Section 1.2: How Modern Accounting Firms Set Prices

 Blake walks through how to move an existing practice to subscription pricing: pick the services that fit, segment clients, and build three simple pricing tiers. CPA Logan Graf shares how he designs his packages, gets most clients to pay 100% upfront, and raised prices by over 50% for underpriced clients while losing only a handful.

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Creators and Guests

Writer

Blake Oliver, CPA

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What is Building a Sustainable Accounting Firm?

This audiobook is more than a guide to building a sustainable accounting firm; it's an invitation to rediscover why you became an accounting professional. It's a roadmap for stepping off the transactional treadmill and into the transformation economy, where relationships thrive, lives change, and legacies are built. Professions aren't transformed by sweeping mandates or top-down reform decreed by professional bodies. They are remade by bold individuals who dare to reimagine what's possible. As you listen to this book, I encourage you to embrace the challenge. Be the change you seek for your firm and your profession. Because the future of accounting isn't something to observe—it's something to build. Building a Sustainable Accounting Firm illuminates the path forward. You'll meet some of the pioneers who are blazing the trail of new business models that challenge the fossilized status quo, while leaving behind maps for the curious. Whatever the design, the bold leap into the unknown is yours to create. One day, posterity will thank you.

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Blake Oliver, CPA: [00:00:00] 1.2 how modern accounting firms set prices. Introduction to subscription services. Okay, I know what you're thinking. Everything we just covered about subscription pricing in the last chapter with Ron Baker sounds great in theory, but how do I start moving my clients to a subscription model? They don't like change and they can be cheap. I don't want to lose good clients just because I've changed my pricing model. All valid questions. But here's what I've learned over my career. Many accountants make it way too complicated with hourly billing or any other method they use to charge clients. It's way too detailed and it's more work than it's worth. Subscription pricing is so much simpler and less stressful. You want to have enough pricing tiers to give each client a fair price, but not so many tears that it's too hard to keep track of all the options you're offering clients to pay for your valuable services. For instance, you might use only three standard pricing tiers for individual clients and three tiers for business clients. In just three years. Logan Graf, founder of the Graf Tax Company PLC, has built a thriving subscription based accounting practice. And he's convinced most clients to pay him 100% up front. He has a minimum fee of $1,000 to do a return. At the time I spoke to him. And he's blowing a lot of repairs out of the water at that price. Graf never bought into the hourly billing model. So when he started his firm, he charged clients in 12 monthly installments. But the administrative challenges got too large as he's grown so fast.

Blake Oliver, CPA: [00:01:36] So he's found it more effective to charge clients for the full year in advance. And he doesn't even need to offer a discount as an incentive for full payment up front. Clients love the convenience of not paying another invoice at tax time. More on that in a minute. Getting started on the path to a subscription based accounting firm. Of course, you probably don't have the benefit of starting from scratch. You've got to make a change. Here's how to get started. Go through the list of services you offer tax prep, bookkeeping, financial reporting, consulting, tax planning, etc. then figure out which ones could be most easily turned into subscriptions. Most likely it will be services like tax returns, tax planning and bookkeeping that produce a clearly defined output and deliverable. Services that make good candidates for subscription pricing. On the other hand, consulting is more challenging to deliver as a subscription service because there's more analysis and opinion, the deliverable is more likely a final report or set of recommendations. So you might want to hold off on that. But that doesn't mean you can't turn it into a subscription. It's just a little more difficult. Next segment your client base by type of service, say bookkeeping or based on headcount and revenue. You might also want to segment by industry. Next, you create subscription tiers and group together the services that you want to add to each tier. For instance, your basic tier might include write up work quarterly, plus a tax return yearly for that package.

