I recently attended the AICPA Engage 2023 conference, and participated in many thought-provoking conversations about the future of pricing strategies in the audit and advisory industry. Over the past few months, I’ve also had extensive discussions with Managing Partner/CEOs and practice leaders about how services are priced, further highlighting the need for modern pricing approaches.
As a former practitioner myself, I’ve seen first-hand a number of different billing models at CPA firms, including traditional hourly-based billing, fixed-fee pricing, and increasingly, value-based pricing. While hourly-based billing is easy to understand, value-based pricing offers unique advantages. It focuses on the client's perceived value of a service rather than the cost of labor. When implemented effectively, I’ve seen value-based pricing deliver significantly higher margins and faster revenue growth capacity, compared to traditional hourly-based pricing.
To really create a Firm of the Future, audit and advisory firms must reassess their overall pricing strategy. Pricing is one of the most important drivers of firm profitability, client loyalty, and competitive advantage. However, many firms still rely on traditional pricing methods, such as hourly billing or cost-plus markup, neither of which reflect the true value of the services offered. Nor do they capture the full revenue potential of their clients.
Why Value-Based Pricing Is Essential
Audit and advisory firms use a number of billing models, depending on the service they provide to their clients. According to the AICPA’s 2021 National MAP Survey, 70% of firms rely on hourly-based billing, 25% on fixed-fee pricing, and 22% on value-based pricing. Hourly-based pricing is easy to operate, while value-based pricing can be challenging to implement without a solid understanding of client needs, as well as a shift in the firm’s thinking around its internal processes, cost structure, and methodologies. However, according to a survey from CPA.com, when done correctly, value-based pricing can deliver 40 - 50% more client revenue than traditional hourly-based pricing.
Value-based pricing has several advantages over fixed fee pricing for both firms and clients.
First, value-based pricing enhances the client-centricity and quality of an advisory firm’s services. Value-based pricing requires firms to understand their clients' needs, goals, challenges, and opportunities in depth, and to tailor their solutions accordingly. Value-based pricing also encourages firms to deliver high-quality work that exceeds client expectations and creates lasting value. According to CPA.com, firms feel that value-based pricing delivers lasting benefits:
- 64% improved transparency between client and firm
- 60% demonstrated the firm’s expertise to clients
- 50% reduced billing surprises for clients
Second, value-based pricing increases the differentiation and profitability of a firm’s services. Value-based pricing allows audit and advisory firms to charge higher fees for engagements that have higher perceived value for their clients, rather than competing on price with other firms that offer similar services. Value-based pricing also enables firms to capture a fair share of the value they create for their clients, rather than leaving money on the table or losing it to discounts or write-offs.
To get the most out of value-based pricing, audit and advisory firms should carefully assess their services and clients, and apply pricing selectively and strategically.
When talking to partners, I’ve seen firms following these steps to get on the path to value-based pricing:
- Research: Gather information from your network, industry publications, and seminars.
- Identify client segments: Segment your market based on client needs.
- Understand cost structure: Analyze your financial metrics and costs.
- Determine technology strategy: Assess your firm's technology infrastructure.
- Build the business case: Develop a comprehensive plan with financial projections.
- Talk with clients: Engage in detailed conversations with clients to understand their goals and tailor service offerings accordingly.
- Roll out pricing in stages: Start with new clients or a specific practice area.
- Build scalable tools: Create collateral and tools to support value-based pricing discussions.
- Periodically reassess: Continually adjust strategies to optimize pricing.
Value-based pricing is a powerful strategy that enables audit and advisory firms to deliver precisely what their clients need. By adopting this approach, firms can increase profitability, foster customer loyalty, and gain a competitive advantage in the long run. By incorporating more value-driven billing strategies, firms can position themselves as a Firm of the Future and thrive in the ever-changing and competitive landscape of the audit and advisory industry.