Pricing for profitability
- Publish date: 01 January 2014
- Archived on: 24 February 2016
Of all the issues that impact on practice profitability, pricing has the biggest effect.
Increasingly, clients expect fixed fees quoted in advance. For a specific assignment, assuming the price is accepted, every additional pound quoted goes straight to profit. Every pound of discount given comes straight out of profit.
If the principals in a two- or three-partner firm are asked independently to price the same piece of work, those with a pricing system will come up with a similar, or the same, fee. Without a systematic approach, there may be significant variances in the fee quoted within a multi-partner practice, and also for a sole practitioner quoting for separate, but similar assignments.
The quote may be influenced by perceptions of what the client will pay instead of what the assignment will involve. If there is a trend, it tends to be towards under-quoting rather than over-quoting, which can have significant consequences on the quality of the work and/or the assignment’s recovery.
Having first quoted low, it is then very difficult to increase the price significantly, thus perpetuating the problem year on year.
What can be done to avoid the problem?
- Check the quality of the client’s books and records wherever possible, so that you know what to expect. The client’s definition of well-maintained records may be significantly different from yours.
- Unless you are a sole practitioner, consider getting a second partner review of the prices quoted.
- If the price is dependent on the client doing certain tasks, quantify the additional fees for the firm doing each of those tasks. If it transpires that the client has not done what they promised, you can: defer the work until the client has done it; or get the client’s agreement to you doing the work for the agreed additional fee.
- If there is still uncertainty, tell the client that the price quoted is for one year only. At the end of the year, tell the client what the work actually cost and quote for the following year. It is then up to the client whether or not they accept the revised quote. If they do, you’ve solved the problem. If they don’t, you’ve lost the problem!
- Many firms now implement differential pricing for preparing tax returns. This introduces some form of premium pricing for clients who bring their books in late. While the dates and percentages vary a lot, a typical structure might be:
- 100% of normal fee if the books are received before 31 October;
- 110% if received during November;
- 120% if received during December; and
- up to 150% if received during January.
If the client delivers the books in late January every year, you still turn them around in time and then charge the same fee, why would they ever bring them in earlier? They will just be billed earlier, so there is no incentive to change.
If you do adopt differential pricing, ensure you notify all clients at the start of the tax year.
Standard pricing can be achieved by benchmarking a range of your clients’ fees, and categorising the client by:
- type of business (company, partnership etc.);
- turnover bands;
- work required (eg, annual accounts; number of tax returns; payroll for how many staff and so on); and
- quality of the records.
Then create a pricing spreadsheet with notional prices based on past fees. Future jobs should then fit into a standard price, depending on what services the client requires. If the client questions the fee, you can ask what services to remove.
The problem is that the main factor affecting price tends to be the quality of the records. The tendency is to manipulate the quality to get to the price you or the client wants. This is less likely if you use written descriptions to categorise quality rather than a straight 1–10 score.
Review your firm’s approach to pricing. Do you recognise any of the issues raised here – and if so, would the suggested solutions work for you? If not, how can you tweak them so that they do?