An accounting firm's pricing strategy can be its most potent weapon to combat the disruptions and uncertainties of today's precarious business environment. 

The right pricing strategy directly supports a firm's ability to:

• Attract and retain clients
• Achieve vital objectives: increase market share, expand profit margins, or gain a competitive edge
• Grow without sacrificing profitability
• Increase sales and profits without spending more on marketing or lowering prices that squeeze margins

A McKinsey study found that, on average, a 1 percent price increase translates into an 8.7 percent increase in operating profits. The bottom line: The right pricing strategy can help accounting firms maximize profits and gain a competitive edge.

Takeaways

• The 4 factors that have accounting firms rethinking their pricing strategy
• 11 best practices for evaluating your current pricing strategy
• The pros and cons of 5 popular pricing strategies for accountants
• Why value-based pricing is changing the accounting industry
• 6 steps to choosing the best pricing structure for your accounting firm
• 4 best practices for introducing pricing changes

SHORTCUTS

The pricing challenge for accounting firms

What if I want to change my pricing strategy?

Pros and cons of 5 popular pricing strategies for accounting firms

Choose the right pricing model that works for your firm

The pricing challenge for accounting firms

What is a pricing strategy?

Pricing strategies are the processes businesses use to determine the amount to charge for their products and services. These strategies take into account the value of the brand, its market, and its customers. Strategies depend on industry dynamics, business objectives, competition, and macro- and microeconomic factors. The goal of a pricing strategy is to identify the price that will allow you to increase your returns, while still growing — and retaining — your client base.

Why is the pricing strategy important?

Pricing not only affects your profits but also has a significant impact on your customers and the way they view your business. If you price too high for your company's perceived value, you risk losing customers. If you price too low for the perceived value of your business, you risk losing customers (and perceived brand value) to prices that make your brand look cheap.

Important to note: pricing strategies are not static. As the business landscape changes, companies may need to alter their pricing strategy.

Why pricing models have changed

Several factors have contributed to changes in pricing models:

• Technology and automation: Cloud computing and other accounting software innovations have enabled accountants to be more productive and offer better advice in less time, with substantially less operational overhead. In a series of industry studies and surveys:
  
  
  • 83% of accountants believe they must keep up with technology to gain a competitive edge in the market.
    
    
  • Over 90% of accountants said that cloud-based accounting software has dramatically impacted their business processes.
    
    
• Changing client demands: Sage's "Practice of Now 2020" report indicates that clients are more demanding regarding accounting job requirements and services.
  
  
  • 87% of clients expect more flexibility and better service levels from accountants without increasing rates.
    
    
  • The report shows clients increasingly expect business and strategy advice beyond the usual accountancy and bookkeeping services.

In a recent study, "Where Opportunity Meets Value: Business Model Trends for Accounting Advisory Services," Kelly Waffle, Managing Director of Hinge Research Institute, reports on what is driving accounting firms to adjust their business model:

• Buyers are open to long-term commitments to non-hourly billing structures. Buyers displayed a high level of acceptance for non-hourly billing arrangements. In fact, 63% of buyers reported paying for accounting services through fixed monthly fees or per-project basis.
  
  
• Buyers are willing to pay more to address their most significant accounting challenges. Accounting firms can convert this willingness to pay for additional services into revenue by addressing buyers' biggest accounting challenges and demonstrating they can solve them.
  
  
• When asked to identify their biggest accounting challenges, 19% of all buyer participants cited "planning for growth and expansion" and "getting expert financial insights." 18% pointed to problems with cash flow and minimizing overhead costs. An additional 17% said staying compliant and lacking time to focus on accounting and financial matters.
  
  
• Automation is directly linked to successful price increases. Automation can create new opportunities for accounting firms to charge higher rates—if their clients understand the value technology and automation bring to their services. This survey found that accounting firms are nearly 3.5 times more likely to successfully increase their prices when they can communicate the benefits of automation to clients.
  
  
• Commoditization of services. The study refers to downward price pressure on services driven by automation and increased competition.

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What if i want to change my pricing strategy?

Successfully transitioning to a new pricing model starts with a clear strategy and goals: What do you want to achieve and why? Factors to consider when developing a new pricing strategy include the types of services you offer, the markets you’re targeting, how price sensitive your current and potential clients are, and what your competitors are charging.

When developing a pricing strategy, it's important to consider your firm's codified values and guiding principles. These principles serve as guidelines to help everyone in the firm make decisions, handle situations, and accomplish tasks. Your firm's principles also influence how you present your firm to clients, as well as the quality and value of the services that they can expect.

A thoughtful pricing strategy can contribute to organic growth and long-term stability and profitability.

