Compete on Value, Not Fees
If you think it’s a good idea to lower your fee to win business, think again. Competing on fees is never a good idea. This is especially true if you are a new firm trying to win business opportunities. Being the firm with the lowest billable hour rates in your market can hurt you for many years to come.
Billing and Revenue Trends
According to Inside Public Accounting’s (IPA) 2017 National Benchmarking Report, personnel costs are outpacing billable rate increases. Personnel costs, excluding partners, accounted for 49.3 cents of every dollar of revenue earned. The average billing rate increase was 4 to 4.5 percent compared to salary increases of 6 to 7 percent.
Billing rates for equity partners increased by 1.4 percent to an average of $345 for all firms. Even so, across all firms, revenue per hour dropped by 16 cents to $158.95, and revenue per full-time employee (FTE) was $140 per hour. Traditional profit margins dropped to an average of 26.2 percent for the IPA 100 firms — the lowest rate in 26 years.
Furthermore, organic growth was harder to achieve for the firms that participated in the survey. Net revenue per charge hour was up a mere $1.62 or less than 1-percent growth compared to 2016. IPA claims this is partially due to firms undercutting the competition with below-market fees in many markets.
Strategic Billing Practices
Firms often use billing rates to increase market share. It is not uncommon for firms to undercut first-year fees to break into new industry niches or to become the market leader. Even so, this strategy can backfire if the firm develops a reputation of increasing fees considerably after the first year of the engagement. It could explain why many companies and nonprofit organizations require a three-year fee commitment or guarantee.
Other firms do the exact opposite. They charge much higher fees to create demand. The thought behind this strategy is similar to Apple charging a higher price for its laptops than most PC manufacturers or “elite” schools charging excessive tuition rates. The perception is that the product or service must be superior because the price is higher.
Compete on Value Instead
The bottom line is that your firm will always compete on price if you do not create enough perceived value in your products and services. Otherwise, prospective clients have nothing else to base a buying decision on other than price. Prospects have to believe that your firm clearly provides more value than the competition. Savvy business owners are typically more than happy to pay a higher price if they believe that they will gain something valuable from developing a relationship with a firm that will have their best interests in mind.
You might think that every firm strives to focus on the needs of their clients and deliver superior value. But let’s face it: tax returns and financial statement audits are considered commodity services by most people today. Both are services that a company must, or should, invest in, but only because they have little or no choice. With this in mind, how can a firm provide true value from the perspective of the client?
The answer lies in uncovering a problem that the client has and matching it to the service that you provide that solves or minimizes the problem. If it is a big enough problem and you can provide the solution, most clients will pay any price.
A Final Thought
According to Investopedia, value-based pricing is a price-setting strategy where prices are based mostly on consumers’ perceived value of the product or service. The notion is that you can make higher profits with value-based pricing. While this may be true, in this case, value is used to differentiate a firm from the competition. Value is not the basis of the pricing strategy, it is what makes the firm unique.
This article appeared in the September/October 2018 issue of New Jersey CPA magazine. Read the full issue.