Editor: April Walker, CPA, CGMA
Part 1 of this series, in the March issue, discussed bringing value to your team. Part 2 of the series, in the June issue, focused on showing and bringing value to clients. Now, the final part of this series provides more detail on adding value to clients, which inevitably brings up a hot debate on value pricing. Pricing tax work has a long history of confusion and frustration in accounting firms.
The terminology can be overwhelming, and CPAs are worried they might do something to violate the AICPA Code of Professional Conduct at every turn. This column clarifies some of these concepts and discusses how to transform a practice for the better.
A shift toward value pricing has been happening for decades. Last year’s AICPA Private Companies Practice Section (PCPS) National MAP Survey showed a continued gradual shift toward it. (See the table “CPA Firm Billing Practices,” below.)
Why do so many firms resist value-pricing tax services when it is has been shown to be more profitable?
Curious to compare these results, the author polled a Facebook group called Accounting Firm Influencers, and, surprisingly, almost half of the respondents claimed to use value pricing. The results are shown in the table “Facebook Poll Results,” below.
Then the author polled #taxtwitter to obtain more feedback from a wider audience. The results are shown in the table “Twitter Poll Results,” below.
The following example gets into the nuts and bolts of the how value pricing might work:
Example: A client comes to you for tax preparation and planning services. The scope of the work is annual tax preparation for a Form 1040, U.S. Individual Income Tax Return, and Schedule C, Profit or Loss From Business. The client also needs estimated tax vouchers each quarter. You meet with the client in a post–tax season meeting, where you review several tax planning ideas. You mention a SEP-IRA or other type of retirement plan the client can set up, discuss an S corporation election, and conduct a reasonable-compensation analysis. You also plan for accelerating the depreciation on business assets and explore the idea of the client’s children being hired to work in the business. The client leaves with some interesting ideas but never implements them because it is unclear who is doing what and for what price. You often might wonder whether it was worth the time of the meeting, and it seems hard to quantify what value you actually provided.
The traditional and safe method of pricing this engagement would be hourly, fixed pricing, or a per-tax-form fee. Using the most common method, based on time spent and hourly rates, the engagement would total $2,550 in billing for three hours of a partner’s time and 12 hours of a staff member’s time, giving the firm a profit margin of 67% and a net profit of $1,700.
Now take this same example and value-price the engagement. This perceived value is a combination of several factors, including the estimated return on investment (ROI) in tax savings and your competitive advantages as a firm.
In this example, you determine there would be $45,000 of estimated tax savings per year to the client for entity restructuring and maximizing business and personal tax deductions (based on the particular client situation). At this point, you determine a value-priced fee upfront to complete this work for the client of $15,000. This method of tax planning is transformational, but what does it cost you timewise? Assume that the time spent by the partner and a staff member is double, when looking at the profit margin. Even if the time the partner and staff member are spending on the engagement is doubled, the profit margin and net profit are astounding, at almost 90% (before considering other fixed and variable costs at the firm). (See the table “Comparison of Hourly and Value Pricing,” below.)
For an example of how to apply value pricing, take a look at the Pricing Tool, a resource developed by the AICPA’s PCPS that is available to AICPA members from a Trusted Client Adviser Workshop. This tool provides a strategy to appropriately price your services using the combination of results, benefits, output, skill of personnel, and risk of service. You can also read more about this pricing methodology from this blog post.
One of the common concerns often heard from practitioners is where to draw the line between value pricing and contingent fees. In the above example, the bill would not be considered a contingent fee since it is not based on the actual tax refund that the taxpayer receives.
You can find out more about the confusion around contingent fees in this Tax Section Odyssey podcast episode.
There are many benefits of value pricing:
- It is easier to manage cash flow;
- Clients understand the value of what they are getting;
- It is easier for clients to link benefits of services provided to the bill they receive; and
- It helps ease the burden on staff, with less focus on tracking hours spent on projects.
Value pricing of services at tax firms brings the utmost value to every client. Combining value pricing with tax planning is by far the most effective and efficient way to provide exceptional value and reduce the heavy toll that focusing on quantity over quality takes at a firm.
Jackie Meyer, CPA, CCA, is a business coach and president of Meyer Tax Consulting LLC in Southlake, Texas. She is also a member of the AICPA Tax Practice Management Committee and Tax Profession Better Ways of Working Task Force. April Walker, CPA, CGMA, is lead manager–Tax Practice & Ethics, Public Accounting for the Association of International Certified Professional Accountants, representing AICPA & CIMA. Ms. Walker is the staff liaison of the AICPA Tax Practice Management Committee. For more information about this column, contact firstname.lastname@example.org.