11 Best practices for evaluating your current pricing strategy

Conduct market research

Sample your target market asking what they would pay for a service — and how they want to pay. Would they prefer a subscription model, pay-per-project model? Find out what they currently spend on similar services. Understand what your potential customers value and find fair.

Look at your competition

Study your competition— the successful firms — to see how they price and package their services.

Know your firm’s value

Codify and communicate every way your firm delivers value. This includes the types services you offer, the experience and expertise of your team, and the technology that supports your efforts in achieving the goals of your clients.

Test and revise

Test and revise until you find that sweet spot that fits both the budget of your customers and the revenue goals of your firm.

Consider your growth strategy

Examine what you're selling. Decide how aggressive you want to be with pricing in relation to your growth goals and brand strategy. Are you looking to quickly take market share by undercutting pricing or are you looking to maintain a high-brand image by maintaining premium pricing?

Align pricing with business strategy

Effective pricing strategies align with the business strategy. Cost justification and revalidation of benefits are also informed by the company’s business goals.

Consider product led growth pricing

Link your pricing to a business metric that the client values and that you have a direct positive effect on.

Define your best customers' needs

Start with finding the 20% of your existing customers that will spend more money with you. Then, define their needs and offer a premium option.

Resist commoditization of your services

No matter how commoditized your offering might seem or actually be, you can wrap a value-added set of features, services and approaches around them to make paying a premium worthwhile.

Know your brand value

Determine where your firm currently stands—and where you'd like it to be—in terms of perceived brand value. Understanding your brand value will enable you to price your services appropriately relative to your competitors.

Know your market

Ultimately, you need to understand the expectations of your ideal client. Your firm needs to meet those expectations in every aspect of your business. Your pricing strategy needs to reflect your understanding of your ideal client.

4 essential tasks when devising a pricing strategy

1. Consider your target audience: Are you targeting small businesses or large corporations? Your target audience will affect your pricing.
   
   
2. Consider your unique selling proposition: What makes your services unique? What sets you apart from the competition? You can charge a premium price if you have a unique selling proposition clients view as valuable.
   
   
3. Define your scope of work: Before you price your services, you need to define the scope of work. What exactly will you be doing for the client?
   
   
4. Consider your costs: How much do your accounting services cost to deliver? This includes your overhead costs (e.g., office rent, utilities, insurance) and your time (e.g., hourly rate).

4 Best practices for introducing pricing changes

1. Use multiple platforms to communicate pricing changes, such as calling or meeting with clients in person, or sending a letter.
   
   
2. When communicating with clients, focus on the value that your services deliver. It's not about the tasks you perform, but the results you produce.
   
   
3. Understand your client's business challenges and position your services to directly address those issues. Connect the value your client places on your services with your pricing.
   
   
4. Avoid sounding apologetic and undermining your value. Communicate confidently your understanding of your client’s needs and the value of your services.

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Pros and cons of 5 popular pricing strategies for accounting firms

Cost-plus pricing

A cost-plus pricing strategy — or markup pricing strategy — is a simple pricing method where a fixed percentage is added on top of the production cost for one unit of product (unit cost). This pricing strategy focuses on internal factors like production cost rather than external factors like consumer demand and competitor prices.

If you sell services, this pricing method isn't the best fit because the value your services provide is often more significant than the physical costs to produce the service. When setting up a cost-plus pricing strategy think about everything it takes to get your product made and in the hands of customers. Consider your cost of sale, not just production costs.

Advantages of cost plus pricing

• It's simple to implement: Using a cost-plus pricing strategy doesn't require extensive research. You just analyze your production costs (e.g., labor, materials, and overhead) and determine a markup price.
  
  
• The price is easy to justify: If production costs go up, the increase can be justified.
  
  
• It provides a consistent rate of return. When calculated correctly, the cost-plus pricing should result in all costs being covered. And you should expect a consistent rate of return due to the markup percentage.
  
  
• It’s a simple and direct way to test the market. With cost-plus pricing you can easily get a feel for how much a client will pay for your services — and refine your pricing strategy from there.

Disadvantages of cost plus pricing

• The price can be set too high. Since this pricing strategy doesn't consider competitor prices, there's a risk that your selling price is too high.
  
  
• There's no guarantee all costs will be covered. Sales volume is projected before pricing the product, and sometimes this estimate is inaccurate.
  
  
• There isn't any incentive to operate efficiently. When businesses don't adapt their strategies to changing market/competitor conditions, it's unlikely they'll be successful in the future. Also, inefficiency leads to higher prices.
  
  
• Cost-plus pricing doesn't always correlate to customer value. Customers don't always equate the cost to value.
  
