Section 1.1: Changing the Revenue Model for Accounting Firms

Drawing on his conversation with pricing expert Ron Baker, Blake explains why accounting firms should move past hourly billing and even value pricing to a subscription model that prices the client relationship rather than the scope of work. He compares the idea to concierge medicine and Design Pickle’s unlimited design service, and also covers niching, client portfolios, and charging a percentage of client revenue. The goal is a better client experience, less staff burnout, and a firm worth far more when it’s time to sell.

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Creators and Guests

Writer

Blake Oliver, CPA

Founder and CEO, Earmark CPE

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] Section one revenue 1.1 changing the revenue model for accounting firms. Lessons from the medical profession and graphic design firms focus on outcomes, not on how long it takes you to do the work. People who know me will tell you I've never been a big fan of the status quo. For instance, I questioned the hourly billing model for my earliest days in the accounting profession and was an early adopter of the subscription business model. Doing so changed my life in so many ways, and I want to share what I have learned with you. I started my own bookkeeping and accounting firm early in my career. From day one, we charged clients a fixed fee on a monthly recurring basis. We didn't have to unlearn the hourly billing model, which enabled me to build a thriving firm very quickly and sell it quickly to. People seem disappointed when I tell them I don't have a secret sauce or grand theory of how to build and sell a successful accounting practice at a young age. As I discussed at the outset of this book, I didn't come from a traditional accounting background, so maybe that made it easier to think outside the box and find a way to get things done as efficiently as possible. I call myself a lazy CPA. My colleagues laugh, but I think being a lazy CPA is a compliment because it means you don't waste a lot of effort. You get home at a reasonable time every night and you're working smarter, not harder.

Blake Oliver, CPA: [00:01:26] Once freed from the hourly billing trap years ago, I came across the book Implementing Value Pricing A Radical Business Model for Professional Firms, by Ron Baker. It filled in a lot of the blanks that I had filled in myself simply by intuition. In many ways, I wish I could go back and start my business again. Armed with Baker's knowledge, if you don't know Ron Baker, he is arguably the profession's leading authority on accounting firm pricing. He is the founder of the very Sage Institute and host of the radio talk show The soul of enterprise. When Baker was a guest on my podcast, I asked him what the term subscription economy meant to him and how accountants could incorporate that model into their firms. As mentioned earlier, the term subscription economy was coined by Tianzhu, the founder and CEO of Zuora, the software company that runs a platform for subscription based businesses. According to USB bank projections, the subscription economy is projected to reach $1.5 trillion by 2025. And if you look at most of the unicorn companies, private companies with a $1 billion or higher valuation out there, they're all subscription based. And we're just seeing a tsunami of subscription based businesses. Some say that within five years you won't own anything. You'll subscribe to everything. But I don't believe that. Instead, in the near future, I think you will have the option to subscribe to everything, whether or not your firm does anything with this model.

Blake Oliver, CPA: [00:02:57] It will be confronted with it because your competitors will be offering it to their clients and potentially to your clients. When we hear the term subscription economy, it reminds me of the old magazine business. Or more recently, giant public companies such as Netflix, Amazon Prime, and Disney Plus. But I run an accounting firm. You're thinking, what does this have to do with me? Plenty, it turns out. Let's say you're a traditional firm that still bills by the hour. Senior partners obviously bill out at a much higher rate than first year associates. But either way, your billing clients after the fact, you complete the work at the end of the month or quarter, you tally up your hours and send your client a bill and hope they're happy enough with the outcome to pay it promptly. If you look at the evolution of our profession's business model, hourly billing is pricing based on inputs, noted Baker. In other words, you're charging for the inputs, such as how many hours did it take and what kind of activity was it? When Baker entered the profession several decades ago, he said there was a hybrid model in which accountants gave a fixed price, at least for the audit work, sometimes even the tax work, if it was bundled. That's charging not for inputs but for outputs, he recalled. Here's a defined scope of work. Here's what we're going to do for the price that we're charging you, he noted.

