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REVENUE GROWTH 12 mins 06 Jun 2024 by Rebecca Mihalic
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Key takeaways

  1. Pricing models explained: Understand hourly, fixed fee, and value pricing, and how each can be applied to different service types within your firm.
  2. Fixed fee and value pricing advantages: Learn why these models are often more client-friendly, providing transparency and aligning charges with the value delivered.
  3. Hourly model drawbacks: Discover the limitations of hourly pricing, including unpredictability and potential misalignment with client expectations.
  4. Client-centric billing: Why it’s important to meet modern client expectations for clear, upfront billing to enhance trust and client retention.
  5. Strategic pricing decisions: Understand the factors to consider when choosing a pricing model that suits the nature of work and client relationships.
  6. Transitioning to new models: Get insights on how to smoothly transition from time-based to value-based billing, addressing challenges like unbilled work.
  7. Technology integration: Learn how revenue generation platforms such as Ignition can simplify billing, automate payment collection, and enhance service description clarity.

Mastering pricing with confidence and clarity

Navigating conversations about pricing with your clients can often feel awkward, especially when you’re trying to convey the true value of your services. 

But when you understand your numbers, profitability and your position compared to your competitors, you can more confidently stand behind your pricing when talking to your clients. You will know with certainty what pricing you can and cannot budge on.

Ignition has produced the 2024 Tax and compliance pricing benchmark report, so you have the information you need to make informed decisions about your pricing strategy. It includes valuable insights about the fees Australian accounting firms are charging, and planning to charge, for the most common tax and compliance services. 

Together with the benchmark report, this blog gives you an overview of how to price your services effectively and competitively

When you’re ready to put learnings into action, download the how-to guide to Transform your firm’s pricing and profitability in 10 strategic steps and my Pricing professional services checklist. You’ll have all the resources you need to confidently approach pricing, backed by data and proven strategies.

Understand the different pricing models

Before you can start pricing services effectively, you need to understand the different pricing models that accounting and bookkeeping firms can use and how they apply to your clients. 

Hourly model

The simplest and one of the most common models firms use is the hourly pricing model. All you need to do is determine hourly rates for your employees to bill to clients and then just take the total hours worked and multiply that times the hourly rate and you have your price. 

While that might be easy from the firm’s perspective, it’s not as client-friendly. They generally don’t know what the price is until after the fact, and the bill they receive isn’t aligned with the services performed. 

Fixed fee

Another model that has gained popularity and relevance is the fixed-fee pricing model. This pricing model sets a fixed price for each service based on a narrowly defined scope. 

Calculating a fixed price for each client can be complicated, based on the services being performed, because there can be multiple variables to consider. But when you standardise your services, it allows for a better way to come up with the fixed price necessary for each service. 

Value pricing

A less common model that’s being used by accounting and bookkeeping firms is the value-based pricing model. Value pricing determines the price based on the value of the work performed to the client. 

This pricing model requires having a good understanding of the client and the work to be performed in order to determine the price for the client. The price given can be billed all at once or done on a monthly recurring basis. 

While hourly pricing has been the standard for firms for years, that doesn’t mean it’s the right pricing model for your firm.  

To determine the right pricing model, you need to look at the type of work you are doing and determine the model that makes the most sense.

The fixed fee pricing model is ideal when: 

  • Performing tax returns or compliance based work. 
  • Scalable services. 
  • Well defined scoped projects.

The value pricing model is ideal when: 

  • Performing advisory services. 
  • Niched within an industry. 
  • Slower sales process. 

Hourly pricing model is ideal for: 

  • Undefined scope of services. 
  • Time-intensive service work. 
  • Ambiguous project work. 

As shown above, hourly pricing is not ideal when performing compliance or advisory services. Your firm is better off when it can provide clients with a price upfront for most of the work that you do.  

Why should you consider moving away from hourly billing?

  • It’s inefficient. Some tasks need to be completed urgently, and may be very quick to do; others are not at all urgent, but can be time-consuming. 
  • It’s quantitative, not qualitative. Billing incentivises the amount of time you put into your clients’ work, as opposed to the quality and value of the work. 
  • It’s unpredictable. Clients don’t like unexpected billing surprises and prefer to know the cost of your services upfront. 

You’re probably already using one of these methods

Do you practise time-billing within your firm? 

