How to Price Client Engagements and Increase Firm Profit
Nearly half of over 6,000+ small- and medium-sized practices (SMPs) from over 150 countries that responded to the 2018 IFAC Global SMP Survey identified pressure to lower fees as their top significant challenge. The IFAC Guide to Practice Management for Small- and Medium-Sized Practices provides comprehensive guidance to SMPs, including detailed material covering firm planning, how to grow, client relationship management and risk management.
This is the second of a three-part series addressing this critical area and covers approaches to fee increases and value pricing. The first part ‘The Importance of Client Selection and Relationship Management’ features client classification and the importance of engagement letters and the third installment will highlight credit control, collection techniques and dealing with conflict.
The articles are a result of discussions at recent IFAC’s SMP Committee meetings, which included practitioners from around the world sharing their perspectives and insights on client selection and relationship management.
The most straightforward way to grow the fee base is by increasing charge-out rates. While this may be a simple process to calculate, it may prove difficult to implement. Care needs to be taken to manage clients’ expectations and they perceive an increase in value with the increase in rate. Certain engagements fees are fixed, so charge-out rates may not feed directly into the final fee charged.
The common increase to fee rates is at least the annual rate of inflation. Those firms seeking to increase rates over and above the inflation rate need to be prepared to handle inquiries from their clients as to the reasons for the increase. A simple increase in charge-out rates in tougher economic times can often become a difficult exercise, particularly if the client perceives no corresponding increase in the value they receive.
It may be useful to consider charging differential charge-out rates for different types of services and perceived value. For example, bookkeeping services may be charged out at one rate, but higher-level corporate finance advice would be at a higher rate. Airlines worked this out long ago. They have first class, business class and economy sections. Each section provides different levels of service, and the prices for each section differ markedly. Yet the passengers all get to the same destination. It’s the level of service they receive on the journey that makes the difference.
The same thinking can be applied by firms by providing the level of service clients want and appreciate. Some clients will appreciate, and pay for, first class service. Others will prefer the economy rate. The point is, the practice will have the opportunity to be flexible in the thinking and creative in the delivery.
When undertaking a client classification exercise (see the first article), the firm may determine that there are clients that may be a better fit for another firm, unless they are willing to pay a higher fee. One approach for these clients is to increase the fees charged on a progressive basis, so they may come to the conclusion the firm has become too expensive and hence, make the decision to leave on their own. However, there are risks to the strategy as the client may not pay the fee, but still expect the work to be done and it could put additional pressure and stress on employees. Alternatively, another possible outcome is that the client comes to appreciate the true value of the service the firm is providing, and the relationship improves.
Firms who wish to increase revenue and productivity must establish pricing strategies that support these goals. Traditional time-based charge-out rates do not necessarily capture value. Introducing a value pricing strategy may allow the firm to increase revenue and client engagement.
Clients like to know what a service is going to cost and what value they will receive upfront; no one likes surprises. Professional relationships can be devalued when the client knows they are being charged in time-based increments and that the clock starts as soon as they pick up the phone. This is often not conducive to building trusted adviser relationships.
Many firms use some form of time and billing software to track time and expenses, allowing the services to be priced based on time plus a margin. The challenge of traditional back office systems is that they fail to capture upfront knowledge and price for client management and engagement systems. The traditional time-for-service pricing model looks at service, cost, price and client, but rarely does it consider value. The value pricing method looks at client, value, price, cost and service.
A value pricing model is based on the perceived worth of services to the client, not the firm. It is put in place before the engagement commences. It establishes a selling price on the perceived value to the client, rather than the actual cost of the service, the market price or competitor’s pricing. Value pricing recognizes the client is the ultimate arbiter of value.
A firm should already have an understanding of the cost of providing core services dealing with clients, overhead costs and profit margin. An understanding of upfront costs is the first step.
The second step, which presents a challenge, is determining how value is expressed in monetary terms. A good starting point may be asking a client some simple questions, which require the client to think of the value of the solution. Subtle but powerful questioning will allow the client to understand how the service will help them. Issues that may be of concern to the client become more clearly defined and understood, a shared understanding forms on matters of urgency to the client and the discussion becomes more focused on the solution and not the cost.
It is important to recognize that the value metrics will be different for each engagement. Sometimes it will be speed and efficiency of service delivery, sometimes it may be the service quality, and other times it may be an innovative solution. Each engagement needs to be priced for the individual value drivers of the client for that particular engagement. Only by discussing with the client will the firm be able to ascertain what these value drivers might be. By having a shared understanding of the purpose of the engagement, challenges and client’s vision, the price can be based on the value of the solution to the client rather than the mechanics of the billable hours.
Alternative fee models include offering a yearly engagement fee, like a retainer agreement. The proposal, in addition to setting out the scope of the task to be undertaken, may include software accounting support services, unlimited phone calls and email, improved access, quarterly or half-year business planning meetings, and monthly invoicing. The focus is on offering client-focused accounting and business solutions.
Another way to increase the firm’s effective charge-out rate is to bundle services together. This way the individual fee for each service is not separately identified on the client invoice, which allows the firm to increase the fees for the entire bundle of services. This may be an easier way to market the increased fees to clients and allows a broader range of services to be offered for a larger fee. Some clients also like this arrangement as they are able to pay larger fees over a series of instalments.
Increase Recovery Rates
Another way to increase profits, and therefore achieve growth, is to work deliberately on increasing the firm’s recovery rate. Essentially this means a reduction in write-offs.
One approach is to ensure the right level of staff are working on the assignment and any team is structured appropriately based on the engagement parameters and risks. It is also essential that the client provides all of the information required on-time at the start of the engagement.
The firm can also focus on improving its productivity management. In brief, this may involve holding weekly productivity meetings with staff to check on the workflow through the office and clarify outstanding issues as they arise. Any issues with client matters can be raised in a regular and timely manner. This allows them to be addressed and resolved promptly, with less time lost on each job. This then leads to improved workflow throughout the office, more efficient completion and invoicing of jobs, and ultimately results in improved profitability per job, and increased profitability for the firm overall. Firms should consider many of the productivity tools leveraging technology available in the marketplace.
The Global Knowledge Gateway includes a number of other articles, videos, and resources on these topics, including:
- Pricing on Purpose: How to Implement Value Pricing in Your Firm, Parts I-III
- Tomorrow’s Firm and the Role of Value Pricing
- How to implement value-based billing
- Three Ways to Effectively Manage Fee Pressure
- Transforming Challenges into Opportunities: Fees Pressure
- Transforming Challenges into Opportunities: Competition
- Your Brand has Value, Time to realize its Tangible Benefits!
- Communicating Value and Quality with Price