Shifting towards alternative pricing models, tax & accounting firms focus in on key strategy for revenue growth and better client service
The landscape of tax & accounting services is undergoing a significant transformation, particularly in terms of pricing strategies. Many firms are increasingly adopting innovative pricing models to enhance revenue and meet evolving client demands, according to the 2024 State of Tax Professionals Report, published by the Thomson Reuters Institute. Indeed, these changes have resulted in significant revenue growth for firms, providing a positive outlook for the future.
Traditionally, tax & accounting firms have relied on hourly billing as the primary method for charging clients. However, the report reveals a growing trend towards alternative pricing models such as flat-fee, project-based, value-based, retainer, and market-value pricing. This shift is driven by client demand for more predictable and transparent pricing and the recognition that hourly billing often fails to capture the true value of services provided. Technology is also a contributor of the death of the hourly rate as most compliance work can now be expedited and automated.
Firms also have experienced success in raising prices across various pricing models. More than 70% of respondents to the survey underlying the report indicated that they had success in raising prices with time-based, project-based, and value-based pricing. Other models, such as flat-fee, hourly, and market-value pricing, also saw success rates approaching 70%. This widespread success suggests that firms are effectively leveraging diverse pricing strategies to enhance their financial performance.
Alternative pricing models and their benefits
Alternative pricing models allow for a multitude of benefits, including:
Predictability for clients — Flat-fee and project-based pricing offer clients a clear understanding of costs upfront, reducing uncertainty and fostering better financial planning.
Value reflection — Value-based pricing aligns the cost with the perceived value of the services, allowing firms to charge more accurate fees based on the outcomes and benefits delivered to clients.
More specifically, different types of pricing models can offer various benefits, including:
-
-
-
-
-
- Value-based pricing — This model assesses the comparative value of services and their impact on the client’s business, then integrates this estimated value into the proposed pricing. Its benefits include transparency, which allows firms and clients to clearly communicate and collaborate on services offered and how those services will be priced. There are no billing surprises for clients, as they agree upfront on the services and associated fees. In addition, this can allow firms to scale some of their services, reducing their costs even further.
- Fixed-fee pricing — This model is based upon approximating the time and expense needed to complete a client’s project. It is all-inclusive and agreed upon with the client before the work begins. Its major benefit is that it simplifies financial planning for both the firm and client; and like value-based pricing, each side knows the exact amount to be paid by the client and what the firm’s receivable will be, which adds predictability to its cash flow.
- Subscription-based pricing — This model features billing clients monthly or annually for a set amount of work. Its benefits include establishing a consistent revenue stream, which makes cash flow more predictable. In addition, it is a way to foster stronger client retention, because clients who are willing to pay monthly or annually are invested in long-term relationship with their firms.
-
-
-
-
Addressing changing client preferences — The shift in pricing models is further supported by changing client preferences. Over the past five years, clients have shown a growing preference for flat-fee, project-based, and value-based pricing. This trend reflects clients’ desire for more predictable and transparent pricing structures. And by adopting these models, tax & accounting firms can better meet client expectations and build stronger client relationships.
Timeliness of payments — Despite the increase in prices, the majority of respondents (78%) in the report said that their clients’ billings are being paid on time. This indicates that clients are accepting the new pricing structures without much pushback and are likely recognizing the value of the services provided. Timely payments also contribute to improved cash flow and financial stability for many firms.
Revenue growth through innovation
Additionally, the adoption of alternative pricing models has positively impacted the revenue of tax & accounting firms. According to the report, more than two-thirds (68%) of respondents said they expect their firms’ revenues to increase over the next 12 months by an average of 21%. In the past year, 72% of respondents reported an average revenue increase of 24%. This demonstrates the effectiveness of new pricing strategies in driving financial growth.
Among firms that have shifted their pricing strategies to better promote growth, many have introduced additional services. In fact, many firms are leaning into high-demand services which are leading to significant growth, according to The Accounting Today Top 100 Tax Firms Report. For example, 78% of responding firms said they were experiencing revenue growth with state and local taxes as demand remains high. The need for specialized tax planning and advisory services, such as estate/trust/gift tax planning and M&A, is also highlighted as a growth area for tax & accounting firms.
In addition to having strategic pricing models and adding or expanding services offered, tax & accounting firms must make strategic investments to enhance their capabilities to enable the delivery of more comprehensive and value-driven services. Investing in new technologies is at the heart of this transformation. The Thomson Reuters Institute report showed that close to half of firms plan to acquire new technologies over the next 24 months, while the Accounting Today report noted that many firms were citing their acquisition of technology as part of their growth strategy.
Conclusion
By adopting innovative pricing strategies and making strategic investments, tax & accounting firms can continue to thrive in an increasingly competitive market. The shift towards alternative pricing models not only aligns with client preferences for more predictable and transparent costs but also enhances firms’ ability to capture the true value of their services, ensuring sustained financial growth and continued client satisfaction.
You can find more insight into Practice Development for tax & accounting firms here.
