Deciding on what to charge a client might be a grey area, but knowing what you’re worth can be black and white.
One of the most bedevilling issues for professional consultants is determining how much to charge. Ask for too much and a client or prospect is likely to go elsewhere – too little and with nose to the grindstone, you could become resentful.
“Most accountants just charge what the market’s charging,” says Peter Knight FCPA, senior partner of Knight Partners and specialist practice Franchise Accounting and Tax.
“Some have multiple charge-out rates for different kinds of work. It may be $120 an hour for transactional compliance, but if it’s tax planning it could be $350. It’s the same person sitting at the same desk, and that’s where it moves from spreadsheet logic to something more magical.”
Working out how much to charge boils down to a mix of science, art and human relationships. Knight says a sound starting point for any consultant is to figure out what they want or need to make, “and be realistic about it”.
Rule of thumb
Pick a gross annual salary and divide it by available working days, leaving out time for holidays, personal leave, and training. The ballpark for a full-time worker is 45 weeks, five days a week and six hours a day of “optimal, juicy brainpower”, Knight calculates.
Next, divide your desired gross annual income by available working time and you have a figure which – by rule of thumb – needs to be grossed up by 25 per cent to allow for rent and other business costs.
Be sure to take into account time for when the printer breaks down, or for networking, Knight advises.
In truth, he believes that to be reasonably accurate this classic pricing model only works “when you have a year under your belt and can look back and see where you have spent your time and money”. Further, despite experience and the most detailed calculations, there are always unforeseeable factors that mess with the accuracy of a charge-out rate, but still, “it’s good to know”.
How perceptions impact price
Now, close the spreadsheet and address the real nub of pricing; the impact of perceptions on what a consultant can reasonably charge.
“The risk of overpricing – beyond losing the client – is in the perception that it’s going to be super service and you may not deliver,” Knight notes. “The risk of underpricing is that it sets an expectation. If you work long hours for meagre earnings, you will struggle to up the price, attracting only those clients who want a low price and who are expert at chiselling you down, or getting more for no cost.”
Author and marketing strategist Dorie Clark of Duke University’s Fuqua School of Business tackles perception issues in a recent article for Harvard Business Review, in which she says underpricing sends a bad signal.
“Price is often a proxy for quality and when you put yourself at the low end, it sends signals that you’re unsure of your value, or the value just isn’t there,” Clark warns. “Either can be alarming for prospective clients.”
For existing clients, she suggests incremental increases to test their appetite. If you hit resistance, consider freezing or reducing rates while building alternative income streams.
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Believe in what you do
However, when someone baulks at price, business coach James Eagle of Nickell Australia doesn’t believe in being the first to blink.
Eagle, who is an advocate of the thinking of leadership and motivational guru Simon Sinek, says: “Accountants need to attach a value to themselves. To do that, you must understand your greater purpose, why you have chosen your career and do what you do.”
Through this, the issue of price is often overridden by human factors, he insists.
“People will buy into what you believe. It’s about being articulate about why you’re in business and how you are different, which creates an emotional connection with the client that builds credibility and trust. Price becomes irrelevant.”
Eagle is his own best example. “My decision to be self-employed is based on having the freedom to do what I want when I want, and I’ve attached a value to that. It resonates with people, and those are the kinds of people I work with. Being nailed to what I do and why I do it, when it comes to price I’m happy for them to take it or leave it.”
Put yourself in the sweet spot
Charging more can mean fewer but better clients, and also put you in a better place in terms of your life and practice, Knight says.
“Work is more enjoyable, you’re not as frantic and have clear brain time to look out the window and evaluate things,” he maintains. “On a low rate, you’re constantly scrambling to meet a deadline. One is clearly a more preferable place to be.”
There are certain variables, however, that may of necessity influence pricing. Overheads will likely be lower in regional areas, for instance. Also, as technology increasingly takes over grunt work with pre-filled tax returns and software that lets clients do their own bank reconciliations, the accounting profession is moving towards bigger ticket items such as strategy and advisory tasks.
Indeed, the commoditisation of accounting is ushering in new pricing models; for example, project work rather than hourly rates, which frees the individual and allows for outsourcing to markets where price structures may be lower. Then, of course, there is value pricing, which rewards on results, and monthly retainers that improve cash flow for all.
Regardless of the final charge-out rate, Knight emphasises that an engagement letter is essential for both client and practitioner to understand which services are included in the price, and what will happen in the event of a cost blowout.
And one last piece of advice: “Whatever your price, put it up by five per cent, because that’s unlikely to lose the client and it goes straight to your bottom line.”
Why value pricing is the new billable hour