Blake Oliver, CPA: [00:03:14] You would charge the client every quarter. Then you could have a more advanced tier in which you're also providing monthly bookkeeping, plus a tax return and two planning meetings throughout the year. Also included in this tier would be the ability for clients to call you at any point throughout the year to ask questions. Finally, you can have a very expensive premium tier. Call it CFO, in which clients have your cell phone number. Be sure to add a second number so you don't have to provide your personal number, and they can call you any time throughout the year. This tier is a complete concierge service. It costs a lot more than the other packages, and people purchasing other packages won't feel like they get what's in the CFO package. To determine which package is best for each client, you can back into the answer. Look at how much you've charged each client in recent years, and then see which of your packages best suits their needs, and which yearly price is close to what you were charging them before, or rather, what you should have been charging them. So you take your new model and see how many in your current client base will slide into it. Some will fit very easily and some won't because you probably underpriced them significantly. That's where you will have discussions with them. Hopefully a good percentage of your client base 80% will fit into one of these packages. About 75% of grafts business is tax, and the remaining 25% is split between bookkeeping, accounting and advisory services.

Blake Oliver, CPA: [00:04:43] Here are the three packages and pricing tiers that graph tax offers. All paid in advance. Note moving to a fixed fee subscription model does not prevent you from being flexible on pricing. Package compliance includes tax return prep, tax return review. Video. Summary. Tax newsletter. Digital document storage price. Personal return start at $1,200. Business returns start at $2,000. S Corp or partnerships package collaborative includes compliance package everything in lower tier described above. Assistance with IRS notices. Year round access to your CPA for quick questions via phone, email or virtual questions. Do not involve in-depth projections or scenario work. Price not published package Concierge Ultimate hands on package for S Corp owners. Includes collaboration package described above. Mid-year and fall tax projections. Annual tax planning meeting in the fall. Payroll assistance price not published. Creating a table with different levels of subscription packages for bookkeeping and tax services is a great way to structure your offerings. Here's an example of how to categorize these packages into three tiers basic. Advanced and premium. Basic package. This is the most straightforward package, offering essential bookkeeping and tax preparation services. It's priced to be affordable for smaller businesses with simpler financial needs. Advanced package. This package offers more detailed financial tracking and reporting. Sustainable for growing businesses with more complex financial needs. It includes quarterly tax estimates plus optional additional services like accounts payable and payroll management for an additional fee. Premium package. The most comprehensive package offering a full suite of services including advanced accounting, strategic tax planning and business advisory services.

Blake Oliver, CPA: [00:06:52] This targets established businesses requiring in-depth financial management and strategic report. The price range column indicated with $1 sign, $2 signs or $3 signs is a relative representation of the cost of each package. The actual pricing will depend on various factors like the size of the client's business, the complexity of their financials, and the level of service required. This tiered approach allows clients to understand the range of services offered, and to choose a package that best fits their business needs. It also provides a clear structure for your firm to categorize clients and offer them the most appropriate subscription package. As Graf told me on my podcast recently. He tries to design his packages so that the middle package is the most attractive one and requires the least amount of work. I try to maximize profits and minimize capacity with that middle package, noted Graf. Otherwise, if you put too much into the middle package and everybody signs up for it, you have a lot of work to do, he asserted. Graf said he designs his pricing to make it seem like a lot of value to the client for something that won't cause potentially that much more work, he added. In terms of which package is best for each client, Graf said. You can back into the answer. Look at how much you've charged each client in recent years, then see which of your packages best suits their needs. He said you should then ask yourself if that amount, on an annual basis, is close to what you were charging before, or what you would like to have been charging them.

Blake Oliver, CPA: [00:08:22] Essentially, Graf is doing pricing anchoring in which the highest tier concierge has all the bells and whistles and is priced accordingly. Some people want the all inclusive option, but it's overkill and too expensive for most clients. But having that very expensive option on the menu that is clearly visible on the website makes the other services seem like a bargain by comparison. Again, take your new model and see how many of your current clients slide into it. There's a good chance 80% will fit appropriately, and for the remainder, you need to have a discussion with them because they've been way underpriced. There's a good chance you, like many accountants, have been Underpricing your clients going through this tiring exercise will help you see which ones and by how much you might end up needing to double your prices. This is the hard part. You have to change your pricing and not wait until tax season starts. You should announce your price changes several months before, if not earlier. You must tell clients why you're changing your pricing and how it will improve their experience working with you. And the key thing is to get clients to commit to it with their pocketbooks. Graf has found a sweet spot in the market for people with slightly complex tax situations who don't want to use a generic solution like TurboTax, but also don't want to go to a midsize firm, or they will have to pay twice as much.