Blake Oliver, CPA: [00:04:19] If something comes up that's outside of that defined scope, of course we're going to have to go to the Department of Paperwork and get a change order and have it approved by six different levels, etc. then value pricing came along. According to Baker, we were taught that you don't price the output, you price the client because the value is subjective. Every client is different, he said. They have their own value drivers, since values are considered contextual, explained Baker. So depending on what the client is trying to do, you price the client. But Baker said the subscription model is different because you're pricing the portfolio and you're pricing the relationship, not the client. So what's the difference between pricing the client and pricing the relationship? According to Baker, there's a huge difference. If you look at how firms have implemented value pricing, he said. We're still pricing the inputs. And he finds that frustrating because that was never the intent. Instead, Baker believes the intent was for CPAs to price the client and the transformation that resulted from their work. But CPAs didn't go far with that mindset. So when you look at three options that firms give hourly value and subscription, it's all based on scope of work, said Baker. I think subscription can blow that up, and it's not based on the scope of work, because the services are just a means to an end. That's not where our value lies, as CPAs, noted Baker.

Blake Oliver, CPA: [00:05:46] We are so much more than the scope and some of our services. We don't provide more value by adding services and piling them on brick by brick. Our real value comes from transformations you provide to your client. And that's what the subscription economy insists you look at. I realize some of you may be scratching your heads a little. I get it. When I think of pricing based on services, I think to myself, we're going to do your bookkeeping right up every month. And there's a fixed monthly price for that. Or if I'm going to do your bill pay plus payroll plus bookkeeping, then it should all be packaged into a fixed monthly price. And maybe I can add a tax return or a little bit of advisory work. That's a new monthly fixed price structure. So that's what Baker means when he's talking about pricing the scope of the services. What accountants can learn from the medical profession. According to Baker, this is something each firm must design on its own. And that's where strategy and positioning come in. First, he believes it depends on what your goal is. Do you want to be a lifestyle firm, he asks. Do you want to firm that you can scale and grow? You can still have pricing tiers, but Baker said it's helpful to think about the medical profession and the difference between direct primary care physicians and concierge doctors. As Baker described, the concierge doctors charge a real premium.

Blake Oliver, CPA: [00:07:10] You subscribe to the concierge practice for X thousand dollars per year, and you're covered for any care. The doctor is qualified and able to provide as a direct primary care DPC provider. You're not going to visit the DPC provider to get oncology treatment for your cancer. You're not going to get cardiac surgery from your DPC provider. You're not going to do all the things that they would refer you to a specialist to do. You're only going to get something that a DPC provider can do. As Baker continued, you just get to move to the front of the line and have far fewer administrative hassles before, during, and after your care. Many people are more than happy to pay a premium for that kind of healthcare experience, he added. If you think about it, Baker said, it works the same way for accountants. The goal is to tell clients, hey, whatever you need done and that we're capable of doing, you're covered. If you get audited, you're covered. If you get a notice from different states, you're covered. He. Related client accounting services. Saas. Taking this a step further, Baker said you could tier your services for a smaller firm that does CAS tax and some advisory. He said you could tell clients in the first tier that you'll do anything they need, as long as it's included in their CAS scope of work and core competencies. Baker said we get too caught up in whether we spend six hours, 8 hours or 10 hours on an assignment for a client, and if it was ten hours, then we feel we lost money.

Blake Oliver, CPA: [00:08:44] But if it took only six hours, we feel we made money. But Baker believes that's faulty logic. Whether it takes 6 hours or 10 hours to get the work done, he argues, it doesn't change the cash flow by one penny. The right way to look at it, said Baker, is to take care of the client, give them peace of mind and give them absolute convenience. I promise you, they're comparing you to Amazon Prime, Disney+, Hulu and Netflix, and they're expecting it to be similarly easy to do business with your firm, he added. Baker believes the client experience has suffered greatly in the accounting profession. According to Baker, the average net promoter score NPS in the accounting profession is down to 23, compared to 56 for Costco, 59 for Porsche, 62 for Trader Joe's, 72 for Apple, 73 for Amazon, and 97 for Tesla. I found that many accountants are not unfamiliar with NPS. If you're not, just know it's a widely used market research metric that asks respondents to rate the likelihood that they would recommend a company, product or service to a friend or colleague. Scores are on a scale of -100 to plus 100. Tallying up all the company's fans, that is promoters and subtracting the detractors. So weighing in at 23 puts the accounting profession right above cable companies and internet service providers, and slightly below airlines, health insurance and public utilities, and way below most other major industries.