If so, this method means that you’re tracking time with hourly rates to come up with a work-in-progress (WIP) figure. Correct? 

Now, if you’re like so many other accounting firms out there, you’re probably familiar with write-offs: when you accrue WIP that’s never going to be billed. 

This can happen for a variety of reasons. Perhaps the WIP figure was inflated; there were technical issues with the work; someone was training on the job, or the work was out of scope. 

So, because you’re not going to bill this WIP, you write it off. When this happens, you’re effectively using a fixed fee – it just hasn’t yet been communicated to your clients. When you have a WIP balance of $4,000 and you know the client will be expecting to pay $3,000, so that’s what you end up billing, it’s the same concept as fixed-fee arrangements. 

Why you should embrace a new pricing model

Client expectations have changed over the years.

One key thing that stands out is that clients nowadays expect to have a great degree of clarity and transparency not only over their accounts, but also over the fees that accountants charge to work with them. 

Business owners want to know upfront what each service will cost them.

If anything, they will be the biggest drivers for the change to fixed-fee agreements – and if we’re honest with ourselves, we know what a job is worth to us and how much we want to charge for its successful completion. 

Managing out-of-scope with fixed fee pricing

A good engagement letter will also contain a clause and a method for you to adjust the fees if you ever find that you have underquoted. And if you use a leading revenue generation platform like Ignition, you can simply use the Service Edits feature to make changes to the price, quantity and billing of existing services even after a client has accepted your proposal. 

 Ignition also has a Instant Bill feature that allows you to quickly bill and automatically collect payment for one-off services, without the need to create and send a proposal – and all within the one platform. 

 This means that if you properly scope work and quickly contact clients if you find something unexpected, there should be no fear in pricing your services upfront. 

Why taking payment upfront is the next logical step

By taking payment details once you send out your engagement letter, you will reduce your debtors, firm up on your own payment terms, eliminate bad payers, and take control over your own cash flow.  

Imagine getting paid on time, every time, for all of the great work that you do for your clients. 

By transitioning towards adopting a fixed-fee billing structure, you can link payments with engagements and take complete control over your billing process going forward.  

Once you’ve set a fee for a service and both you and your client have signed off on the engagement, taking payment upfront is the next logical step. Why? Well, you already have their agreement on the price, so why not also ask to be paid on time? 

If you’re working off the basis of monthly recurring fees, taking payment details in advance and being in control of the payments is the only way this really works. 

For clients that you bill on completion, you still have the ability to raise an invoice and advise the client that you will be taking payment on the due date, they then have your terms period to query the invoice if there are any concerns with the service. 

How to work out what to charge

When it’s time to take the plunge, do away with hourly pricing in arrears, and embrace the upfront fixed-fee billing mode – you might be asking what you should be charging.  

Whether you decide to do this using bill on completion, monthly recurring, upfront payments, or any combination of these methods, the first thing you need to know is what other firms are currently charging. 

Ignition’s 2024 Tax and compliance pricing benchmark report has valuable insights on the fees firms are charging nationally, in capital cities, and in regional areas for the most common tax and compliance services. 

With this information on hand, you can assess how your firm’s current pricing stacks up against the data and understand what percentage fee increases firms are looking to apply this year. 

You’re not flying blind when it comes to pricing your own services. 

Now, you have the context and insights you need to assess your pricing strategy, and what you’re charging for each of your services.

With Ignition, you can use a pre-loaded services library tailored for accountants and bookkeepers, or import your existing services directly from QuickBooks Online or Xero for a quick setup. Ignition also enables you to craft professional service descriptions using AI. See how it works.

If you're already using Ignition, you can easily export your service list, including current pricing, to Excel. 

Determine the cost of delivering your services by breaking it down into two main categories: direct costs and overheads.

Direct costs: These can be fixed direct costs – such as client software subscriptions necessary for specific services. Or, variable direct costs, which fluctuate based on output, like wages and additional staff costs tracked via timesheets for each job or client.

Overheads: These are often fixed expenses that don’t vary with the volume of services provided. Examples include rent, advertising, association fees, and time spent on non-productive or administrative tasks.

After identifying costs, they must be attributed to accurately determine service delivery costs. Fixed direct costs are straightforward to attribute as they are clearly identifiable. Variable direct costs' allocation depends on whether timesheets are used; with timesheets, labour costs can be tracked and averaged per service. Without timesheets, the time spent is estimated and allocated to the service.

