Many accountants find the most challenging part of their chosen profession is pricing services to secure the best possible profit margin while keeping clients satisfied. The ongoing discussions with clients around fees and their expectations about service can be stressful and time consuming. Some accountants even prefer to maintain engagements with clients where they make no margin at all rather than have the difficult conversation about increasing fees or disengagement.
At Initor Global we have helped hundreds of UK Practices reduce their costs with our modern outsourcing solution. Our services can be commissioned on a fixed price or ad-hoc basis, helping accountants price their services competitively and with greater confidence.
In this blog we discuss the various pricing models our customers have used successfully to increase profit margins and scale their business.
What makes pricing accountancy services so challenging?
Accountants provide a range of services which require different skills and resources to deliver. Developments in accounting software, such as the automation of bank reconciliations, bankfeeds and the impact of regulatory changes such as Making Tax Digital means many of the recurring, compliance based tasks typically completed by an accountant have changed significantly. External factors such as the cost of living crisis, difficulties in recruiting new talent and increased competition mean that pricing strategies can quickly become out of date.
Further challenges arise where accountants have a diverse client base. Accountants find some clients are comfortable maintaining their own accounting records and seek specialist advice only at key points in the accounting period or tax year. Other clients are simply not interested in the mechanics of accounting and prefer the accountant to complete all bookkeeping, accounts preparation and tax filing on a recurring basis. Regardless of the services involved, accountants need to ensure they have appropriately qualified and skilled people available to deliver.
With such wide client needs, expectations and service requirements, and the impact of a fast changing external environment, it is little wonder accountants struggle to price services effectively.
In this blog we will look at how accountants are changing their approach to pricing and increasingly using outsourcing to improve profit margins, add value to their business and improve client experiences.
What pricing models are available?
Many accountants remain committed to a timesheet based approach to pricing. They provide an estimate of the cost of a service to the client and bill the amount based on hours recorded by individuals at the end of the assignment. The fee per hour is based on the skills and qualifications of accountants and other professionals based on a fixed schedule of rates.
While this may be a comfortable approach for accountants, it does present some risks. Not least where a client challenges the number of hours to complete an assignment and the obvious time lag between incurring the cost of delivering the service and billing upon completion.
The modern accountant now looks at different pricing models and takes a proportion of the fee when an assignment commences. This has the advantage of preserving cash flow and ensuring clients are fully engaged in the progress of an assignment. For recurring tasks such as bookkeeping, payroll or accounts preparation, many accountants now prefer a subscription model based on a fixed payment each month to cover the fees for all services provided.
Outsourcing services to an offshore provider such as Initor Global, can help drive down costs and help preserve profit margins.
While using different pricing models may appear to be complex, automating the billing and collection of fees will ensure the amount a client pays accurately reflects the services provided. Some examples of pricing models used by our customers are provided below.
Model 1 – Fixed pricing
Fixed pricing involves using a flat rate per hour based on the type of service provided. To calculate the fixed rate, accountants will need to understand the cost of the resource and the margin needed to achieve the desired profit. These calculations will need to be based on the type of professional involved in the assignment, from bookkeeper to qualified accountant and other experts such as payroll operatives. Indirect costs of employment tax, holidays and employee benefits will need to be included in the fixed price calculation.
No accountant bills 100% of their time, with ‘non-chargeable time’ needed for training and continuing professional development, business growth, engaging new clients and Practice management. Another factor is the qualification and experience of the accountant, with trainees and newly qualified accountants typically billing more hours than more senior accountants who may have wider responsibilities across a Practice. Typically, an accountant will look to bill anything between 800 hours and 1,200 hours each year (depending on the scope of their responsibilities).
To calculate the fixed fee, the accountant will need to understand the direct and indirect costs of employment and the profit margin required. A simple example to calculate the hourly rate for a newly qualified accountant earning £40,000 per annum with 1,200 chargeable hours is shown below.
|Direct employment costs||£40,000|
|Indirect employment costs (25%)||£10,000|
|Total employment costs||£50,000|
|Planned profit Margin (40%)||£20,000|
|Chargeable hours||1,200 hours|
|Fee per hour (£70,000/1,200)||£58.33|
Using a fixed fee approach makes quoting for work straightforward and the fee is easily understood by clients. There is also scope to improve profit margins through investment in technology and improved processes, reducing the amount of time taken to complete an assignment. Outsourcing work can provide significant reductions in the total costs with the cost of an offshore resource such as Initor Global typically being 50% less than the UK equivalent, and indirect employment costs are avoided.
Less positively, using a fixed fee approach means the risk of completing an assignment within the estimated number of hours lies with the accountant. If there are significant cost overruns there may need to be a renegotiation of the fixed fee. Tracking the progress of each assignment is therefore essential to raise awareness of any delays, additional work or cost overruns at the earliest possible stage.
Preparing clear terms of reference and engagement letters and effective communication with clients is essential to the success of the fixed price model.
Model 2 – Value pricing
Value based pricing means fees are calculated based on the value of the assignment to an individual client. Preparing a fee for the work can be time-consuming as the accountant will need to consider the specific characteristics and needs of each client before agreeing a fee. There will be some initial investment in understanding the client and the outcomes expected. The value pricing model is suitable for assignments where unique skills may be needed to deliver, such as advisory services or specialist tax advice.
Once agreed the fee will usually be fixed, which means the risk of any cost overruns or ‘assignment creep’ lies with the accountant. Positively, the value pricing model does mean fees can be prepared based on a premium because of the rich skill mix needed to deliver. The fee should be paid based on agreed milestones with a significant amount paid before the assignment commences.