Blake Oliver, CPA: [00:10:17] We need to do better. From where I sit, the problem stems from the fee for service model. Just as we see in corporate health care, with overworked doctors unable to spend quality time with patients, the only way for doctors and administrators to make more money is to provide more services in the medical profession. Doctors rush you in and out of the office to get you checked off their list. They're not developing a relationship with you. They're not spending time with you and they're not able to provide quality advice. We see that in accounting too, especially in firms that mostly do tax returns. It's impossible to have a relationship with clients when you've got hundreds, if not thousands of returns to finish and not nearly enough time to look them over carefully, or to suggest ways for clients to minimize their tax hit for the next year. You're just trying to get them done so you can bill for them when you're using an hourly transactional model. But in a subscription business, you can spend more time with each client because you've priced in the capacity. I know one of the big objections to a subscription model is mindset. If I'm not billing hourly, how do I make sure that my team doesn't get completely overwhelmed? How do I deal with the capacity problem? In other words, if I sign up a client to the subscription model and they start asking for the world, what happens if I didn't price it in? According to Baker.

Blake Oliver, CPA: [00:11:39] They can't ask you for the world because they can only ask you for things that you're competent to do. By that he means you can only guide your client through 1 or 2 transformations in a year anyway. What irks folks like Baker and me is when you're going through a client's income statement and you see consulting expense paid to another firm and you realize the client has paid the consultants five times more than they've paid you. Sound familiar? When you ask the client what the consulting fees are for, they typically reply, well, we hired so and so to help us with it consulting, cash flow analysis or succession planning. And then when you tell the client that you offer the same service, probably for less, the client replies with surprise, oh, you guys do that? Well, whose fault is it that the client didn't know? It's your fault. Exclaimed Baker. According to Baker, it's backward thinking to worry about your capacity constraints. Plus, you're limiting the number of clients that you take in. For example, he said, the average primary care physician in the United States has a panel of 2400 patients. And he said, that's why you only get to spend five minutes with your primary care physician. They've got to see 50 or 60 patients a day, and they're on that fee for service treadmill.

Blake Oliver, CPA: [00:12:54] Accountants are actually on the same fee for service treadmill, noted Baker. I don't care if you're billing hourly. I don't care if you're value pricing. You are on a fee for service treadmill. Baker believes that we ultimately get paid for what we do to the client, rather than what we do for the client. Baker shared this example with my listeners. Let's say you do a business client's tax return every year and notice the company has added ten employees. If you're on the value pricing model, you must tell the client that the scope has changed and that you have to go back to the department of Paperwork. As Baker likes to call it under the subscription model, he said, it's very simple. If you need it and we can do it, you're covered. We're going to get it done. And if we can't do it, We've got specialists in our social capital network that will refer you to. And we'll quarterback the relationship with them. As Baker noted, we've just created a bureaucracy with value pricing that the subscription overcomes. Let's go back to the medical profession. As Baker noted earlier, the average doctor in the United States has 2400 patients. The average DPC physician has 600. The average concierge doctor only has 50 to 100 patients. They can afford to serve a much smaller patient pool because concierge medicine charges patients 5000 to $10,000 a year or more, regardless of how often or infrequently a patient sees them.

Blake Oliver, CPA: [00:14:22] I can tell you from personal experience, my parents recently signed up for concierge medicine and they love it. They can get an appointment with a specialist within days instead of weeks or months. The concierge doctor's office will not only take care of everything they need when they're on site for an appointment, but we'll also book follow up appointments for them and make referrals to experts. In other words, the concierge doctor's office will do all the annoying administrative stuff that has been pushed onto patients, which is a much better experience for the patient, and most will happily pay for it. Concierge medicine will dramatically change the way we deliver health care in this country, noted Baker. We even have Amazon moving into it. Like Baker, I believe the shortage of doctors and the lack of quality time they spend with patients has dramatically increased burnout among doctors and greatly increased the adoption of concierge medicine, which is essentially a subscription model. According to Harvard Medical School, fees spent on concierge medical care are expected to more than double from $6.1 billion in 2022 to $13.3 billion by 2030. The accounting profession is poised for a similar reconciliation because we bill by the hour, and we're on a fee for service treadmill. We're burning out people and eating our young. Related Baker. We are eating our young because we put them in a fee for service model, he noted.

