The Path to Advisory: Positioning and pricing your advisory services

Note: Many thanks to the Intuit® Tax Council for their guidance in putting together this article and for their input on “The Path to Advisory.” See editor’s note to download the guide.

Businesses in many industries are shifting to value-based pricing and subscription models, and advisory services are a natural fit for this transition. Almost all of our Tax Council members charge a flat recurring monthly fee for advisory services. They vary in their methods for determining pricing, but all of them have shifted away from time tracking and instead use value to determine fees.

Jamie E. O’Kane says, “We have always been a tax planning first model and a recurring retainer first model. We don’t do tax preparation only. The reason we moved to this model is better profitability for us, as well as delivering the services clients were expecting from their provider but were not getting. This works really well for us. We provide ROI through the planning.”

Alejandra Matias says, “Bundled services enable us to work closely with clients on a monthly basis, instead of an annual basis, so we get to know them better and can tailor more services around their needs.”

Before we look at the benefits of the different pricing models, let’s take a moment to define them.

Transactional pricing relies on defined hourly or service fees derived from the calculation of internal firm costs plus a standard markup.

Value-based pricing leverages the rate firms believe their clients are willing to pay based on the associated value provided. Colin Horsford says, “the complexity of the situation and the engagement often influences the value and price.”

Subscription pricing is a common form of value-based pricing where the fees are divided into regularly timed increments across the timeline of the contracted engagement. Subscriptions also work best for recurring services like onboarding, training, accounting, payroll and bill pay.

John Jordan says, “Transitioning clients from a transactional model to a value model can be challenging. We capture what is most important to the client, which is tax savings, and bundle it with the other services into their monthly service package. We are selling peace of mind and ROI on our fees via tax savings. Clients appreciate that everything is included in the monthly fee, so they don’t ever feel blindsided or nickel and dimed by hourly billings.

Heather Satterley says, “There are lots of experts and programs to help advisors pricing and positioning services. Rootworks really helped me think differently about my value, which changed my life. Joe Woodard also has a good program to create tiers or packages of services that clients can choose from. Then when clients want things outside the limits of that tier, our team gives them the option to move up.”

Next, let’s look at the detailed pros and cons for the firm, as well as the best applications for each of the pricing/billing models.

Pros and cons of hourly fees

A firm charges a set hourly rate for services based on the staff members involved in the required processes in this format.

Colin says, “we try to price by project for valuations and consulting because clients like to know what the fee is, and we move to a subscription fee for recurring services once we understand the scope of work. We learned to put an end date on projects and clearly define scope, or clients may keep requesting changes. We switch to hourly additions at a date and that helps limit their changes.”

Pros

• If staff is paid hourly, theoretically, you should consistently profit on staff time if all time is captured and billable.
• Simple and straightforward.

Cons

• The more efficient you and your team are, the less you earn.
• Time-tracking can be tedious.
• Unhealthy lifestyle for advisors to keep working more hours to earn more.
• Encourages clients to shop around for lower rates.
• Unpredictable invoices for clients.
• Revenue is limited by available hours.
• If staff is salaried but clients are billed hourly, you have an uncorrelated profit and performance structure. This can create a disconnect between firm values and both employee and client satisfaction levels.

Hourly billing is best used for:

• Projects with too many unknowns.
• General unspecified consulting.

Pros and cons of task or project fees

Many traditional tax and accounting firms use this fee basis for standard tax returns and tax form filings. This form of pricing is when a firm charges a fixed flat rate for specific services regardless of the time required to complete the service.

Pros

• Leverages value-based pricing.
• Clients know the costs upfront.
• Rewards efficiency.

Cons

• Profit risk – mainly when any aspect is new:
  • New services.
  • New client.
  • New staff.
• Encourages clients to shop around for competitive fees.
• Must manage client scope creep, which can be difficult for new practitioners.

Project fees are best used for:

• Cleanup work.
• When there is a good idea of the time commitment required.
• Scenario planning.
• Consulting on tech or workflow.
• Cost segregation analysis.

Andrew Poulos points out, “To make a change in your practice, make sure clients understand the value you bring, and what differentiates you from every other advisor.”

Pros and cons of subscription pricing

In subscription pricing, multiple services are bundled into a single long-term agreement (generally annual) with a fixed flat-rate price for the combined set of services. The fee is then invoiced in consistent increments across the agreement term (such as monthly payments).

Pros

• Levels out income cash flow across the year.
• Spreads out expenses to the client across the year.
• Supports higher fees.
• Discuss fees just once per year.
• The client feels taken care of.
• Rewards efficiency.
• Supports long-term staff planning.
• Encourages ongoing connection with clients.
• Encourages retention.

Cons

• Profitability can be risky on initial engagements.
• Requires more up-front information from clients before pricing.
• Bundling services requires careful definition of services.
• Must exclude activities that fall out of the ordinary course of business.

Subscription pricing is best used for:

• Advisory in an ongoing manner
  • Tax planning
  • Audit defense
  • Software support
• Recurring services with a slight deviation in time required, such as:
  • Bookkeeping
  • Payroll
  • Sales tax
  • Bill pay

Adopting value-pricing and a subscription model in your firm

Adopting value-based pricing requires a new way of thinking in the firm. Many firms switch from simply communicating the tax liability, to communicating the tax savings from strategies implemented. This creates a very high return on investment for the client fees. Tax savings are one of the easiest areas for tax professionals to communicate value, but advisory services that help grow revenue and profits, increase net worth, and expand the business also create value that can easily be quantified. Employees need to remember they are providing value and not just completing tasks. The difference is a mindset around outcomes. This model is well-suited to advisory services, but will require a paradigm shift for you and your team as you transition.

• Considerations when shifting to value-pricing in your firm.
• Determine who will calculate and approve new client estimates.
• Standardize and tier solution bundles.
• Implement tracking to record and measure value in engagements.
  • Dollars saved
  • Credits earned
  • Time saved for clients
• Peace of mind (use short client satisfaction surveys)
  • Train staff on the structure of your new pricing and service model and create KPIs to support it.
• Communicate with existing clients to set new expectations.

Tips for calculating pricing based on value

1. Research competitive pricing. Knowing what your competitors charge for similar services will help craft an appropriate range for your fees.
2. Find historical proof points. Look at the results you have created for existing clients to quantify the value generated by these services.
3. Leverage service bundles or packages. Bundling distributes value across the whole and reduces client focus on high-priced elements.

Editor’s note: This article is a small part of a whitepaper, “The Path to Advisory,” that can be downloaded and used extensively in your firm. The PDF includes checklists, charts, and many other activities that could not be included in this article. Download it today. There is also an Executive Summary available for download.