Blake Oliver, CPA: [00:09:43] Graf can run a profitable small firm, charging 1000 to $1200 for people with somewhat complicated business and individual tax situations. They'd rather pay $1,200 to Graf's firm to take care of everything than pay $600 and spend all day doing TurboTax, if they could even get through it. Asking clients to pay 100% upfront may sound too aggressive for you, but you should at least have the confidence to ask for 50% upfront. Because there are so many CPAs out there getting 100% upfront. And here's the kicker. Once clients have paid you up front for their returns, they have some skin in the game and are much more likely to get you the documents you need on time. It's all about supply and demand. Noted graph. He has steadily increased his tax return pricing to about $1,200 from $450 when he started the firm three years ago. I don't really want to add another tax client, but I will at this price. Unfortunately. Noted graph. Too many accountants don't follow the rules of supply and demand. They're more likely to base their pricing on what the guy down the road is charging. By the way, graph gets many of his clients from a local firm that has maxed out their capacity. They start at $1,500. So I look like a steal by comparison, he chuckled. Gut check your pricing. During tax season or when preparing a client's return. Graf said he'll make notes to himself about how difficult or easy the return is and how cooperative the client has been.

Blake Oliver, CPA: [00:11:15] I'll look at what I'm charging them and ask myself, was this client worth it to me at this price, considering the amount of work I'm doing and the emotional energy expended, said Graf. Are they a difficult client? Do I have to follow up with them a lot? Do they follow instructions? Well. If those factors don't line up, then I'll write down a price that would have made sense for me to justify working for them and compare that to what I'm currently charging them, and then bridge the pricing gap for the following year, Graf said. It's best to make these notes to yourself when you're feeling the pain the most and the engagement is fresh in your mind. In 2022, Graf said he had to increase prices by over 50% to a large tranche of his underpriced clients. He emailed all of his clients in late October, announcing the higher subscription prices. He also told clients they were now expected to pay 100% up front to have his firm handle their tax returns going forward. Clients were asked politely to respond within two weeks if they planned to discontinue with Graf's firm. If they didn't respond or cancel within two weeks. He told them the assumption would be they're planning to continue with the new pricing and payment terms. Only two canceled outright and only a few others ignored the request, Graf said. For the remainder, he immediately sent them his proposal using his proposal software, which they could use to accept on the spot and submit payment online.

Blake Oliver, CPA: [00:12:37] Even better, one new client can typically replace two underpriced clients who leave. That makes you way more efficient, he said. Raising prices without angering clients Graf admits he hasn't ripped the band aid off completely. It's hard to tell people you care about that. You're raising prices significantly, he said. I'll admit it's natural to fear client blowback, and that clients will leave and you'll lose revenue. However, I rarely hear about firms in good standing that raise prices by a reasonable amount and still have a negative impact on their bottom line. In the few times that's happened, the firm was drastically undercharging clients and they raised prices by a large amount all at once. You have to communicate what you're doing and keep raising prices gradually. It's like boiling a frog. If you throw a frog in a pot of scalding water, it will jump right out. But if you started in tepid water and keep turning up the heat gradually, it won't seem to mind and will stay in the pot for a long soak. No matter how hot it gets. Conclusion. In most cases, said Graf, clients will understand where you're coming from unless you hit them with a huge increase all at once after not raising prices for 20 years. But the more you communicate with them in advance, the less friction you'll face. Graf has sample email templates you can download to announce price increases if you follow him on X.