Accountants believe the value based model fairly reflects the value of the services they provide to clients. It also offers scope to for accountants to develop new skills, increase their network of clients and industries, building their Practice presence and expertise in new markets. Clients prefer the model to be applied to complex projects because the fee is fixed unless the scope of the assignment is changed, helping with their cash flow forecasts and financial monitoring.
There are of course risks with the value pricing model. Understanding the scope of an assignment and the outcomes expected by a client can be challenging and requires investment from senior professionals to ensure the scope is clearly defined. Clients expect measurable results improving their financial and operational performance where a value based approach is taken. Delivering an assignment may involve intense periods of working long and unsocial hours and committing significant resources from a Practice.
Model 3 – subscription based model
With the advances in cloud based accounting, and the option for businesses to ‘self-serve’ their bookkeeping and accounting arrangements, many accountants are now implementing a subscription based model to collect monthly fees from clients. The subscription model is suitable where clients are seeking a fixed service each month, such as one or two hours of bookkeeping or a monthly payroll run. It also ensures accountants have a fixed amount of monthly income based on a clearly defined level of service.
Clients will usually set up a monthly standing order to pay their accountant and for the use of their chosen accounting software. They may choose to complete their own bookkeeping and monthly bank reconciliation. The fixed fee therefore covers the cost of software and preparing annual accounts and tax returns. If additional services are required, these costs are added to the monthly subscription amount based on a fixed schedule of rates and paid over a 12 month period.
Clients who are small business owners prefer the subscription model and the certainty it provides about their accountancy fees and the services they can expect.
Accountants also have the scope to sell additional services, particularly when their clients grow and require specialist tax or advisory services. These services require careful scoping and pricing, similar to the fixed fee model.
Model 4 – hourly or ad-hoc rates
Some accountants prefer to bill clients each month based on the number of hours they have spent working on an assignment. The services are commissioned by clients on an ‘ad-hoc’ basis and paid for based on a schedule of fixed rates. Clients are billed at the end of each month based on the number of hours taken to complete the work and the cost of the resource involved.
Hourly billing is one of the simplest pricing models to use though accountants will need to accurately record the time taken to complete work for each client using a timesheet system.
Unlike fixed pricing and value based pricing, the total fee for work billed hourly is calculated after the work is complete, so there is some risk if a client disputes a bill or refuses to pay. Some clients may not perceive any value from the services provided as they simply pay as they go. The hourly or ad-hoc rate approach is most suited to recurring tasks, such as monthly bookkeeping or the preparation of quarterly VAT returns and annual accounts.
Model 5 – Contingent fees
Billing clients on a contingent fee basis means the fee is calculated based on an agreed outcome resulting from an accountant’s work. There are strict ethical rules for accountants working on a contingent fee basis, particularly where there are self-interest or advocacy threats to an audit assignment. Contingent fees may be suitable where specific conditions exist for a client, for instance where they are looking to spread the risk and cost of an assignment with an uncertain outcome, such as a claim for grant income from the government or seeking new investment which may not be successful.
The contingent fee is only paid when the agreed outcomes have been achieved, which means there can be a significant time lag between completing an assignment and the outcome being secured. Accountants may have to commit significant resources to completing an assignment with the timing of the fee payment remaining uncertain.
Positively, accountants can use contingent fees to secure significant returns from their work. The assignment will usually involve highly skilled accountants providing specialist services. The fee does not reflect the number of hours taken to complete the assignment, but does reflect the value of the assignment to a client. So an accountant can secure a high fee based on their knowledge and expertise in an area rather than the costs involved in completing the assignment.
The main risk of the contingent fee model is where an agreed outcome isn’t achieved, and the client does not have to pay anything. Though as highlighted above, the rewards can be high for an accountant.
Which pricing model is best for my Practice?
Accountants will need to determine a pricing strategy based on the type of clients they serve and the assignments which need to be delivered. They will also need to understand the costs of delivering services and the margin of profit they are seeking.
Accountants will also need an effective Customer Relationship Management system, to track the progress of work and the number of hours billed by individual accountants. Accountants will need to identify other costs billable such as accounting software.
Some pricing models will need to be tested against the market and close competitors. The subscription pricing model is commonly used by accountants where they have high numbers of similar clients. These clients tend to be small businesses who are comfortable shopping round for the best deal or introductory offer and do not mind changing accountants regularly.
Understanding your client needs is essential when determining a pricing model. Getting to know clients’ financial performance and growth plans will ensure services can be tailored based on a suitable pricing model. High growth clients with an appetite for risk will require a different pricing model to an owner managed small business.
How Initor Global can help you find the right pricing model for your Practice
At Initor Global, we have been providing offshore services to accountants since 2006. Our customers include sole proprietors, as well as small and medium sized UK Accountancy Practices. Our outsourced tax, accounting and payroll services are suitable for all client engagements – from sole traders and micro businesses to SMEs and large companies. We offer services paid for by the hour, a half-time equivalent or a full-time equivalent employee basis.
Typically, the cost of outsourcing work to Initor Global is 50% less than a UK resource, securing immediate reductions in your cost base. With the additional capacity Initor Global brings to your Practice, you will be able to focus more on your core business objectives, whether that involves increasing your client base or offering a wider range of higher margin services to your clients. You will find that outsourcing recurring tasks such as bookkeeping, payroll or accounts preparation frees up time to help clients and understand their needs and offer high margin advisory services when your clients need them most.
Our services include:
- Digital Bookkeeping
- Year-End Accounts
- Company Tax
- Personal Tax
- Secretarial Services.
To arrange an informal discussion and a free, no obligation trial of our services, please contact us at [email protected] or visit our website at initor-global.co.uk. You can also call us on 0203 519 2121.