The “Keep It Stupidly Simple Pricing Strategy” for Accountants
Head of Accounting, Practice Ignition
Admittedly when I first came into the accounting industry many years ago, I got sucked into the debate of how accounting firms should be pricing and importantly how they should NOT be pricing their fees in their business.
One of the first articles I ever wrote was titled Hourly Billing vs Fixed Fee vs Value Pricing? What do they all mean? I wrote this back in 2016 after first doing research from a few of the pricing guru’s in the industry, whilst wanting to focus on the origins of hourly-based billing. I needed to understand why the industry went in this direction in the first place. The trouble is that 4 years later, the bubble is still overcomplicating how accountants can and/or should price their fees and because of this - firms can feel paralyzed and instead, do nothing.
It’s easier to do nothing and/or default back to hourly billing because this was a simple method to follow. Track the time, bill the time, do the work, tell the client you’ve done the work, tell them how long it took you to complete the work, send an invoice asking them to pay you for the time you spent completing the work. Now, this wouldn’t be a problem if you weren’t implementing cloud accounting and becoming more efficient as your role as an accountant, and therefore decreasing the time you spend completing the work that used to take you 10 times longer. So you’re completing work 10 times faster but you didn’t increase your hourly rate by 10 times? You’re still billing £95 per hour, instead of £995 per hour. If you have increased your fee, and your clients are happy with that - good for you. You can finish reading here. Otherwise my big question for you today.
Why is the industry still using time billing as a core measurement for pricing their services with clients?
Why do accountants still default to an hourly billing pricing strategy? Now I’m not talking about measuring profitability before anyone jumps the gun and says “I measure time to see how profitable the jobs are.” I’m specifically talking about communicating with your client that you’re billing them £95 per hour to complete a set of accounts, to manage their monthly bookkeeping, or to process their payroll for variable amounts of staff every single month. Why are you doing it? (Again, I know why you're doing it - But why do you keep doing it!). As I’ve outlined already, we’ve established it’s easier for you to track the time (and write it off later when you blow the WIP).
It’s also “easier” for you to measure and “easy” for you to explain to the client why your fees cost what they cost - because that’s how much time you’ve spent doing the work. My biggest gripe with hourly billing is that your clients will now measure you based on how fast you are at completing the work. Which isn’t a fair representation of what you do and how you do it for them, and doesn’t take into consideration your knowledge and accounting skills you spent so long acquiring through studies and further education. I’d also add that hourly rates also don’t scale well in a professional service business because you’re essentially selling time. You only grow by selling more time, hiring more people so you can sell their time, to more clients who measure you based on how much time they buy from you. Changing the pricing strategy can be difficult but it’s not impossible, in fact, it can be stupidly simple. Today my goal is to introduce to you a “stupidly simple pricing strategy” and help you get started on moving away from an hourly pricing strategy and talking about how much time spent completing the work with your clients.
K.I.S.S Pricing Philosophy
Now let’s review the cleverly coined K.I.S.S Pricing philosophy, (Keep It Stupidly Simple Pricing). My challenge for you is to stop hourly billing and just start out by introducing a stupidly simple way to calculate a fixed fee price with your client. It’s really stupidly simple hence the name. Our goal here is to help you introduce and implement a fixed recurring fee with your client, and do it in a way that’s simple and easy to communicate. Cloud-based accounting firms are encouraged to focus on monthly recurring revenue (MRR). This allows you to become the Netflix and Spotify to your clients for their accounting fees. With all the software subscriptions and increase in fixed overheads coming into your practice, it’s more important now than ever to introduce monthly recurring income into your business.
To do that we need to easily create a fixed monthly pricing option that your clients will understand and you can communicate, where you stop selling time and start selling the end result. In other words, we want to now start to price and communicate the outcome of the work, not price the journey (or the time it took) to achieve the outcome. If you do complete the work sooner than expected - and I expect you too (no pressure). Then you won’t suffer a decrease in fees due to the time reduction. Because you’ve priced the outcome and now you’re encouraged to complete the work even faster to improve profitability on those jobs. If you want to keep track of time to measure profitability - go for it. Personally I think you can do without time tracking, but whatever makes you feel most comfortable and in control of the scenario. Baby steps.
Let’s look at last year's total bill for the year. Let’s say it’s £1500. You’re going to increase the fee by 15%, we’re going to sit down with the client and do a needs analysis. What else are they focused on in the new year? Where else can you help them? Maybe you sit down and do a Clarity HQ appraisal to identify their profit opportunity for 2020. With a 15% increase, and no additional scope changes we’re looking at a fee of £1725.
£1725 divided by 12 months equals your clients new fixed monthly fee of £143.75. If the scope of the work changes, eg training, consulting, monthly management meetings, this can be easily introduced as an adhoc piece of work (which could still be time-based if it needs to be) or be an increase to the original fixed fee you’d introduced.
But what we’re now selling to the client is that this fee of £143.75 per month is their total fee for the year. Sure they can pay upfront if they want, or they can pay monthly to spread their cashflow. Your focus now should be on making the job as efficient as possible. The way you communicate to the client is not built on how long it took for you to complete the work.
So Remember to Keep It Simple
Today’s message to you today is to not over complicate your pricing strategy. This may seem like a really basic approach or dare I say “Stupidly Simple”, and it is. It’s designed to be simple so that you feel just as confident shifting to fixed pricing, as you do when you naturally go to hourly billing. In an industry now riddled with philosophies and gimmicks that end up in the “too hard” basket. Let’s keep it stupidly simple and implement something that is easy to understand and communicate. I’m fortunate that I work in a team and a platform that has analyzed over 150,000 won proposals issued by accountants with their clients.
We know the average price on all services, we can see the difference and increase of fees when you’re serving both compliance and advisory services to your clients. We can also see which 3rd party apps you’re selling to your clients more than the other apps in the marketplace. Our first step when we work with a new firm, which these days is getting close to 200 every month, is to analyze their pricing, their services, how they communicate this with their clients and in turn create a stupidly simple approach to introducing a new fixed monthly pricing strategy. It’s stupidly simple and we know it works, as we now see just under $1 Billion dollars worth of revenue managed within our platform, used by accountants just like you. Happy hunting and remember to just Keep It Stupidly Simple.