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In part one, we covered the merits of value pricing and how it benefits accounting firms. We also covered why hourly pricing will, for the most part, not help you grow your revenue.
This article is part two. Here we'll be covering the details of value pricing through the lens of tax planning. The goal of the series is to help you move closer to charging based on your experience and the value you provide to clients.
To start off, you need to understand what value pricing is and what it is not.
What is Value Pricing?
Value pricing goes off of the idea that you should charge your clients based on how much value you provide them with instead of how much work you do for them.
This model is used across many industries since it helps service providers demonstrate to their clients how much they’ll benefit (the value of their services) and understand the ROI of investing with you.
The good news is that for you, as an accounting professional, it's easy to illustrate how much your expertise can help them. For example, I had a client whom I previously was able to help save around $100,000 in his taxes. So next time I approached him with a tax planning proposal, going the value pricing route was straightforward.
The proposal was that you pay me $X amount upfront, and my conservative estimate is that I’ll save you $Y. This type of proposal makes it a no-brainer for clients to say yes since you are now focusing on what really matters to them.
Is it ethical?
Yes, value pricing is an ethical way to price your services — even encouraged by the AICPA.
The reason? Yes, value pricing helps accounting professionals increase their bottom line, but in a way that reflects the overall benefit of your services (hence “value”).
It's important to make the distinction between value pricing, charging a flat rate, or a contingent fee.
Contingent pricing: A contingent fee is a structure where you charge based on the amount of refund your client gets on their tax return.
Flat fee pricing: Charging one fee for your service(s) without any augmentation based on the client. For example, “we charge $500/mo for our tax planning package, regardless of who you are.”
Neither of these pricing examples represents proper value pricing structure.
Value pricing consists of an upfront payment combined with monthly maintenance fees based on a conservative estimate of how much you can help them save them with your tax planning services.
in other words, it's a fixed rate based on your estimated performance, so it is not contingent on their final tax return amount.
Packaged offerings help your clients understand the value you provide
The main objective of value pricing is to get out of the compliance rat race and increase your revenue while decreasing the number of hours you spend working. But to this, you first need to structure your services in a way that your clients can understand. Creating packaged offerings is a great way to do this.
One of the most effective ways to present packaged offerings to your clients is by creating a three-tier pricing structure based on the amount and complexity of tax strategies that you can execute for them.
This way, you can offer them a base, a mid-tier, and a high-end package. Your clients will be able to see in monetary terms how much each package saves them. And you will be able to plan how much time you’ll have to dedicate per client.
Is Tax Planning the same as Financial Planning?
This is a common question that clients have regarding tax planning. The answer is no; tax planning and financial planning are different.
Tax planning is focused only on the specific tax strategies and accompanying compliance services that you will provide. Financial planning can vary in scope and encompass a whole variety of services. It's important that you are clear with your clients and don't confuse both of these terms so that there aren’t any misled expectations.
Does it work for every type of client?
Value pricing can work for a variety of clients, but you’ll often find that the clients that will benefit the most from tax planning are higher net worth clients. The reason is that simply higher net worth clients have more to gain since, in most cases, they underutilize tax strategies that can help them.
It is possible to use this type of pricing with non-profits or clients with a lower net worth. But in this scenario, you have to be more careful about the price point you’re aiming for. Because the reality is that the lower the amount of taxes they have to pay, the more difficult it will be for them to see the ROI on their tax planning investment with your firm.
Always be careful not to price out your clients when presenting your proposal.
Value pricing is one of the best tools you have so that you can escape the endless hours that come with being a compliance service-reliant firm. It allows you to charge more while working less and not have to worry about spreading yourself thin.