  

What is the formula for cost-plus pricing?

Flat-rate pricing

Flat-rate pricing or flat-fee pricing is a pricing model where a business charges a fixed rate for a service instead of charging by the hour. If you price things correctly, a flat rate will cover the direct and indirect costs with a healthy profit leftover.

Advantages of flat-rate pricing

• Flat-rate pricing rewards productivity. When a business is paid a flat rate for completing a service, it can make more money by performing more services in a shorter amount of time. This makes owners focused on finding ways to deliver as much value as possible as quickly as possible. Provided service providers work efficiently and quickly, they can usually earn more in a flat rate system than in hourly rates.
  
  
• Flat-rate pricing fees are transparent and easy for customers to understand. The greatest benefits of flat- rate pricing are its simplicity and predictability. A flat-rate pricing plan is easy to communicate and, therefore, is easy to sell.
  
  
• Flat-rate pricing simplifies cash flow management. It is easier for a flat pricing business to project revenue or profits per job done. You already know how much each client will pay regardless of the time involved.

Disadvantages of flat-rate pricing

• Because flat-fee pricing puts the emphasis on performing as much work as fast as possible to maximize profit, it could lead to poor quality.
  
  
• A potential disadvantage of flat-fee pricing is that any obstacle that gets in the way of productivity reduces income. A flat rate may not be the best system to use in complex tasks or those likely affected by unforeseen problems.
  
  
• A pre-packed one-size-fits-all approach satisfies no one. Different clients have different needs and create different demands on your firm.

What is the formula for flat-rate pricing?

Flat rate price = (Hourly rate * Hours of work) + (Materials cost * Markup percentage)

Competition-based pricing

Competition-based pricing involves researching your competitors' offerings to determine your pricing strategy. Unlike cost-plus pricing, a competitive pricing model doesn't look internally at production costs; instead, it looks outward at competitor prices and consumer demand to determine the optimal final price.

Competition-based pricing reflects three approaches

• Offering the lowest price: Setting prices lower than your competitors (which is also known as loss leader pricing) can help to grow your market share and revenue in a short period of time.
  
  
• Premium price points: Charging a higher price than the market rate can work if the company can prove that their product or service is better than the competition.
  
  
• Price match promises: Companies guarantee to offer the same price as their competitors for identical products.

Advantages of competitive-based pricing

• Reflects market dynamics and provides a viable pricing strategy
  
  
• Business benefits from competitor experience and market research
  
  
• Offers a quick approach to establishing a pricing strategy

Disadvantages of competitive-based pricing

• Price matching or loss leader pricing strategy can lead to lower margins
• Companies that base their prices on their competitors’ prices can risk leaving potential revenue and profit on the table if they have a premium or superior product
• You have less in-house insight into what price is acceptable to your customers
• Competitive advantage on price may be short-lived as competitors adapt

Time-based pricing

Time-based pricing is determined by the time of purchase for the item or service. This pricing strategy is particularly popular in industries where the demand for the product or service changes throughout the day or where businesses want to offer incentives to encourage purchases for different reasons.

What is the formula for time-based pricing?

Businesses use dynamic pricing to set flexible prices based on dynamic market conditions, like supply, demand, and competitive prices.

Advantages of time-based pricing

• Dynamic pricing allows businesses to remain competitive by adjusting their prices in real time in response to changes in the market.
  
  
• By adjusting prices to match demand, businesses can reduce excess inventory and optimize their stock levels.
  
  
• Dynamic pricing can provide customers with better prices, increasing customer loyalty and satisfaction.
  
  
• By setting prices based on market demand, businesses can maximize their revenue potential and improve their bottom line.
  
  
• Time-based pricing generates valuable customer insights, informs pricing strategy, and enables the business to optimize revenue and profit.

Disadvantages of time-based pricing

• Inaccurate market data can cause significant profit losses.
  
  
• Time-based pricing can be time consuming as switching up prices on products and services continually requires a lot of competitor monitoring and market study.
  
  
• Fluctuating prices may cause customer confusion and a poor user experience.
  
  
• Time-based pricing can be less profitable in some cases. 

Value–based pricing

Value-based pricing is used by businesses to charge products and services at a rate they believe customers are willing to pay. As opposed to calculating production costs and applying a standard markup, businesses instead gauge the perceived value to the customer and charge accordingly.

Value-based pricing packages services into bundles for which the price is fixed up front. This means clients know what they will be paying for and the firm knows what they’ll be getting in return.

Companies that offer unique or highly valuable features or services are better positioned to take advantage of the value-based pricing model than companies that sell commoditized items. For accounting firms to develop a successful value-based pricing strategy, they must invest significant time with their clients to understand their needs, priorities, and business goals. It also requires the firm to study markets they want to grow and analyze competing firms and consulting businesses.

