For as long as I have been in public practice, I have heard the pricing debate. We are all familiar with the three typical ways that firms charge their clients:
- Hourly (most common and traditional method)
- Fixed Fee (easiest way to develop a schedule of prices for specific services and charge that exact amount)
- Value Price (charge the client for the value you are providing them)
And then there are the time frames you can bill for work:
- Annually (as it is completed)
Hourly billing is always the easiest (if you are focused enough to actually track your time accurately) but it comes with a few draw backs. First of all, your team will hate tracking their time down to the six-minute increments. Second, your clients will be more reluctant to call if you send them a bill every time they do, creating a slightly adversarial relationship. There are also a few positives. As long as you have enough work, you will always have profitable time spent on a client because you can control for profit margin on a micro-level.
Fixed fee tax practices are generally based on a schedule of costs. The firms assign a cost to each schedule: Schedule E = $250, Schedule C = $750, etc. Now the client will get billed based on their return and the tax preparers’ estimate of their cost of the average of all Schedule C’s (or E’s or F’s or D’s, oh no D’s and F’s!) plus a fair profit margin. In this way, tax preparers can simplify their time tracking (or eliminate it) and still produce a fairly profitable practice overall. The downside is they risk that you will have a busy season filled with disorganized Schedule C’s that take umpteen hours and cut heavily into profit margins. It is a gamble many tax accountants have taken. I have also seen some tax accountants setting fixed fees based on how much the like the client, or how interesting the returns are. I do not recommend this method, unless you are in a financial position to disregard profitability.
My favorite type of pricing is value pricing. But – it is by far the hardest to get right! So, naturally it is what I have gravitated to (why make it easy on myself?). Value billing is a combination of understanding which services provide more value to your clients and setting prices with higher profit margins on those services. For example, for a two-hour project, I might charge $1,000 if it is related to helping my clients resolve tax controversy (where they have a significant amount at stake) and $300 if it is closing out their bookkeeping to be able to start the tax return. It all depends on the value that you are providing to that client.
Most firms bill with a combination of methods. They might be hourly based but quote their fees on a fixed fee basis and just mark up or down time to meet that quote. Or, they might be like me and charge a value price for ongoing services, and an hourly rate for out-of-scope work. We go as far as to vary our hourly rates depending on the type of work that is being done. If we are sorting through receipts for a client (regardless of who is doing the work) we max our charges out at $100/hour. Presumably they had the opportunity to hire an assistant to do it, and they procrastinated so that service is now in high demand, and high value. However, it would be price gouging to charge our tax consulting rate of $350/hour for the work that a good high school student could do.
Now we get to the fun part: WHEN do you bill? I bill monthly, mostly; quarterly, sometimes; and annually the rest of the time.
January is when we send out updated engagement letters every year. In each of our engagement letters to traditionally annually paying clients this year, we gave a choice between their traditional annual fee (+5-10%) and monthly fees. In the monthly fee we included many options for returns, planning and even quarterly bookkeeping tie-outs. We use a service called Better Proposals (www.betterproposals.io) which allows for dynamic pricing like the options displayed below.
I have a few clients where we do quarterly bookkeeping tie-outs as well as estimated tax calculations that we bill on a quarterly basis for the work. However, we find it easiest to break everything down into a monthly price and then auto-draft our clients on the first of the month. We get paid more consistently and timely and we no longer have to front the operating costs to get paid in arrears. We have found that value billing on a monthly basis yields the most engaged clients, the best relationships, and overall the most profitability to our firm.
However you bill, make sure you understand it, your clients understand it, and your team does as well. There is nothing like a good “I’m confused about your bill…” conversation to make a busy season day even more fun.