When you know how to price your services, you can avoid charging your clients less than what you deserve. You can also make your bookkeeping business more profitable.
How much should you charge your clients for your bookkeeping services? This is one of the biggest dilemmas that owners of bookkeeping firms face. Often, they end up deciding their prices based on how other bookkeeping firms price their services. Worse, they price their services randomly, thinking that pricing is just a number. But that’s not really the best way to approach the pricing dilemma, especially if you want to scale your bookkeeping firm and make it profitable. Because if you go with either approach, you’ll more than likely end up undercharging your services. And you don’t want that to happen, right?
Fortunately, I had an enlightening chat with Robert Knecht in my podcast about this very topic. He’s the president of the Universal Accounting Center. And he’s also known as an expert in helping business owners grow successful bookkeeping and accounting firms. In this article, you’ll find out his four methods of charging your bookkeeping firm’s services that are proven to be profitable.
The Four Pricing Methods
Method #1: Hourly Billing
A lot of bookkeeping business owners are familiar with the hourly billing method. Here, they simply charge for the hours spent working. It’s an easy way of charging, and it’s probably the most common method being used by bookkeeping firms. Typically bookkeeping firms have an hourly rate that ranges from $40 to $80 per hour, depending on the service. And some charge even higher, particularly when providing a specialized service. In contrast, accountants will charge anywhere from $80 to $125, while CPAs can charge as high as $250 or more per hour.
Robert has a formula for this pricing method, and it basically involves asking yourself one question: If you were working full time, how much would you be earning per hour?Then, when you come up with a number, multiply it by 2.5. This will give you a general idea of how much your bookkeeping firm should be charging per hour.
Why? The reason for this is that if you have an employee who’s working for you full time, you have to bill the client that number to get ahead and make a profit. After all, that profit will not only cover your employee’s wages but also their benefits and your business’s needs. Robert says that the formula he uses is the minimum that a bookkeeping firm should use if they choose hourly billing. It’s because if you go lower than that, chances are you won’t earn enough to cover your bookkeeping firm’s expenses over time. When you understand this, you can justify your pricing to your clients and get them to pay you what you are worth.
Now, the major disadvantage of charging by the hour is that it can be difficult to predict how long it will take you to complete your work. That’s why despite having the formula to ensure fair pricing, Robert believes this method of charging should be the least used.
Method #2: Flat Rate
Robert believes that this type of pricing could be ideal if your clients tend to have relatively simple books. Or if you enjoy repetition and knowing exactly what type of work will be involved with each project. Traditionally, there are two ways of determining a flat rate fee for services: The transaction approach and the package/menu approach.
For the transaction approach, you get paid for recording the transactions that are happening in your client’s business. That’s why your firm needs to know exactly what you are going to record and track. To do that, ask your clients questions like how many accounts they have and how many deposits they make per month. With this approach, you should ideally charge anywhere between $0.50 to $1.25 for each transaction. That means if your client has between 300 to 500 transactions each month, you get between $500 to $800 from that client alone.
The other approach is the menu/package approach where you offer your services in tiers. With this, you give the client flexibility to choose the plan they want based on their needs and their budget. Here’s an idea of how you should price your packages: Let’s say package C covers your basic services, so you can charge below $500 for it. Package B has the basic services as well, but some other services as well, so you can charge between $500 to $1000 for it. Meanwhile, package A, with all the bells and whistles, can have a flat rate of over $1000.
Method #3: Revenue-Based
This pricing method is essentially similar to a flat rate, but the rate depends on your firm’s revenue. That means the higher the revenue of your bookkeeping firm, the higher you charge for your bookkeeping services. For example, let’s say you’re a $1 million company, so you should charge $4,000 a month per client. And if you become a $1.5 million company, you can then increase your price by $250 or $500 increments. That means you now charge as much as $4,500 a month.
This is usually a relationship-based engagement that is reviewed from time to time, ideally every three to six months. Doing so helps ensure you are paid fairly. It also allows you to see if the client needs other services that you can provide - for an additional fee, of course. According to Robert, revenue-based pricing is ideal if your bookkeeping firm works with large clients.
Method #4: Value Pricing
For Robert, this method is misunderstood and bookkeeping business owners don’t leverage its full potential. He says that value pricing fundamentally involves setting a rate based on the value that you can bring to your client. Now, the value that you can bring to your client can either make them more money or allow them to save money.
When it comes to value-pricing, there are three common ways bookkeeping firms do this. First, use hourly billing, but double your rate to account for the value you’re bringing to the client. But this isn’t really recommended. Second, charge your flat rate, then multiply it by the amount of time you think it will take you to work on the project. Third, you can agree on a commission-based service. This means the money you get will be based on how much money you save the company or how much more money they earn with your service. The charge for the commission based service is typically 20 to 25% of the total savings or extra earnings.
Which Method Is Right For Your Firm?
Whichever of the four pricing methods you choose, the key is to understand why you are charging what you are charging. When you understand this, you can charge your clients the prices you want with confidence. More importantly, you’ll no longer be undercharging for your services. And your bookkeeping firm will become more profitable.
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