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Value Pricing Tax Services: Don’t Leave Money Behind

Have you ever stopped and asked yourself why you would ever want to make a tax return engagement more efficient, if it really only means you will charge less over time? 

Stay with me here while I explain how value pricing and efficiency can go hand-in-hand.  Below is a hypothetical chart of fees incurred to prepare a 1040 return, as well as the amounts actually invoiced.  I am going to explain how you are leaving money on the table.

Year

Hours

Rate

Fees

Discount

Invoice

1

10

$150

$1,500

(400)

$1,100

2

8

150

1,200

(80)

1,120

3

6

150

900

 

900

Year one is largely spent reviewing the prior year returns to familiarize yourself with the client and to establish your internal workpapers. This will naturally take more time. So when you bill the client and see that you have incurred $1,500 in fees, your gut might tell you that the return is not worth that amount. So, you discount the fees to reflect the amount that you a) think the return was worth and b) think the client is willing to pay. 

Time-clockIn year two, you have established efficiencies in preparing this return, and while the tax situation is exactly the same, you’re able to spend less time on it. Despite this reduction in time, your actual fees exceed the amount you charged in the prior year. Do you think it is reasonable to expect the client to pay more money for the same service when nothing has changed? Probably not, so you find yourself discounting the return again, perhaps to avoid an angry client calling to inquire about the increased fee.

Year three rolls along and you have delivered the same product, but your amazing efficiency strides result in even fewer hours completing  it (translating to lower fees). If you hold to your historical model of billing “actual time” spent, you have backed yourself into a position where you have to charge less than prior years. And you, my friend, have left money on the table.

You may not have realized it, but, in the first year of this engagement, your gut was actually steering you to value bill the engagement. The bottom line was that you knew the value of the services and what the client was willing to pay. In simplest terms, the key to value pricing (in advance) or value billing (in arrears) is that you need to price both the work and the client. 

Had you trusted your gut instinct in year one, you could have established a fee with confidence, while saving the time involved in tracking hours and worrying about billing. And if you had truly embraced the concept of value pricing, you might have looked for opportunities to differentiate your services and offered the client fee options. I am not suggesting this is easy, and it is certainly not at first. It takes research, preparation and communication with all parties involved, but is worth the investment of time.

When I was in practice, I came across Ron Baker’s "Implementing Value Pricing" and it opened up a whole new world for me in practice management. The concepts in that book made so much sense that I could not understand why professional service providers would bill any other way.

I encourage you to spend some time this fall researching the topic and figuring out what it could mean for you and your firm. Learn what other practitioners have to say in Leaving the Billable Hour Behind  from the Journal of Accountancy. Then, develop a strategy that works for your unique practice and head into the upcoming tax season with a new confidence and pricing approach that enables you to bill for the value of your services, not how many hours you clocked in a week. Who has time for that?

Other AICPA resources to help you learn more about value billing include:

Cari Weston, CPA, Senior Technical Manager - Taxation, American Institute of CPAs.

Time clock image via Shutterstock

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