Advantages of value-based pricing

• Can lead to higher price points
  
  
• Establishes how much a customer is willing to pay for services
  
  
• Potentially increases the firm’s brand value
  
  
• Encourages client feedback thereby promoting a positive client experience
  
  
• Promotes customer loyalty
  
  
• Emphasizes quality of service
  
  
• Allows for customization of products

Disadvantages of value-based pricing

• Client research and product differentiation may require a substantial investment
  
  
• Clients' perception of value can change over time
  
  
• Evaluating the perceived value of a service can be complicated
  
  
• Scaling can be a considerable challenge without the proper technology to automate processes and support staff

Is value-based pricing right for your business?

• Successful value-based pricing depends on how effective your firm is in:
  
  
  • Differentiating itself in the marketplace through its services
    
    
  • Creating strong brand value in the minds of clients
    
    
  • Understanding and responding to the competition

Value-based pricing should build a client base that values the firm's work, leading to long-term relationships and growing revenue. Value-based pricing can be a compelling way to gain new clients, increase profits, and develop better brand recognition.

How value-based pricing is changing the accounting industry

Value-based pricing turns upside down the traditional way accountants view their work and its value. Consider how much your perspective changes when you focus not on how much your services cost but on how much your client values your work and the results you produce.

Value-based pricing is changing the accounting industry by promoting transparency, strategic planning, improved collaboration, and enhanced client relationships. It requires accounting professionals to shift their focus from solely considering the cost of services to understanding and delivering the value they provide to clients. All of which can lead to better outcomes, higher customer satisfaction, and increased profits.

Steps to value based-pricing

1. Change your firm's mindset: Focus on value, not just cost
   
   
2. Manage client expectations
   
   
3. Elevate your services
   
   
4. Communicate your value — repeatedly
   
   
5. Use technology to automate your processes
   
   
6. Continuously assess and adjust your pricing strategy

Back to shortcuts

Choose the right pricing model that works for your firm

How to choose the best pricing structure for your accounting firm

The following are starting points to consider when deciding on a pricing model:

1. Understand your clients’ needs and preferences: By aligning pricing with the perceived value by clients, firms can offer attractive pricing and packaging of services structures.
   
   
2. Ensure the pricing model covers all costs and provides adequate profitability: This analysis helps determine if a particular pricing model is financially viable and sustainable.
   
   
3. Conduct market research and analysis: By analyzing market dynamics, firms can identify opportunities to differentiate themselves through pricing strategies.
   
   
4. Develop a unique value proposition: The firm’s unique value proposition highlights its distinctive benefits and advantages as to competitors, influences the pricing model choice, and helps attract clients who align with the firm's value proposition.
   
   
5. Segment your client base: By segmenting clients based on their characteristics, such as size, industry, complexity, and value derived from services, firms can tailor their pricing models to specific client segments.
   
   
6. Align pricing model with profitability goals: The chosen pricing model should enable firm to achieve specific objectives, whether it is maximizing revenue, optimizing profit margins, or achieving a certain return on investment.
   
   

   How to test new accounting pricing packages for your firm

   Start testing new accounting offerings with three options. Three options provide clients with a manageable range to choose from. For example, you could organize a range of packages under the headings of essential, premium, and concierge services.
   
   

   When pricing your packages, consider your client’s needs, wants, and desires:
   
   

   • Needs: Essential reports, work, or information that the client requires.
     
     
   • Wants: Services that solve a specific problem or attract a particular client.
     
     
   • Desires: Services, programs, and third-party partnerships that the client would qualify as 'ideal' or 'in a perfect world'.
     
     

   When testing, you also want to:
   
   

   • Test potential new clients: Testing prospects first allows you to gauge the market response and gather feedback without risking the loss of existing clients.
     
     
   • Test different pricing: By monitoring customer behavior, conversion rates, and profitability, you can assess the effectiveness of different pricing options and make data-driven decisions.
     
     

   Testing different packages requires market insights, careful planning, and goal-driven analysis. It is vital to establish clear objectives, define success metrics, and track the results of your tests. By combining insights from potential clients, value-based analysis, elasticity of demand, and price testing, you can refine your pricing of packages to better meet your clients' needs while maximizing profitability.

    

The right pricing strategy is crucial for your firm to navigate these uncertain times successfully. It should be organic, reflecting your accounting firm's business objectives, management principles, and revenue goals. The firm's brand, services, and client experience must align with its pricing strategy to be compelling and authentic. A well-chosen pricing strategy can put the firm in a very lucrative and competitive position.