Overhead cost allocation is more complex and involves calculating an allocation base and rate, typically based on labour hours. For example, if a practice has $100,000 in overheads and 1,250 service hours in a year, the overhead rate would be $80 per hour. This rate should be added to the service cost to cover overheads effectively.

For a detailed guide to calculating how much it costs to provide a service, download the full guide on how to Transform your firm’s pricing and profitability in 10 strategic steps.

It’s a step-by-step ebook that’s packed with insights, including:

• Example service cost calculations.

• How to apply your profit expectations to services.

• How to develop tiered pricing.

• How to cross-sell for maximum impact.

Once you know what your costs are, the actual price to charge for your service will be based on your profit aim (made realistic of course, by comparing to competitors and market standards where available).

For example, if your costs were $2000 to deliver a service and you wanted a 20% profit, the fee should be set at $2,500.

What to do with unbilled work

With an understanding of what other firms are charging, and having worked out your pricing strategy, and how upfront payment works, the transition over to recurring revenue isn’t difficult. 

The biggest, and maybe only inhibitor to this move is the uncertainty around existing work-in-progress (WIP) or unbilled work – so how do you deal with this and ensure that you’re fully protected going forward? 

The problem

You want to move your clients to fixed fees from the beginning of the new financial year, but there’s a problem. You’ll be busy completing their tax return and/or other time-consuming work early on in your engagement. 

Fixed fees essentially mean a smoothing over of fees throughout a 12-month period. So, what if the client leaves halfway through the year, and you’ve already spent a significant amount of time on work that they haven’t yet paid for? 

The two potential solutions

There are two possible solutions for you to pick from, so let’s explore both of them in a little more detail.  

1. A combination of bill-on-completion and monthly recurring invoicing for the first year 

With this method, you kickstart monthly recurring invoicing from the beginning of a new financial year for all work that relates to that financial year only. 

Following on from the example above, the monthly fee will cover work that relates to the 2024 financial year work – so by June 30, 2024, you have effectively been paid in full for all of the 2024 work (some of which may not have yet been completed). 

Then, as you finalise the 2023 work, you will raise your last set of bill-on-completion invoices to the client to cover off all the work you have completed. 

2. Straight into monthly recurring only 

If you decide to just move into monthly recurring, then you need a mechanism to protect yourself in case your clients leave during the year, before they have fully paid for the work that you’ve already completed. 

One way to do this is by breaking down the cost of each service in the proposal as if they were still being charged as a bill-on-completion client. Then, in your engagement terms, ensure there’s a clause that notes the monthly fee is for all work over 12 months – and if they terminate services during the contract period, they’ll be liable to pay for any completed work that has not yet been paid via the monthly fee. 

This process would then require you to reconcile payments made versus cost of work performed to calculate the difference and the on-charge.

Take your pick, but communicate with clarity  

Whichever pricing strategy you choose to adopt, make sure that you do one thing: communicate with clarity. Clients hate confusion, especially when it comes to money matters. 

 Make sure you outline all the key details regarding your billing and payment process, and ensure that you’ll always be on hand to answer any queries that they might have. If you’re changing your pricing model, read this blog about how to communicate change (with samples)

Get paid for your value

You’re an expert in your field and the boss of an established business, not just a skilled contract for hire. Owning that fact and adopting that mindset changes everything, most importantly how you reflect your value and how your clients perceive your value. 

If clients easily grasp your worth, they’ll have no problem paying for it.  

Talking about prices will be a nonissue – no longer a hoop to jump through or hurdle to overcome. You’ll find it’s easy to ask the price that’s best for your business – and never feel awkward about discussing it again. 

Set clear prices upfront and stop chasing payments. With Ignition, you can collect payment details upfront in proposals and automate payment collection once your clients sign. When you connect Xero or QuickBooks Online, the platform can also automate invoicing and reconciliation. 

Easily create, send and sign your proposal, automate your engagements and get automatically paid in one place, with Ignition, the leading revenue generation platform.

See how Ignition works

Meet the author

Rebecca Mihalic

Head of Accounting (APAC) at Ignition and Director  businessDEPOT

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Published 06 Jun 2024 Last updated 06 Jun 2024