One of the keys to success with Client Accounting Services is profitably pricing engagements.
There are three primary options:
- Fixed Fee Pricing
- Hourly Pricing
- A Combination of Fixed Price and Hourly
Fixed Fee pricing is how current conventional wisdom says all CAS firms should bill their clients. CAS firms should “value price” and charge clients a premium price that is well in excess of what its price would be if it charged hourly for its services. By automating services and billing for expertise not time, firms can come out ahead. However, while specialized niche firms can make out quite well using value-priced fixed fees, by mathematical definition not every CAS can price above the industry average.
More pragmatically, Fixed Pricing introduces the concept of moral hazard. Moral hazard is the idea that if a customer is paying a fixed fee, then it has incentive to maximize the benefits it receives for that fixed fee. There is an almost unlimited amount of work that an outsourced accounting partner can provide to a client. Once a CAS provider proves itself as skilled, clients ask for more and more support. Scopes of service naturally expand. The interests of the firm and its client are not aligned.
Hourly pricing is the traditional “old school” method firms use to bill clients. It is simple, billing for the time it takes to deliver services. If billing rates are properly set and staff utilization rates are maintained, then target profit margins naturally follow. Clients will meter themselves and largely eliminate the problems of scope creep.
However, CAS clients these days are increasingly accustomed to fixed pricing. They may request “not-to-exceed” pricing or may want advance notification if a monthly cost budget is being approached. Even if proactive billing management is not required, clients may be upset to receive surprise bills. Although hourly pricing is simple and easy from the firm’s perspective, it may be inefficient to administer. Furthermore, there is no incentive to become more efficient with accounting services as efficiency reduces profit to the firm. The interests of the firm and its client are not aligned.
The third option is a hybrid model that combines fixed fee and hourly pricing. For services that are driven by transaction volume, firms may price on a fixed fee or on a per-transaction-per-month fee. For services that are consultative in nature or that require services above and beyond coding transactions, firms charge hourly. Clients with simple needs and streamlined operations pay a low, relatively fixed price. Clients that have complicated needs and inefficient operations pay a higher, variable price based on their unique wants and needs. In this case there is alignment of interest in streamlining core operations for the client to reduce the number of billable hours, and for the firm to become more profitable on the fixed price portion of its fees.
Note that not all transactions are created equal. A bill with 10 lines with multiple GL accounts as well as Classes and Locations is much more complicated to account for than a bill with 1 line with one GL account. The fixed fee or per-transaction fee needs to account for the intensity of transactions, not just the number of transactions. SmartBooks Genie provides reports detailing the intensity of transactions as well as the number of transactions.
In my decade-plus of experience running a pure-play CAS firm, I have concluded that the hybrid option is the best. It allows clients to self-select which kind of pricing they want, and best aligns the interests of CAS firms with their clients.
Make sure to join me in my webinar with Insightful Accountant; you can register for "Managing your Quality in Your Client Accounting Services" on May 27 at 2:00 p.m. Eastern Time here.
Author Bio: Cal Wilder is founder of SmartBooks Genie, an application powering client accounting services practices. Integrated with QuickBooks, Genie automates accrual accounting, monthly close management, custom reporting and dashboards, task management, and scope of service-based pricing. Genie was born out of the challenges of scaling Cal’s original client accounting services business, SmartBooks Services, from zero to forty people in 7 years.