The allusive “charge what you’re worth” is a concept many tax accountants battle with. I have been seeing interesting exchanges on professional groups criticizing incumbent tax firms’ rates, calling them abusive or downright fraudulent. Busy season brings the most critical, stress-induced personality traits to light from our profession. Let us explore generous assumptions around billing practices that might exceed your own. Value is generated in many intrinsic and overt ways. If anyone claims to have mastered the art of billing – they are lying.
Intrinsic Value Demonstrated by Hourly Rates
If we take a step back, into the hourly billing traditions of accounting, we can see how people set value. Different professionals and different levels would assign a different rate. That would then be applied across every activity that that professional did – whether it was value adding or not. A 25-year veteran of the industry might have a $400/hour billing rate. This rate is applied if that professional is representing their client in front of the tax court and the same rate would be applied if that professional is preparing a Form 1120.
Setting an hourly billing rate based on your experience and education level is an example of intrinsic value. The assumption is that because you are a professional who knows a significant amount more than your client, the value you bring is intrinsic to you.
While this is an easier way to set a price and stick to it, it is also intrinsically flawed if your intention is to bill for your value. Do you provide the same value to someone who is in a sticky tax situation as you do to a simple compliance client? Likely not. So why are a significant portion of our peers charging the same rates for each?
Generous assumption #1:
That prior year bill for $4000 to prepare an easy 1040 came from a place of using consistent billing practices and not paying attention to how often they picked it up and put it down (and it was likely a chatty client).
Extrinsic Value Demonstrated by Fixed Fees
Fixed fees are a great way to set a value for a product. It is much harder to do that with a service, however, you can. This type of pricing has led our profession down a commodity compliance road that is difficult to recover from. Many tax accountants were receiving calls on April 15th asking their prices for a 1040 and if it could be completed that day! I got a few myself. That aside, fixed fees are a great example of setting a value for a product.
With tax returns, you might say $250 for a 1040-EZ, $100 for every 1099-consolidated, $250 for every Schedule C, and so on. This type of pricing schema is assuming the value of the work is the actual compliance function. There is limited room for additional advisory, planning, or otherwise helping clients maximize their tax positions. While you might be providing those types of value adds within the compliance service and charging a fixed fee, it is not implied in the pricing schema. And, unless the fixed fees are quite a bit higher, you are technically not charging for that service. The service being provided with a fixed fee is the deliverable, which is why I refer to this as product pricing. The product provided is a tax return filed timely.
Lower fixed fees are used as a market tactic to create enough market share and name to start charging more. It is also frequent that inexperienced tax preparers will charge less as they are not confident in their skills yet and feel like they are learning.
Generous Assumption #2:
Tax accountants are being forced to compete in a TurboTax fueled world. That super low fee that set the client’s expectation last year was a fixed fee from a firm trying to get enough market share to survive.
While this article may not actually help you price better, hopefully, it gives you a little bit of insight into the pricing schema of other firms. Hopefully it gives you a reminder to have grace for others in the profession.