Blake Oliver, CPA: [00:15:42] General practitioners are in short supply, too. But I think the DPC and concierge models are what's going to bring more people into that medical practice, he added. My take is that the subscription based model could bring more people into the accounting profession if they're allowed to focus on quality care for their clients and help deliver transformations, rather than just churning and burning. It's a much better quality of life, and it allows them to help people, which is why most of us go into this profession in the first place. Baker agreed with me that we must do away with the 150 hour rule that we complain about all the time, but doing away with that rule doesn't solve the problem. Once you pass the CPA exam and start working in larger and more prestigious firms, you realize this business model sucks, noted Baker. It's the same today as it was when I joined the profession back in 1984. I couldn't agree more. That was my least favorite thing about joining a big firm. I went in as a manager after I sold my own practice, and I had to account for every quarter hour of my time. The hardest thing for me was not having enough time to make a meaningful difference for the clients who needed my help the most. I had to be so miserly with my time, especially with startups and other smaller clients that needed my help the most.

Blake Oliver, CPA: [00:16:58] Ask any professional why they became a doctor, lawyer, CPA, or actuary, and two thirds of the time they'll say it was to help people, noted Baker. Well, you can't help people if you have 1000 clients or patients. Relationships don't scale. Baker said that according to Dunbar's number. See sidebar. You can only have relationships with about 150 people. You shouldn't expect knowledge workers to handle more than that. If we want to move to guiding clients to breakthrough transformations, which is the highest point in the value curve, said Baker. Dunbar's number. Dunbar's number was first proposed by British anthropologist Robin Dunbar in the 1990s. He found a correlation between primate brain size and average social group size. By using the average human brain size and extrapolating from the results of primates, he proposed that humans can comfortably maintain 150 stable relationships. Dunbar believed the social limit is a direct function of relative neocortex size, and that social limit in turn limits group size. According to Baker, the issue is not about the services or the paperwork, the financial statements, the bookkeeping or the number of transactions clients have. He said the only thing that matters is that you're taking them from where they are today to where they want to be in their desired future. We can do this over and over from the moment they're born to college planning to estate planning from womb to tomb. Not many other businesses can do this, but accountants can do it, he said.

Blake Oliver, CPA: [00:18:31] I strongly believe that moving to a subscription model is not just good for the firm owners and the partners. It's also really good for the staff. I agree with Baker that the accounting profession's business model, the hourly service fee, is our main problem. Cranking out hour after hour and moving from one job to the next is not fun. It's not exciting. It's one of the biggest impediments to attracting talented young people to the profession. Being stuck in that business model is especially demotivating for a young accountant, because their generation is especially motivated to make a difference in the world. I did too, when I was early in my career, recalled Baker. I wanted to know what was beyond the audit, but it never got that far. I was told to move on to the next job, get the work done, and not to have any conversations with the client about what we can do for them beyond the audit or the tax return. It was simply move on to the next job, move on to the next job, he added. In my experience, this mindset is hypocritical if you think about it. We say we care deeply about our client relationships and want to be a client's most trusted advisor. But we're obsessed with monetizing every transaction and with moving the work out the door as quickly as possible. So there's this disconnect in the business model between what we say and what we monetize.

Blake Oliver, CPA: [00:19:50] As you'll hear throughout this audiobook, a subscription model cleans up that disconnect and aligns it with what most accountants want to do, including new accountants, help clients achieve their dreams and reach their potential. That is, achieve what Baker would call a transformation. Practical. Next steps. Portfolios of clients. Baker's book Time's Up, the subscription business model for professional firms, introduces the notion of creating portfolios of clients, segmenting them into different portfolios, and then pricing them by type of client. Later in this section, we'll show examples of client portfolios you can incorporate into your practice. I found that Baker's approach is fairly easy to implement with the data that most firms have on their clients. Let's say you're doing a lot of accounting, bookkeeping, or tax work. You can bucket your clients into different tiers such as easy, medium, and hard. Then it's a matter of assigning them a price and aligning that price with the revenue you're bringing in. Today, you could look at what you did last year in terms of revenue on a fee for service basis, and figure out how to create a subscription plan that approximates the same amount of revenue. Baker believes this model gives us more pricing power. If we go to the market with a common offering, say Cass advisory or tax, it's a common offering and you'll command a common price, he noted. But if you go to market with an uncommon offering, what Walt Disney would call a plus offering, and we continue to plus it like concierge doctors do, then we can command Uncommon pricing.

