for years to come, make a dedicated effort to keep time sheets and detailed billing information for one year so that you're able to aggregate this data. Then, gradually stop keeping time sheets for the clients that have the most consistent ongoing time requirements.
Every few months you can then keep time records for a small sample set of clients in order to test against the historical records to see if there's been any scope creep that may have gone unnoticed. This exercise is also critical to calculating your firm's ongoing effective billing rates. Often, firms can be extremely excited to reduce the use of time sheets only to find that after several months, a scope creep has in fact found its way into the engagements. If this occurs, it dramatically reduces the true hourly rate and the profitability of the engagement.
Step 2: Account for Technology
Providing your clients with turnkey access to an integrated suite of hosted and web-based accounting, client relationship management (CRM), budgeting, sales tax, and other solutions can save them hundreds or even thousands of dollars each year compared to the investment that would be required if your clients attempted to acquire these solutions directly. On the other hand, it can be easy to forget how quickly the costs of, for example, something like multiple monthly SaaS subscriptions can add up!
Here's where you want to calculate the cost of the solutions you provide to your clients - again, not an easy task, but something that's vital if you want to price your services accurately. You'll want to include the number of user accounts you need as part of your bundled service offerings compared to what may be considered an "upgrade" pricing option your clients may purchase to add more users and functionality.
In addition, be sure your ongoing financial reporting processes include a step that reminds you to compare your invoices from your SaaS solution providers against your active user counts for each client to ensure you're not paying subscription costs for users that should have been terminated from the system.
Step 3: Establish a Contingency
In every client engagement, special circumstances will arise. Clients will need the occasional customized report, their transaction volume may spike in a given month, they may have a business decision to make that will result in their need for additional consultation time - any number of other things can occur. Think Murphy's Law . . . as a result, fixed-fee agreements that don't allow for these types of fluctuations will face an ongoing battle. Do you write off the additional time incurred or try to obtain the additional fees from the client in each of these instances?
Trying to obtain additional fees can be time-consuming and uncomfortable for the firm, but more than that, it leaves clients feeling "nickel-and dimed", often making them hesitant to reach out for help. This isn't what you want for a successful, long-term accounting services agreement. Including a "contingency" in each pricing estimate is an easy way to solve for this.
During the initial analysis of a client engagement, you'll gather information that will help you make reasonable assumptions about how much a specific client's engagement-time needs may fluctuate. Let's say you estimate the client will require up to 10 percent more time in a given month than what's needed on average. By including this cost in the fixed-fee quote provided to the client up front, you'll allow for scenarios such as the following:
- If a client requests a special report, a few extra phone calls during the month, or other services, you'll still be able to add a line to the invoice with what you'll call "special requests", but it will show as a "courtesy discount" that reduces the balance due to zero. You can afford to do this because you've already built in to your ongoing agreement a budget for these small spikes! This can result in more client loyalty and, hopefully, referrals.
- If a client has a spike in activity in a given month, you'll have the comfort of knowing you can remain profitable during such months. Over time, you'll even find that you'll be able to keep some unscheduled time available for certain members of your staff so that they're able to accommodate these fluctuations when they arise and avoid operating in an ongoing burnout environment.
There are several other investments of time and money to consider in fixed-fee pricing; we'll explore those in next month's article.
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About the author:
Jennifer L. Katrulya, CPA, CITP, CGMA, is president and CEO of BMRG, LLC. Katrulya provides advisory and mentoring services to growing and large CPA firms seeking to successfully establish best practices, educate, and motivate management and staff during periods of change and to streamline integrated processes in a hosted and SaaS environment. She is a frequent author and instructor on a wide range of technology topics. Katrulya also serves as a consultant for a number of software developers who seek input from her regarding their anticipated road maps and strategic plans, constructive feedback about solutions and/or features as they are developed, and ongoing feedback from her as her firm and BMRG's clients use many of the solutions. Contact her at [email protected].