Blake Oliver, CPA: [00:21:29] Baker said it's not unrealistic to take your prices and double them, triple them or even quadruple them with a plus offering because you're giving clients convenience and peace of mind, just as concierge doctors do. According to Baker, the more you're niched, the more pricing power you can command. My friends, accounting practice serves nothing but dentists and only a certain type of dentist from a certain size practice, noted Baker. He charges them all the same because everything's on the rails. In my own experience, breaking down geographical barriers can create a huge competitive advantage. You can access the best talent anywhere to work for your firm, and you're not requiring them to relocate to work for you and serve your clients. But too many firms of all sizes are still just regional, and they're only locally sourcing clients and talent. As Baker noted, with today's technology, you can be based in Youngstown, Ohio, and serve clients in all 50 states. And that makes it easier to serve a niche. Baker said his colleague with the dental specialty gets all of his clients via referrals. He said he visits all the dental schools he writes in dental publications. He speaks at all of the dental conferences. Everybody knows him, said Baker. From the people who sell equipment to the dental practices, to the insurance people. As a result, Baker said he can be very, very picky about who he brings on and can charge aggressively.

Blake Oliver, CPA: [00:22:55] In my experience, many larger firms think all you need to develop a niche is a partner who specializes in just one area, say business valuation or auto dealerships. Meanwhile, they'll have a partner who does everything to cover their bases. The thinking is you acquire all the expertise you can so you can provide any service to a client. But as a client, it's problematic. You never really know what you'll end up paying to have your needs met. So the soup to nuts approach is flawed. Myth of economies of scale. As with so many things in life, bigger is not necessarily better. As Baker would argue, there is a misconception about economies of scale in the accounting profession. That is, the bigger we are, the cheaper we can do things. There are no economies of scale in this business, he said. It's a human capital business, for crying out loud. There's also a lack of collaboration because those big firms are nothing really but lots of silos, all using the same logo in office space, he added. According to Baker, the subscription model solves the silo problem because now the client is at the center of the business and the firm can circle the client and do whatever they need from whatever area of expertise they need it from. Case in point, I recently did a webinar series with Hector Garcia, CPA, called Build a Focused Firm.

Blake Oliver, CPA: [00:24:16] Garcia told me something I'd never considered before. He calculated that if you take the gross domestic product GDP of the United States and divided by the number of accountants in the country. You get something like $19 million in revenue per accountant. That's how much potential revenue there is for each U.S. accountant, on average. So by that logic, you can calculate the total of all the accounting fees in the U.S. as a percentage of GDP, and it comes out to roughly one half of 1%, 0.5%. In effect, U.S. businesses pay on average 0.5% of revenue to get their accounting done. Suppose we base fees on a percentage of client revenue. If you're a large firm, you could do a subscription model in which you charge clients a fixed percentage of their revenue. It's similar to the assets under management AUM model that wealth advisors commonly use. Wealth advisors don't charge for every single service they provide for clients. They charge clients a fixed percentage of how much in assets they're managing for them, typically 1%. When the client's portfolio grows in good years. The investment adviser earns more in down years. When the portfolio shrinks, they earn less, so they have plenty of skin in the game. Beautiful. It has nothing to do with how much time or work they put into managing those assets. You can see investment advisors are very happy with the AUM model. They're making a good living and enjoying life more than most accountants.

Blake Oliver, CPA: [00:25:44] Why don't accountants take the same approach? Skeptics will say it might impair independence. For instance, you couldn't charge a revenue percentage and include the audit. Sure, you could take a page from Eisner Ampner, spin out the attest function, do that under separate cover, and then maybe do everything else based on these different models. But you could do the tax work. You could do the accounting services, bookkeeping and advisory work. You could do it all for just a percentage of revenue. You could tell clients up to this revenue threshold, it's 2% of your revenue. You might charge a little more than 2% for the smaller firms and then reduce the percentage as they get bigger. The other reason I bring up the percentage of revenue model is that I used it to gut check my own pricing when I had my bookkeeping firm. I wasn't advanced enough to have this pricing model in place officially. Still, when I did my analysis for each client and looked at the final number, I would take the annual fee. I was charging each client and divide it by their revenue to figure out my fee based on a percentage of their revenue. I did that because I knew how much they were spending proportionally on accounting and bookkeeping services. That's probably what their CFO and controller were looking at. Not only does the percentage of revenue model grow with your client's business, but it can also be automated. You don't have to deal with the emotions and complexity of pricing clients.

Blake Oliver, CPA: [00:27:05] Another way to deal with capacity is to follow the model of design. Pickle, an outsourced graphic design firm in my hometown of Scottsdale, Arizona. They offer unlimited graphic design services to small businesses for a fixed monthly fee. The monthly fee start as low as a few hundred dollars per month for unlimited design services. I know it seems like they would get crushed under this model, but clients can only submit one work order at a time, and that's how they deal with capacity. Each client gets a designer from design pickles, pool of designers. So you put your work order into the online system at any assets you have, and then your designer works on your job overnight in the Philippines and they come back to you. That's how they manage capacity because they know that if they have X clients, there are only so many work orders that can come in daily. Design pickle just needs to have enough people on staff to make progress on those jobs every day. I thought that was such a brilliant way of managing capacity and expectations. Of course, if you want a designer to respond to you in real time, there's another, more expensive package. They need people who can chat with you anytime. So it's a lower client to designer ratio and you must pay accordingly. As with concierge medicine. However, as CPAs, we don't have the proper language to describe subscription based services.

Blake Oliver, CPA: [00:28:24] We always want to allocate revenue to certain things well in subscription. What do you allocate revenue to? For instance, what does Netflix allocate revenue to? Do they get a list of every show or movie you watched and allocate a tiny portion of your monthly subscription to each one? No. Your monthly subscription goes into a single bucket called revenue. With a subscription model, you're creating lifetime annuities that are more valuable than the cost to acquire them. Everything's about the client's lifetime value, so you don't have to worry about the math, as Baker would say. We always criticize Wall Street for being too focused on the short term. That is quarterly results. However, traditional CPA firms are even more shortsighted. They're hourly focused. They're trying to allocate costs down to every single hour. Likewise, suppose you're an accounting firm doing a bunch of tax returns. In that case, you have fewer clients and spend more time with them and let them know we're going to talk at the beginning of the year about what they can do to reduce their tax liability. And then you meet at the end of the year to review progress and start planning for the following year. It's nothing new. It's called tax planning. It would be a smooth transition if you did it as a subscription service. It's a way to take a traditional firm, cut the number of clients, increase the fees and do more for clients with something you're already doing for them.

Blake Oliver, CPA: [00:29:48] I have a London based colleague named Paul Kennedy who does business advisory services. Related Baker. His philosophy is to start where other firms leave off. So if you don't want him to do your tax work and your bookkeeping, fine, he's willing to work with you only on an advisory level, he added. But according to Baker, Kennedy will only work with a client if they do advisory. And the only way to get Kennedy to do the tax and compliance work is to be an advisory client. Baker said one of the first things Kennedy tells new clients is this if you work with me, you are going to pay more taxes. We will do everything in our power to minimize your tax. But my long run goal is to increase your wealth and your income. Would you rather have to pay more tax? To me, that begs the question would you rather have an accountant focused on maximizing your wealth and income, or an accountant focused on minimizing your taxes? I will take the former any day of the week. This is where the wealth managers are beating CPAs. It's a huge opportunity for accountants to get into that side of helping clients grow their wealth. Baker agreed, adding that CPAs have become too focused on solving problems rather than on seeking opportunities. If you're still doing hourly billing, you can jump right over value pricing and go right to a subscription model, Baker noted.

Blake Oliver, CPA: [00:31:06] I found the model works because you have a balanced portfolio of clients. Some are safe, some are mid risk and some are high risk. Some clients will get audited or receive more IRS or state notices than others. That's okay. We're covered for all that extra work during busy months by all the consistent income coming in during the slower months. Again, you're not going to get screwed over by doing audit defenses or performing extra services for certain clients. That's because you know how many clients you have and you know how much revenue they generate on a recurring basis. So you know how many staff you can afford. You just need enough staff to handle all that inbound IRS correspondence. And if you know that it doesn't matter if one client is profitable or not profitable on a cost allocation basis, because those are all imaginary allocations of fixed costs. That's the great evil of cost accounting. We're trying to run our firms under the same cost theory that industrial factories used in the 1800s. But no smart, talented accountant wants to be treated like a factory worker. If Amazon founder Jeff Bezos thought like a traditional accounting firm, he would never have offered free two day shipping for Amazon Prime members. Why? Because when you allocate the costs for shipping, you'll see that most items lose money when they're shipped in two days. And Amazon lost lots of money on free two day shipping in its early days.

Blake Oliver, CPA: [00:32:29] They hadn't yet built out their network and were paying UPS and Fedex $15 to deliver a $5 to $10 item. That seemed crazy to people at the time. But Bezos realized that as he built out his own delivery fleet, he only had fixed costs to worry about. He didn't have actual allocated costs, such as shipping cost per item. Amazon is so focused on the customer, they're making their experience better and better, observed Baker. When they raise their price, they don't have to blame it on inflation, rising labor costs or supply chain problems, etc. they talk about all the value that they've added to Prime in the last two years, and there's always something to talk about there. Amazon's products are not unique and their prices are no longer exceptionally low. The reason they have so many repeat customers and earn such high valuations from investors is that they make it incredibly easy to do business with them. And that means they have millions of customers evangelizing on their behalf and referring their friends. Most accounting firms don't have the same relentless focus on improving the customer experience. They don't have nearly as many evangelists referring on their behalf. And they get repeat business only because the government requires those customers to get their tax returns done every year. What do we have to talk about when telling clients that we must raise our prices because of inflation? What have we done to improve the offering in recent years? Not much.

Blake Oliver, CPA: [00:33:55] Accounting firms typically sell for about one times gross revenue, but with a subscription model, you have predictable annual recurring revenue. So you're starting on the 50 yard line every month. You're not starting deep in your own territory, constantly having to fill the funnel with marketing and sales like you do in a traditional hourly transactional model. According to Baker, subscription based firms sell for multiples of 2 to 3 times revenue or more. I found that technology companies with recurring revenue sell for such high multiples because their costs are so low and they have so much recurring revenue that enables them to set B hags big, hairy, audacious goals. But accounting firms, by contrast, tend to set really mediocre conservative goals, like increasing utilization rates by 10% or growing top line revenue by 20%. That's not inspiring anybody, lamented Baker. Let's think about the future of accounting. There's an incredible opportunity in accounting. Even though we have this talent shortage and not enough young people entering the profession. But if you want to go out and start your own firm and you want to serve clients the right way, the door is wide open for you to do anything. It's never been easier for fun. Let's say you stumble into the fountain of youth, and you take a swig of the magic water, and suddenly you're 20 years old again and just starting your career. What would you do? Baker said, one thing's for sure I would never bill by the hour.

Blake Oliver, CPA: [00:35:24] I would never fill out a time sheet. I would niche, from what I've seen in my 40 years in this profession. The most profitable firms all have one thing in common they're niched. Remember my colleague whose firm only services dentists. If I told you his net income as a sole proprietor with 12 team members, you'd be shocked. He's making more than the Magic circle firms in the UK, or law firms pulling down $6 million to $7 million per partner per year. The subscription model is a game changer for accounting firms. It aligns incentives with clients, provides a superior experience, and lets you focus on delivering real value instead of nickel and diming everyone to death? Plus, it's a heck of a lot more fun than tracking every minute of your day. Now I know change can be scary, but trust me, the upside is huge. Subscription based firms are worth more, have better cash flow, and can attract and keep top talent. It's a win win win. Conclusion. So what are you waiting for? Take a good, hard look at your firm and figure out how you can start offering subscriptions. Don't overcomplicate it, but also don't forget the big picture. By adopting this model, you're not just changing how you bill. You're also redefining the value proposition. You're going from number cruncher to strategic partner. Remember why you became an accountant in the first place. When you match your passion with a business model, that makes sense, the sky's the limit. So why aren't you charging and delivering value commensurately?